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Research Roundtable

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The panelists are optimistic about what they forecast to be the sixth year of the bull market. No, they’re not wearing rose-colored glasses: In interviews this past October, they factored in weaker corporate earnings, credit market problems, housing instability, the dollar’s decline. Still, their general outlook is upbeat about both the stock market and the U.S. economy. Indeed, despite concerns, no one on the panel is predicting a recession in the final year of George W. Bush’s presidency.

Some of our experts look for healthy large-cap returns in sectors such as banking, energy and technology. In foreign investing, Europe and Asia — especially China — are focal points. What’s up? Read on.

The Roundtable Members Are:

JOHN BUCKINGHAM (Laguna Beach, Calif.) CEO and Chief Investment Officer, Al Frank Asset Management, managing $875 million in assets. Editor, The Prudent Speculator newsletter; co-editor, The Prudent Speculator Tech Value Report. Manager, the $270 million Al Frank Fund, with an annualized five-year return of 24.48 percent through September 30, 2007.

DAVID N. DREMAN (Aspen, Col.) Chairman and CIO, Dreman Value Management. Forbes columnist (“The Contrarian”). Managing editor, The Journal of Behavioral Finance. Manages $22 billion in assets, including the $9 billion DWS Dreman High Return Equity Fund, with an annualized five-year return, for Class A shares, of 16.73 percent (net), through September 30, 2007.

KENNETH L. FISHER (Woodside, Calif.) CEO, Fisher Investments, which manages $45 billion in assets. Forbes “Portfolio Strategy” columnist for 23 years. Author of The New York Times bestseller, The Only Three Questions That Count (John Wiley-2006).

WENDY TREVISANI (Santa Fe, N.M.) Co-Portfolio Manager and Managing Director, Thornburg International Value portfolio, totaling $17.5 billion-plus in assets and with an average annualized return of 14.8 percent (A shares), through September 30, 2007, since its May 1998 inception.

What’s your outlook for the stock market in 2008?David Dreman: There are a lot of contingencies. How bad is credit going to be? Are we going into a recession? The dollar is sinking. Higher inflation. It’s a tough one. It’s going to be very volatile. There aren’t a lot of places to go.

Buckingham: I’m optimistic. The fourth year of a presidency is statistically favorable. The economy is slowing, but valuation is still attractive. Interest rates are low. Corporate America is in pretty good shape.

Fisher: Next year will be another very good year — in the realm of 20 percent-plus. Stocks are very cheap compared to the cost of long-term interest rates. By the end of this year we’re going to have a resurgence in both stock buy-backs and takeovers driven by public companies.

Trevisani: Globally, growth remains relatively robust. There’s plenty of opportunity outside the U.S. for continued economic expansion.

What specifically do you see happening in international?Trevisani: The bulk of our diversified portfolio of a limited number of names is invested in Europe, [but] we see growth continuing in emerging markets. We’re primarily in advanced emerging markets. Nowhere else can you find a telecommunications company that’s adding 5 million subscribers a month like China Mobile, or a pure-play manufacturer like Embrear or a retailer that’s able to grow its same-store sales like Wal-Mart de M?xico.

Buckingham: Investors shouldn’t flee U.S. equities because the conventional wisdom is that you need to invest overseas. The world is a global economy; everything is interconnected. You can invest in a company headquartered in Peoria that sells products to European manufacturers and sources products in Asia.

Dreman: Foreign investing has been outstanding this year, but most of it was currency gain as the dollar fell. When the pendulum swings, you lose it just as fast.

So then you all disagree with Ms. Trevisani when it comes to emerging markets?Fisher: They’re leading the world very much the way tech did in the mid-1990s: When the market goes down, emerging markets go down less. [But] when it’s over, emerging markets will behave badly.

Buckingham: There’s a lot of danger there. In the short run, emerging markets will continue to intrigue investors; in the long run, many people are going to be disappointed.

Dreman: Go back to 1998 and the Russian and Far Eastern crises. Some of those markets were down 40 percent or 50 percent. The companies just unraveled.

What do you foresee regarding inflation next year?Dreman: The one thing I’d bet on is that we’re going to have higher inflation than most people think before the end of next year.

Buckingham: We don’t have a lot of inflationary pressures on investors. It’s one thing to say everything costs more; but when you’re doing the calculation as the government does it, inflation is not that big a problem.

Do you predict more interest-rate cuts?Dreman: There may be further cuts, but it would be a disastrous thing. You can cut interest rates in a productive manner only when you’re not fighting the kind of inflation that we may face.

Trevisani: There will be more cuts, not only in the U.S. but in Europe and the U.K. The U.S. runs a bigger risk of inflation if they make too big a mistake. But in Europe and the U.K., the consumer has been pretty strapped. A decline in interest rates would be beneficial for their economies — and perhaps provide some support for the U.S. dollar as well.

Buckingham: It wouldn’t surprise me if there would be additional fall-out from the credit crunch and the housing slow-down, so we may see another cut or two. That would be positive for the stock market.

Fisher: People who are pinning everything on the Fed are missing the point that Fed cuts are kind of 50/50. Remember that it cut rates in 2001 and 2002, and the market didn’t go up.

What’s in store for bonds?Dreman: With the threat of more inflation, I certainly wouldn’t want to buy bonds or fixed-income securities. If I needed income, I’d buy very short maturity bonds, but I wouldn’t go further than that.

Fisher: Look for bonds to go sideways, the way they’ve been for the last few years.

What do you predict for the U.S. economy in general?Dreman: On one hand, the Fed has cut interest rates to stop the sub-prime and liquidity crisis from getting worse. On the other, inflation is still rising. But on the whole, I’m optimistic.

Fisher: Since the stock market is going to be fine, the economy is going to be OK. The market is the best leading indicator. Today the U.S. is one-third global GDP. So if the rest of the world is strong, the U.S. is going to be just fine. Once upon a time, if we had a recession, we dragged the rest of the world down. Today, the rest of the world will drag America forward.

Buckingham: We’re not going to have a significant downward move in the economy, nor are we going to have a big spike up in growth.

So none of you thinks the U.S. will fall into a recession?Buckingham: The market is an anticipatory mechanism. Therefore, many investors have already priced in a recession — or something close to it — which was what was going on last summer.

Dreman: I don’t see us going into a real recession, but we could see earnings’ rate of increase come down to almost zero — they could even be down a bit because a lot of prices will be rising with inflation.

Do you share Mr. Dreman’s views?Buckingham: If you can grow earnings at 7 percent, that’s still pretty gosh-darn good.

Fisher: Earnings will be better than people expect because we’re going to be shrinking the supply of equities through stock buy-backs and takeovers.

What are your expectations for U.S. employment and consumer spending?Buckingham: Spending has got to slow based on the fall-out from housing. But never underestimate the strength of the American consumer: after 9/11, people went shopping.

Dreman: Consumer spending is messy: they’re getting chopped by two or three factors. The middle class is pretty unhappy.

Fisher: Consumers are far from overspent and are very vibrant. People always think consumers are in terrible shape. All the folks who have been wrong about that before are still wrong about it.

Will ’08 be a big-cap or a small-cap year?Dreman: We’re seeing more of a movement toward large-cap, [even] some movement toward large-cap growth. But there’s been nothing new there since the late 1990s. A lot of companies with very poor records in the last seven or eight years are trading at pretty high multiplies — but they don’t have the earnings.

Fisher: This is more of a mid-cap market because that’s where you get both the takeovers and the takeoverees. Mind you, I define big as stocks with caps bigger than the average cap of the market, which makes them pretty darn big.

Buckingham: Small-cap has had such a great run that it was probably natural that large-cap would start to outperform, as it’s done this year. I expect that trend to continue.

What’s the biggest threat to the market next year?Trevisani: Recession. That, coupled with mounting inflation pressures, would [make] the market go down. If individuals can’t manage, certainly we’d be in for some pull-back.

Dreman: The liquidity crisis. It still has to be played out. It’s not only subprime mortgages. Private equity companies have about $300 billion in bonds to sell. It’s doubtful they’ll be able to sell them all in the next three to six months.

Buckingham: Outside of a terrorist event, if earnings don’t materialize or if things look like they’re getting far worse in terms of the economy, that would be cause for alarm for a good many investors.

Fisher: There isn’t a threat that’s particularly big. The issues are exogenous geopolitical ones. The threat of terrorism is always a possibility, though it’s never very likely [to occur].

How about the continuing housing meltdown?Buckingham: We don’t know how deep the downturn will be. But in the long run, housing is an area you want to invest in because the population continues to grow and people need a place to live.

Fisher: Housing will be weak, but it’s not big enough to matter — and everybody already knows about it. It’s already priced in.

Will the credit crunch yet be plaguing us?Trevisani: There’s still some fall-out to be had from matters like adjustable mortgages. That’s probably in the third or fourth inning, and it’s going to hurt in the U.S., particularly where housing prices are still very high. But it’s priced into a lot of stocks, especially those in the financial realm.

Fisher: I deny that there ever was a credit crunch! Utter nonsense! What we had were people floating cash and acting crazy in fear of a credit crunch. That’s bullish. We’ve had a subprime mortgage issue that rippled over into housing issues that people feared would become credit crunches.

What do you forecast for the dollar?Trevisani: If interest rates keep coming down relative to the world, it will create downward pressure on the dollar.

Dreman: The dollar is difficult. If foreign banks raise interest rates, as rumored, they’ll be fighting inflation more aggressively than we are; and that would drop the dollar. The more inflationary fires continue to pick up here, the more likely the dollar is to come down even more.

Fisher: Dollar doesn’t matter. Think about the period from March until now. The dollar has been terribly weak, and the U.S. stock market has been just fine compared to foreign markets.

What sectors do you like for next year?Dreman: We have a big position in oil — it’s a cash cow. The money the major oil companies are making is enormous. They’re trading at 12 times earnings — and the earnings are holding up extremely well. We like Conoco, Apache, Anadarko, Devon.

We like some tobacco — though we’ve cut down. Philip Morris will do well when they spin off their international portion early next year.

We have some banks. Two of my favorites are Bank of America and Wachovia.

We like Freddie Mac and Fannie Mae. They’ve been whipping boys for the Federal Reserve since they ran into accounting problems [a few] years ago. The Fed and the Administration froze their ability to expand and put very stringent standards on them. But they forgot all about the subprime people, who had no standards and caused real problems.

Freezing Freddie and Fannie actually did them a very good turn: Now they’ve got enormous surpluses. They can certainly bring more liquidity by buying the mortgages of many firms that have to sell their holdings.

Buckingham: We like tech, including Microsoft. Its balance sheet is fantastic: over $23 billion in cash. Another interesting company is American Science and Engineering. They have x-ray technology to detect explosives, etc., in container shipments. This is a way to hedge your other long exposure that might be hurt by a terrorist attack.

We like United Online, an Internet services provider; they also have, which in August filed to go public and could get a nice valuation.

We’re investing in financial stocks because they’ve underperformed for a very long time. We like Citigroup. Another sector we like, believe it or not, is energy — companies that are more on the natural gas side, such as Chesapeake Energy. We’re enamoured with its management team.

We also like retailers. One is American Eagle Outfitters, who’s done an excellent job of navigating the retail [scene] for those fickle 16- to 25-year-olds.

Fisher: In an environment where the economy does better than people think it will, materials, energy and industrials will do very well, as will the capital- spending part of tech. Most of tech spending is cyclical, just like industrials.

Dreman: I don’t see tech. We’ve gone through an almost 10-year period where not much is new. Except for Google and Yahoo!, the rest of the companies are pretty mundane. Normally a technology boom is led by major innovations. That’s not the case now.

Trevisani: [Internationally], telecommunications remains one of the most attractively valued sectors. We like the big telecoms but also the emerging-market wireless companies and tangential companies like Nokia, one of our top performers. We also like ARM Holdings, a U.K. company that makes phone components.

Recently, we bought some companies that we consider consistent earners, such as Nestl? and Danone. Another with strong pricing power is the luxury goods maker, Louis Vuitton, which has a broadening consumer base.

Health care is a pretty lively, though arguably unappealing, out-of-favor sector. However, we believe there are some gems in the rough — like Israel’s Teva Pharmaceuticals, the world’s biggest generic manufacturer, and the Danish Novo Nordisk, a leading supplier of diabetes therapies.

How about Latin America?Trevisani: We own the same stocks we’ve owned there for a long time: Wal-Mart de M?xico, American Movil, Embraer. So we’re not finding a heck of a lot of new value in Latin America. We’re seeing more opportunities for growth at a reasonable price in places like Asia.

China, for example?Trevisani: Yes, it doesn’t show many signs of slowing; it’s still a very unpenetrated market when it comes to goods and services. China has the largest economy in the world by population and is continuing to grow in wealth status. We do see some inflated valuations there, though.

About 10 percent of our portfolio is invested in China. Some very intriguing names that we’re going to own for a long time are: China Mobile; Country Garden — a property developer; China Merchants Bank; and Sinopec, also known as China Petroleum & Chemical.

Fisher: China is going to continue to be great until late in this bull market. The same way that tech rolled over close to the peak of the market as a whole, China and Asia will roll over. When you get to the very end, it will do badly. But the very end is probably after it’s done so much better so much longer than anyone can conceive. Remember: At the top, nobody thought tech was going down.

Buckingham: China has different accounting standards, a whole different way of looking at things from a governmental standpoint. Yes, China is exciting. But can companies actually make money there?