From the March 2008 issue of Boomer Market Advisor • Subscribe!

A quick Q&A with Craig Callahan

Hearing that someone has a "system" for better performance in volatile conditions usually means a sweaty guy clinging to a craps table in Las Vegas. This is decidedly not Craig Callahan. A finance professor by background, the founder and president of Denver-based ICON Advisers applies a strict, academic methodology to the firm's bottom-up value approach to investing. Callahan took a few minutes to explain the recent market volatility, and what it means for the boomer portfolio.

Boomer Market Advisor: What are the chances of a recession in 2008?

Craig Callahan: No one knows the answer to that question, not even the Federal Reserve. Rather than trying to predict the unpredictable, we focus on numbers. Economic forecasting is not part of our investment process. That said, we believe the Fed is acting in a responsible manner to try to prevent a recession.

BMA: The market as a whole seems reasonably priced based on forward P/E ratios. But what if earnings forecasts are wrong?

CC: Some investors focus on year-over-year earnings comparisons. We do not. We compute intrinsic value and do not use P/E or other simplistic ratios. We measure domestic stock prices as about 20 percent below our estimate of intrinsic value as of December 31, 2007, and we are bullish.

BMA: What's the biggest risk factor for 2008?

CC: The stock market has been on a better-than-average advance during the last five years. Many investors who have been worrying about oil, housing, war, and other news events have missed out on market gains.

Our valuation readings suggest domestic stock prices need to advance about 20 percent to reach our estimate of fair value. We go by our valuation guide and do not guess about events.

BMA: Should investors buy now?

CC: In our experience, stocks often begin a rally when the news is bad. As the rally proceeds, the news continues to worsen for many months. Then, finally, the news begins to improve. Under this analysis, an investor who waits for good news will likely miss the rally. The volatility we've seen during the last five months is typical of an industry theme change. We view the volatility as a tug-of-war between an old theme and an emerging one. Investors oscillate between the old theme and the new theme as news is released. Our valuation measurements have told us to remain invested, and that would be our recommendation for investors.

BMA: What's your view of international stocks?

CC: Over the last five years, gains in international stocks have been even better than in the U.S. International stocks were generally better bargains; prices had further to go to catch intrinsic value. Now, however, as far as we can tell, that valuation advantage is gone.

BMA: What sectors do you currently like?

CC: Some new sector and industry leadership emerged in 2007 such as Information Technology, which had lagged the last few years. We believe the Technology sector may continue to lead the market. Consumer Discretionary and Financials represent the best two sector bargains under our system, and our research suggests they may emerge as leaders sometime in 2008.

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