Cruisin' for bruisin'?

IN a rosy year for investing, here's a thorn. Along with the many blessings rising stocks and lower-rated bonds has brought, it has reduced the supply of bargains left to buy.

Ask any professional pessimist: The stock market is flying close to the sun again. Bonds are an accident waiting for a rise in interest rates to happen. Yields in the money markets are ridiculously low, and prices of much desirable real estate ridiculously high.

U.S. investors might be tempted to stash their dollars under the mattress--except that every foreign-exchange maven in the world is bearish on the dollar too.

That's the miserable math of money management for you. When prices are low enough to buy, conditions are too bad to allow any prudent buying. By the time conditions turn reasonable, prices are so high as to drive away all prudent purchasers.

It's no place for the easily discouraged. Right now, despite scandals in the mutual fund industry, people keep buying fund shares, notably of stock funds in groups not tainted by investigations into trading abuses.

While the Standard & Poor's 500 Index has gained 39 percent from the bear-market bottom in early October 2002, corporate earnings have risen too.

So the aggregate price-earnings ratio of the stocks in the index has actually declined. According to Bloomberg, the S&P index's multiple on the past 12 months' earnings has dipped from about 29 then to 27 in recent days. The Nasdaq Composite Index's P/E has also been shrinking, though at 182 to 1 it remains a long way from cheap.

Other stock-fund managers of the "value" school have similar reservations. At midyear, Bill Ruane, Robert Goldfarb and the other managers of the $4A billion Sequoia Fund said they were keeping a "reserve for future purchasing power" in money-market securities, despite the paltry 1 percent returns on those short-term investments.

The Federal Reserve offers little promise that those yields will increase any time soon, insisting it can keep interest rates low even as the economy continues to recover. At the same time, bond-market participants worry that bonds are vulnerable to a negative surprise any day now.

"To judge by today's low yields, the corporate debt market has relocated from planet Earth to a far better place," says James Grant in his fortnightly Grant's Interest Rate Observer. "In this paradise, companies don't default, interest rates don't rise and rating agencies don't downgrade."

So the question is simple: What to order from the investment menu when nothing looks appetizing?

Similar conditions prevailed 10 years ago at this time, at year-end 1993. Interest rates were poised to rise in 1994, which also turned out to be a year of little progress for the stock market.

If the money were spread between a representative stock fund (50 percent), a bond fund (25 percent) and a money-market fund (25 percent), the overall return for our conservative investment plan would have been 9.4 percent a year, good enough to double our money every eight years or so.

Most people would call that a pretty lofty goal for the next 10 years. Then again, most people would have said the same thing 10 years ago too.

--Chet Currier, Bloomberg News