NEW YORK (Reuters) – It is a good time to be a U.S. stock investor for the long term – if you can ignore the noise erupting every few hours.

That is the advice from some money managers, who are taking the opposite tack of many who want to avoid the turbulence. Instead, they are confronting the volatility head on, adding to stock allocations rather than standing pat.

Much of their increased optimism stems from a belief the U.S. economy is likely to avoid another recession, even as a European downturn seems more likely.

Because of that, they believe the euro zone's debt crisis, which has kept the market on its toes for months, will recede as the main driver of market direction. A Reuters poll of 12 U.S. fund companies showed managers in December boosted equity holdings to their greatest percentage this year.

But for those worried investors who have been out of the market for a while, Shawn Kravetz, president of investment management firm Esplanade Capital, suggests starting small.

"You should start to deploy capital into the stock market gradually and, in the coming months if it's up, you keep doing it. If it's down, you get a little bit more aggressive," said Kravetz, who favors large retailers, including Lowe's (LOW.N), Target (TGT.N) and Wal-Mart (WMT.N).

U.S. economic data has improved in recent months. That is likely to help U.S. companies continue to report healthy profits, among the biggest tailwinds for stocks in 2012.

But there remain many reasons to be wary. Even optimistic money managers acknowledge that Europe's debt troubles are far from over and the fallout could still extend to the United States, especially the U.S. financial system.

Cautious retail investors overall still prefer bonds and cash to stocks. Assets under management at all equity funds dropped by $186 billion for the year through December 12, according to Thomson Reuters' Lipper. For the same period, assets under management at all taxable bond funds rose by $69.8 billion.

The well-worn arguments about attractive valuation have not won the day in 2011. The benchmark Standard & Poor's 500 (.SPX) appears headed for another losing year, despite valuations that have not been this low in a decade.

The index is down 4.2 percent for the year, and stocks have been on a topsy-turvy path for months, showing strong gains one day, only to slump the next.

By contrast, investors in the Barclays U.S. Treasury Aggregate Bond index are sitting on returns of nearly 10 percent for 2011, according to Barclays Capital. That's despite a bevy of predictions that the bond market had nowhere to go but down this year.

STOCKS GO THEIR OWN WAY

Major asset classes have traded in tandem with one another for the last several months. The euro, commodities, stocks and sovereign credit markets have been increasingly linked because of fears of a financial meltdown in Europe.

The tight relationship between stocks and the euro has diminished in the last month, however. In October, the euro and the S&P 500 nearly matched each other in the direction and magnitude of their moves. The rolling 22-day correlation coefficient, which represents how close a relationship the two assets have, was last at 0.14.

A perfect relationship is 1, with 0 making two assets essentially unrelated. In late October, the correlation was routinely above 0.9.

High trading correlations between stocks in the same sector have resulted in many "mispriced" stocks, said Craig Hodges, president at Hodges Capital Management in Dallas, Texas.

"Equities move in lockstep day in and day out, irregardless of individual fundamentals. What you have are situations where babies are thrown out with the bath water," said Ken Farsalas, who manages a small-cap growth fund at Oberweis Asset Management in Lisle, Illinois.

The price-to-earnings ratio of the S&P 500, a measure of the price paid for a share relative to the company's profit, is low by historic standards. The S&P 500's forward P/E ratio of 11.3 is at its lowest in more than a decade, S&P data shows.

One approach to investing in stocks today is to aim for global diversification, according to Todd Petzel, chief investment officer at Offit Capital Advisors.

"If you focus on global franchises with good cash flows, the stocks still are trading at very reasonable multiples and have very good prospects," he said.

Petzel also noted mortgage real estate investment trusts, or REITs, are good bets for retirement accounts, because of the steady stream of cash and low valuations. "We think the cash flow is very good and steady and they're trading at very near book value these days."

Annaly Capital Management (NLY.N) and MFA Financial (MFA.N) are in his retirement plan and many of his firm's clients' plans.

Valuation has proved a tough sell in the last several months. Banks, which trade at less than the value of the assets on their books, were hit again on Monday.

Calm periods in markets have been brief this year. Markets do not often repeat the stomach-churning periods that marked August through October, but Tobias Levkovich, chief equity strategist at Citigroup Global Markets, says recent declines in volatility may still prove transitory.

Many see the market's choppiness as here to stay, and suggest investors accept it.

"It's painful, it's hard, but sometimes it's better to turn off (the news) and take a step back," Farsalas said.

(Reporting by Caroline Valetkevitch; additional reporting by Daniel Bases; Editing by Dan Grebler)

NEW YORK – Ask the people who invest billions for a living to name their favorite picks for 2012 and you’ll get a smorgasbord worthy of a holiday party: Brazilian stocks, U.S. junk bonds, and government debt from Colombia. Ask them what they dislike and they’ll name one of the top-performing investments this year: U.S. government bonds.

Investors can rattle off a long list of reasons to avoid Treasurys. They pay next to nothing and are bound to plunge in value whenever interest rates begin climbing from their historically low levels. It seems nobody likes Treasurys, yet everybody keeps buying them anyway.

“Our least favorite asset is Treasurys,” said Christine Hurtsellers, chief investment officer for fixed-income at ING Investment Management during a recent press briefing. “We still have a lot, but it’s hard to make the argument for them.”

It’s a tricky problem for bond-fund managers at a time when everyday Americans are trusting them with more of their savings. Among investors, there’s a solid belief that Treasury prices must fall and push interest rates up at some point. But those who have bet on a Treasury market collapse this year got burned.

Bill Gross, the bond-world version of investment sage Warren Buffett, dropped nearly all Treasury holdings from the fund he manages at Pimco in early 2011. He argued that if Republicans held up lifting the government’s borrowing limit, the country would risk default. Borrowing rates would spike as the world’s investors dropped U.S. government debt, just as they have in Europe.

Most of what Gross predicted came true. The debt-limit fight raised worries about default and led to Standard & Poor’s taking away the country’s AAA credit rating in early August. But instead of spiking, U.S. borrowing rates plunged as traders sold everything else to buy U.S. government debt. The race into Treasurys helped drive the entire bond market up 3.8 percent from July to September. Gross got the big picture right but his big bet against Treasurys didn’t pan out. Pimco’s Total Return Fund lost 1.2 percent, its worst quarterly performance in three years.

It’s been a recurring story since the financial crisis hit in 2008. For three years running, pundits have predicted that investors will eventually refuse to finance the U.S. government’s $15 trillion in debt and the Treasury market will collapse. But worries over the U.S. economy and the perilous state of Europe’s financial system keep drawing banks and money managers from around the world back to the U.S. dollar and Treasurys.

That demand continues to push U.S. government bond prices up, the main reason why the Treasury market has returned 8.5 percent this year, despite microscopic yields, according to Bank of America-Merrill Lynch data. The benchmark for stock market funds, the S&P 500 index, has returned less than 1 percent, including dividend payments, and that’s with a 7.4 percent surge over the past week.

“It’s been a pretty strong year for bonds,” said Michael Gitlin, director of fixed income at T. Rowe Price, “and it’s largely a result of Treasurys.”

Judging by the gauges money managers usually check before making a move, buying Treasurys still looks like a bad idea. Consider this sample:

(asterisk) The benchmark 10-year Treasury pays just 2 percent a year. Take inflation into account and the payout on Treasurys equals negative 1.5 percent, what finance types call the real rate.

(asterisk) Treasury yields pay less than top-grade corporate bonds at 3.7 percent and even less than the stock market’s 2 percent dividend yield.

“My colleagues say there’s little value in 10-year (Treasurys) and I’d agree,” Gitlin said. “People have been saying there’s a fixed-income bubble. No, there’s a Treasury bubble.”

If there’s so little to like about U.S. government bonds, why are the world’s investors still buying Treasurys instead of dumping them? In a word, it’s Europe.

As the crisis seemed to spread from country to country this year, the world’s traders plowed more money into Treasurys. The higher the demand for U.S. debt, the lower the interest rate, or yield. So when it looked like Greece might default on its debts earlier this year, the yield on the 10-year Treasury note sank below 3 percent. And when attention turned to Italy and its government debts the yield sank even further, dipping below 2 percent in September. The shift of money out of Europe and into the U.S. has pushed Europe’s borrowing rates to dangerous levels while causing U.S. interest rates to sink.

“You can hate the budget situation and hate the low yield, but if there’s a panic it’s the asset that outperforms,” said Robert Robis, head of fixed-income strategy at ING Investment Management.

A good reason to hold Treasurys, in other words, is that the Treasury market remains the world’s favorite hiding spot. So, for many fund managers Treasurys aren’t exactly an investment. Buying Treasurys is like taking out an insurance contract, Robis said. They’re protection against global financial trouble.

The ING Global Bond fund, for instance, has 15 percent of its $641 million in Treasurys, less than the 20 percent in the benchmark Barclay’s bond index. Robis said having none would be like betting European governments will come to a quick solution to the region’s debt crisis and that the U.S. economy will soon recover its health.

“There’s still a need to hold Treasurys,” Robis said. “Just don’t expect to make a fortune off them.”

WASHINGTON (Reuters) – U.S. regulators are launching a broad review into the business practices of failed futures brokerage MF Global Holdings Ltd as their hunt continues for over $600 million in missing customer money.

Round-the-clock shifts for examiners have become the norm as they sort through the collapse of the firm headed by former New Jersey Governor Jon Corzine. MF Global filed for bankruptcy on Monday after risky bets on European debt scared away clients and investors.

"We will look at every aspect of how the firm conducted business," Mary Schapiro, chairman of the U.S. Securities and Exchange Commission, told Reuters regarding the agency's review. She declined to discuss any potential action that the SEC's enforcement division may take.

Investor fears over European sovereign debt risks facing other investment houses hit shares of Jefferies Group Inc hard early on Thursday until it issued a statement saying it had no meaningful net exposure.

In other developments, the president of a congressionally chartered investor protection group said there were some problems finding firms to take over some former MF Global customer accounts because of questions about missing money.

Both SEC's Schapiro and Gary Gensler, chairman of the Commodity Futures Trading Commission, painted a picture on Thursday of close teamwork between regulators to get to the bottom of why the firm collapsed and track down the funds.

Gensler said CFTC staff has been on-site at the firm since last Thursday, and took part in calls in the middle of the night with other regulators about the fate of the firm.

"The first time that we actually knew there was a shortfall for me was when I got woken up 2:30 a.m. Monday," Gensler told reporters after testifying to the Senate's Permanent Subcommittee on Investigations on Thursday.

So far, the long hours have failed to turn up much in terms of money — and that may not be an accident. CME Group, the biggest U.S. futures exchange operator, has said that MF Global appeared to have made "transfers of customer segregated funds in a manner that may have been designed to avoid detection.

"The most troubling aspect about the MF Global situation is the shortfall of customer money at the firm," Gensler said, adding that customer money may be tied up for a while as the bankruptcy court and trustee do a full accounting.

The CFTC, which oversees the futures markets, is the regulator working to track down the hundreds of millions of dollars missing from customer's futures accounts, which makes up the lion's share of the shortfall at the bankrupt brokerage.

As of now — the regulators seem to have more questions than answers.

"It's extremely troubling the kinds of risks that were taken," Schapiro told Reuters. "We don't know yet what holes exist, whether they can or will be filled, and until we know that, we can't really do the post-mortem."

CUSTOMER ACCOUNTS

Brokerages like MF Global are required to keep their customers' money segregated from the firms' own cash. Questions about whether this took place at MF Global has attracted the Federal Bureau of Investigation in addition to regulators.

Neither MF Global nor Chief Executive Jon Corzine, who once ran Goldman Sachs, have been accused of any wrongdoing.

"Segregation of customer funds is the core foundation of customer protection in the commodity futures and swaps markets," said Gensler on Capitol Hill. "Segregation must be maintained at all times. That means at every moment of every day."

As customers of MF Global clamor to gain access to their frozen trading accounts, bankruptcy liquidators are having difficulty finding rival brokers willing to accept a court-approved transfer of these accounts, a top liquidator told Reuters on Thursday.

"The most elemental question is finding a home for these accounts, but given the fact questions (remain about the cash shortfall), it's proving to be a challenge," said Stephen Harbeck, president of Securities Investor Protection Corp, a group that recovers assets from failed brokerage firms.

In the 2008 bankruptcy of Lehman Brothers it took liquidators seven to ten days to begin reuniting retail customers with their accounts, Harbeck said.

Gensler made clear U.S. taxpayer money was not at risk in the MF Global meltdown. "This was an example, actually, of a financial institution having the freedom to fail," he said.

(Writing by Edward Tobin; Reporting by Sarah N. Lynch, Christopher Doering, Philip Shishkin in Washington DC; Editing by Tim Dobbyn)

WASHINGTON – A former California investment executive is paying $2.5 million to settle federal charges that he hid a computer error that resulted in financial losses for clients. He will also be banned from the securities industry for life.

The Securities and Exchange Commission said Thursday that Barr M. Rosenberg, the co-founder and former chairman of AXA Rosenberg, learned of the coding error in June 2009. But Rosenberg told others to keep it quiet and not fix it immediately, the SEC said.

The error was not disclosed to clients until April 2010. By then, clients lost $217 million.

Rosenberg, 68, was the developer and original programmer of the computer model used to manage clients’ investments.

“Rosenberg chose concealment over candor, and in doing so, selfishly served his interest over those of his clients,” said Robert Khuzami, the SEC’s enforcement director.

Rosenberg’s attorney, Jonathan R. Bass, said his client is relieved the matter is concluded.

“He never acted with any intention to cause harm to AXA Rosenberg clients or to gain any advantage or any benefit for himself,” Bass said.

The investment firm has paid $242 million to settle civil fraud charges. AXA Rosenberg neither admitted nor denied wrongdoing in settling the case. But it agreed to refrain from future violations of securities laws.

Jeremy Baskin, AXA Rosenberg’s global chief executive officer, said in a statement that the firm was “not a party to the settlement” and that “Barr has not been involved with the operations of AXA Rosenberg for quite some time.”

“Our focus is on looking forward and delivering returns for our clients,” he said.

AXA Rosenberg, based in Orinda, Calif., is owned by French insurance company AXA SA. The company’s assets have declined to $29 billion as a June, down from $70 billion in early 2010.

MANAGER SETTLES: The co-founder and former chairman of AXA Rosenberg is paying $2.5 million to settle federal fraud charges. He will also be banned from the securities industry for life, the Securities and Exchange Commission said Thursday.

BIG LOSSES: Barr M. Rosenberg learned of the coding error in June 2009, federal regulators said. The error was not disclosed to clients until April 2010. By then, clients lost $217 million.

EXECUTIVE `RELIEVED’: Rosenberg’s attorney, Jonathan R. Bass, said his client is “relieved” that the settlement is over and that he never intended to “cause harm to AXA Rosenberg clients or to gain any advantage or any benefit for himself.”

NEW YORK – Small investors, take note: The smart money isn’t sure what to make of the economy, either.

Some market strategists say the recent drop in stock prices means the market is expecting a recession. Banks like Goldman Sachs and others have lowered their year-end forecasts for the Standard & Poor’s 500 index. And Mark Zandi, the much-followed economist from Moody’s, says the chance that the economy will fall into another recession is 40 percent.

Which is to say, there’s also a better-than-even chance the U.S. economy will continue to grow, albeit slowly. That’s the case Federal Reserve Chairman Ben Bernanke and others have been making. This camp believes the economy will grow at a gradual pace now that gasoline prices have fallen, Japan’s factories are mostly back up to speed after the earthquake and tsunami, and the debt ceiling debate is over for now.

All of these mismatched signs are leaving large investors in the lurch. Tack too hard to either safety or to risk, and there’s a chance that whatever the economy is doing will make their bets go sour. With so much hanging in the balance, some money managers say they don’t know what their next move will be: buy stocks, load up on bonds, or simply hoard cash and wait for the dust to settle.

“We’re in a no man’s land,” says Robert Stein, the head of Astor Asset Management who is responsible for investments of $1.2 billion. “As a portfolio manager, I would like to have clarity. If it’s going to be a recession, we know what to do. If the economy is improving, that’s even better. But the economic data that’s been coming out is doing a great job of creating more question marks.”

Stein slashed his stock holdings by 50 percent in June after poor reports on economic indicators including consumer spending and new applications for unemployment benefits made him think the economy was stalling. He thought then that stocks would pick up during the last three months of the year. That’s when he planned to buy, but now he’s not so sure.

“We could buy again soon,” he says. “But it’s equally possible that we could reduce (our stock holdings) even more. We don’t see a tipping point either way yet.”

Stein is not alone. Confusion about the economy is one reason the stock market is the most volatile it’s been since the peak of the financial crisis in 2008. The Dow Jones industrial average rose or fell by more than 100 points 16 times in August, a rate that comes to two out of every three trading days. It swung by more than 400 points for four consecutive days in the middle of the month — a first in its 115-year history. Since hitting a high for the year in April, the Dow has fallen nearly 11 percent.

What investors do know is that the economy barely grew during the first six months of the year. Consumer confidence fell to its lowest level since April 2009, when the economy was still in a recession. And there was no job growth in August.

At the same time, the Federal Reserve’s latest survey found that the economy grew in all 12 of its regions from mid-July to the end of August. Sales of big-ticket items like cars increased from the same time last year.

Some money managers say the economic picture is muddled now because there are so many important issues that aren’t settled. Europe’s economies continue to battle slow growth and lingering debt problems. If Greece or another country were to default, it would likely throw the European Union into a financial crisis. That would directly impact U.S. companies, which rely on Europe for about 20 percent of their exports.

It’s not much clearer at home. Investors are waiting to see whether Congress can pass any legislation to bring the unemployment rate down from 9.1 percent, and if the so-called super committee can agree on $1.2 trillion in spending cuts before the end of the year.

Wil Stith, fixed income manager at MTB mutual funds, says that he thinks the economy will continue to grow at an annual rate of less than 2 percent. He’s buying corporate bonds because he thinks they provide attractive yields.

But he is still concerned that Europe or the U.S. economy could falter soon. “We’ve never had this sort of dynamic before, and I’m not sure where it goes from here,” he says.

The mixed signals are prompting some money managers to sit on the sidelines. “I don’t remember a time when the market has traded from economic report to economic report like this, and I’ve been doing this for 22 years now,” says Mark Lamkin, who manages $350 million for retail investors and endowment funds as part of Lamkin Wealth Management. “There is a huge tug of war going on and we don’t know the direction.”

Lamkin says that he tells his clients that they could either lose their capital or an opportunity. “Right now, I’d rather lose an opportunity,” he says. Lately, he’s moved 70 percent of his client’s assets into cash. The last time he was this cash-heavy was when Lehman Brothers fell in September 2008, he says.

He’s not buying government Treasurys, a traditional place that investors park their money when they aren’t confident in the economy. That’s because the economic gloom has pushed Treasury prices near record highs.

The yield on the 10-year Treasury bond fell to 1.87 percent on Sept. 12th as investors piled into assets thought to be safe during a down economy. That was the lowest since the Federal Reserve Bank of St. Louis began keeping daily records in 1962. If the economy improves, bond prices will likely fall quickly, Lamkin says.

“Why take the risk and tie your money up?” Lamkin says. “I’m trying to keep my powder dry so that when a trend does become clear we can make some money on it.”

NEW YORK (Reuters) – Volatility in equity markets is burning smart-money players, and even experienced traders are finding it hard to keep up.

Some fund managers have been dipping back into stocks to pick up bargains but could end up in a value trap if equities fall into a bear market and the economy falls into recession.

Others are taking a wait-and-see approach after getting blindsided by market swings not seen at least since the financial crisis — and by some measures well before that.

Most are unlikely to dive back in given fears over Europe's debt crisis and fears of a second recession in the United States that sent equity markets sliding over the summer.

The $2 trillion hedge fund industry — often seen as the smartest of the smart — will ultimately play an important role in whether stocks can rise over the long-term. Uncertainty there means more of the same churning action and precipitous falls without that wall of money to act as a back stop.

"Gross exposures have come down industrywide and large bets in either direction have also decreased because of the volatility," said Robert Francello, head of equity trading a Apex Capital, a hedge fund in San Francisco.

Francello said that as well, short-selling bans on banks in parts of Europe were hurting liquidity "no question."

A recent survey of hedge fund managers found that bearish sentiment rocketed in August to its highest level in a year.

The survey by BarclayHedge and TrimTabs Investment Research showed bearish sentiment rose to 42 percent in August from 27 percent in July.

It also revealed very bearish views on the economy. About 56 percent think the U.S. economy is already in recession or will slip into recession soon, and just 3 percent say economic growth is set to accelerate.

For Sam Ginzburg, head of capital markets at First New York Securities, where he trades his firm's capital, the "binary" situation is presenting investors with something akin to a zero sum game.

"There's a lot of money to be made or lost right now," he said. "If you have a view, meaning this isn't 2008 all over again and you think things are going to settle out and you start buying some of the mega-cap, big-cap stocks that will do well as the economy does better — or vice versa — the amount of money you can make is astounding," he said.

But for Ginzburg that time is not now. He said his fund was still "light" compared with the amount of money he could invest.

Over the summer the S&P 500 index, a broad measure of U.S. large-cap stocks, crashed 17 percent in just 14 trading days between July 21 and August 10. For investors, that was one of the most trying periods on record, and they are just not ready to start taking on big bets.

One market veteran who runs a proprietary trading firm in New York told his traders they could "go to zero (and) get the hell out of here" in August as the firm's inventories shrunk to just 15-20 percent of what they could be.

"It's just like betting on horses," he said. "That two-week period was the hardest I have ever had to deal with."

Joseph Mazzella, a senior trader at Knight Capital, agreed. Knight has one of the biggest retail books in the business and deals with a host of institutional clients.

"This is the most difficult trading environment I've ever seen," Mazzella said. "Performance has struggled, it's a really difficult year".

Many hedge funds cut bullish bets that they put on in the first half of the year, and comparisons with the financial meltdown of 2008-2009 abound.

"There is a lot of pain out there," said Mazzella. "These guys have just been whipsawed like crazy."

Earlier in the year many hedge funds built up bullish positions in growth-oriented stocks — bets that are likely to have been cut over the summer.

Data compiled by Credit Suisse from filings with regulators show that up until the end of June hedge funds were overweight stocks that are expected to do well in a growth environment.

But Pankaj Patel, the Credit Suisse analyst who compiled the data, said given what he is hearing from hedge fund clients, he expects many of them have become much more defensive.

"They are not telling us that they are taking a defensive move but talking to them you could sense that," he said. "Before they were not asking about the economy."

Options activity suggests uncertainty is running high.

Todd Salamone, an analyst at Schaeffer's Investment Research, said an increase in early September in downside protection in the form of put option buying on major exchange-traded funds based on equity indexes suggests some funds are hedging renewed equity exposure.

However, a lack of call buying on CBOE Volatility index (.VIX) options, which are another hedging vehicle for fund managers, sends the opposite signal.

"There is not a consensus there, and that is why we are having this choppiness," said Salomone.

In terms of institutional flows Knight's Mazzella has been seeing a flight to defensive bets.

"The only thing we see is a very defensive shift: utilities, healthcare, consumer staples; everything else is for sale," he said. "People are playing technology a little bit but everybody's leery so it's very much defensive positioning."

"We went from no protection being bought in the market to massive protection, and massive defensive positioning," he said. "So if you want to play the contrarian angle we probably went too far again."

(Reporting by Edward Krudy; Editing by Leslie Adler)