MoneyShow Pundits Like Cheap Drugs, Junk Silver & Yield

LAS VEGAS -- MoneyShow -- The world's great money managers and market newsletter writers have gathered here to pitch their latest tips, and there's a definite theme: fear of inflation and the potential for market-toppling debt problems.

But then when you break down their individual investment picks, you get into a more eccentric lot, including bags of junk silver and speculative biotech stocks.

Michael Murphy, publisher of New World Investor, and a long-time growth stock advocate, started his presentation off with some thoughts on the threat of hyperinflation. He said there is little downside risk to owning bags of junk silver, which might come in handy "to buy toilet paper" some day.

His eccentric picks don't stop with bags of silver. Murphy is advocating a mixture of high-yield investments, tech and biotech stocks, and precious metals. His favorite stocks include Dendreon Corp.(Nasdaq: DNDN) and Infinera Corp.(Nasdaq: INFN). Such volatile stocks, he believes, should be counterbalanced in a "barbell" with high-yield plays such as Annaly Capital Management (Nasdaq: NLY).

Ron Muhlenkamp, CEO of Muhlenkamp & Company and one of the great value investors, says that real inflation is a problem, as the ballooning national debt puts us on course to be compared with Japan and its epic economic struggles.

But not everybody is so alarmist, as newsletter publisher and money manager Jim Stack points out that if you'd stayed away from the stock market based on fear of debt problems, you would have missed the 1980s Reagan-era bull market. Stack believes we're entering "Stage 2" of the bull market, where investors might gravitate toward safer stocks such as healthcare and consumer staples.

Others were similarly optimistic, pointing out there's no reason to get out of the market right away, even though investors should be wary of things turning south.

"The dashboard says to be in [the market], and to be overweight, but I have concerns about all the stimulus we're spending," said Jack Albin, CIO of Harris Private Bank, during a lunchtime market panel. Harris favors safer yield investments such as inflation-protected treasuries (TIPS) and high-yield funds like HYK.

Long-time stock watcher, market columnist, and fund manager Jim Jubak said he was worried about all of the "hot money sloshing around the world," saying that unnaturally low interest rates are generating high market volatility.

"It's not a normal market... with all this money sloshing around, including 0% interest rates in the US and Japan, you are talking about a lot of hot money," noted Jubak.

Where's the value? Several panelists cited the big-pharma market. Jim Stack likes medical-equipment maker Medtronic (NYSE: MDT), trading at only 12-times earnings. "You are seeing a lot of the best valuations in healthcare, said Stack.

Morningstar analyst Paul Larson also likes healthcare, pointing to the value of big pharma companies such as Abbott Labs (NYSE: ABT) and Pfizer Inc. (NYSE: PFE).

But even the most optimistic market pundits said they are aware of the rising threat of big inflation and debt problems, in light of the large intervention of government in the market. This has the most cautious advisors, such as Muhlenkamp and Murphy, advocating investments in silver and gold, despite their extended run.

Muhlenkamp says the current policy of the Federal Reserve is a "disaster," resulting in a misallocation of capital. "When you have interest rates this low it just encourages hedge funds to borrow more money and buy commodities futures," he insists. "QE2 [Quantitative Easing] has done the opposite of what it was set out to do. This is the second great economic experiment of my lifetime."

Muhlenkamp also cited research showing that when spending as a percentage of GDP rises, economic output slows. The US has followed just such a path. The only choice to avoid sluggish growth would be to cut government deficits, says Muhlenkamp. "We can choose to be Japan or Canada," he says, referring the the path of the two countries (Canada has shrunk government spending and grown more rapidly in the last two decades).

The bottom line? Most forecasters see more stock volatility driven by macro elements such as deficits, government spending, and debt. Individual investors should be more vigilant about a potential turn in the market, given its extended two-year run.