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Portfolio > Economy & Markets

Research Investment Roundtable 2009-2010

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The tumultuous first decade of the 21st century is nearly history.

Taking the mystery out of the first year of the second are predictions from our distinguished Research Roundtable panel of experts.

In October 2009, they largely look for more stability in both the economy and financial markets, though most view as iffy the sticking power of last year’s rally.

Uncommon government intervention somewhat beclouds the crystal ball. Nevertheless, our panel — voicing widely divergent opinions on certain issues — draws a cautiously optimistic picture, citing such areas as energy and emerging markets as good bets.

Demystifying 2010 are Roundtable panelists:

John Buckingham (Laguna Beach, Calif.) Chief Investment Officer, Al Frank Asset Management, managing $460 million in assets. Editor, The Prudent Speculator newsletter. Manager, the $130 million Al Frank Fund, with an annualized 10-year return of 9.78 percent, through September 30, 2009.

Kenneth L. Fisher (Woodside, Calif.) Fisher Investments, which manages $35 billion in assets. Forbes Portfolio Strategy columnist for 25 years. Author of the New York Times best seller, How To Smell A Rat: The Five Signs of Financial Fraud (Wiley & Sons, 2009)

Nicole Gelinas (New York City) Searle Freedom Trust Fellow, Manhattan Institute for Policy Research. Chartered Financial Analyst. Author, After the Fall: Saving Capitalism — and Washington (Encounter Books, November 2009).

Robert L. Rodriguez (Lake Tahoe, Nevada, and Los Angeles, Calif.) CEO, First Pacific Advisors. President and CIO of FPA Capital Fund, with a 10-year annualized net return of 8.77 percent, as of August 31, 2009. His FPA New Income Fund, with a 10-year annualized net return of 5.56 percent, as of August 31, 2009, hasn’t had a down year in more than 32 years.

What’s the state of the stock market right now?

Fisher (left) : It’s a bull market; the bear market is over. If this market were to turn around and reverse, it would be by far the biggest global so-called sucker’s rally that’s ever occurred.

Rodriguez: The stock market is overly ebullient and highly speculative. The robust earnings growth we’ve seen has came as a function of cost reductions, not top-line growth. We’re in an interlude.

Buckingham: This has been a rally that’s benefited crap over quality. Are we pricing in significant economic improvement — or lackluster earnings and perhaps another economic let-down? It’s a little of both. Stocks aren’t reflecting a robust economic environment.

Gelinas: We’re doing the same thing that we did a few years ago: pushing asset prices up through borrowing. But this time, it’s federal borrowing, not house borrowing. Everything has become a risk of the government and the financial industry.

What’s your outlook for the stock market in 2010?

Rodriguez (left): A number of securities’ prices that have had significant rallies are discounting some very optimistic outcomes. But what will top-line earnings growth be? There will certainly be more volatility. If we didn’t feel this way, would we be selling?

Gelinas: The fact that we haven’t fixed financial regulation will contribute to uncertainty and market valuations that are perhaps based on government guarantees and the expectation of future guarantees rather than on fundamentals.

Buckingham: Stocks can move higher because, despite the rebound, there isn’t a lot expected of them. They’ve done so well this year that it’s hard to envision that there won’t be some pull-back. However, history shows that some of the best times to buy are after stocks have gone nowhere for 10 years — and in the last decade, stocks have gone nowhere.

Fisher: There will be some form of pull-back. But it will be a bull market, and we’ll see markedly higher prices by the end of 2010.

How will earnings shape up?

Buckingham (left): As the economy continues to show signs of life, we’ll start to see a little bit of top-line growth. But I’m not expecting it to become significant.

Fisher: Earnings will be very robust all around the world because people cut costs so much. Profits will be markedly stronger than revenue growth.

What’s your outlook for the overall economy?

Fisher: The U.S. economy is clearly in recovery mode. It will grow. However, it will lag most of the rest of the world. Categorically, emerging markets are now leading the world; they have new stuff going for them. America has more things to get over.

Rodriguez: I don’t believe we’re in a sustainable economic recovery. We’ve seen almost unprecedented intrusion into the private sector. The Congress has been fiscally incompetent. They have leveraged up the system and not addressed the liabilities of Social Security and Medicare. Now you have the administration trying to do health care.

Gelinas: The real risk for the economy is that we’ve got a government whose economic policy is to keep housing prices inflated and allow financial firms not to take the full extent of their very real losses. This is crowding out other parts of the economy that may be more productive in terms of growth. Unless the financial industry shrinks, it’s difficult to see how we’ll have productive growth elsewhere.

Buckingham: I’m more optimistic about the first half of the year because expectations will be low. In the second half, the bars are going to start to rise; and we could run into some headwind.

What’s the outlook for bonds?

Fisher: In a world where the economy is expanding, there’s a bit of inflationary pressure. I don’t expect to see very good returns from bonds.

Rodriguez: We’re maintaining very short-duration, very high-quality bonds.

Buckingham: With all the money that’s gone into bond funds, I’m pessimistic: The asset class that attracts all the money is often the one that performs poorly in the subsequent year.

What will happen with President Obama’s financial reform plan in 2010?

Gelinas (left): [We need to] make financial firms accountable to market discipline like the rest of the private-sector economy and [institute additional] sets of regulations. If we had treated instruments, such as credit default swaps, like any other kind of financial instruments and put reasonable limits on them, we wouldn’t have had a crisis.

Most of the failures were failures to recognize new, speculative markets and instruments, and to apply rules. That isn’t an SEC issue; it’s more a Fed issue with some SEC involvement.

Rodriguez: Treasury Secretary Geithner was head of the New York Fed when the balance sheets of investment banks exploded. Fed chairman Bernanke was a big supporter of [former chair] Alan Greenspan’s insane monetary policy. It doesn’t seem like there’s any [sense of] responsibility there! The Federal Reserve already has too many missions. Do I have confidence that the Fed and the regulatory agencies will control [banks]? Too much politics!

Fisher: There will be more regulation, but not much more. Most of it will be stalled until after the mid-term elections. The [proposed] consumer protection agency is nonsense. The consumer and only the consumer will protect the consumer.

What’s the risk of inflation?

Gelinas: People should be very worried about inflation and government borrowing crowding out a rational private-sector recovery.

Buckingham: You have a tremendous amount of stimulus in the system; and you’d think that ultimately that has to be inflationary.

Rodriguez: One of the things we’re watching is the size of future TIPS [Treasury Inflation-Protected Securities] auctions.

What do you see happening to the dollar?

Fisher: If our central bank ends up raising short-term interest rates and other central banks don’t, the dollar will be strong. If other central banks raise rates and we don’t, the dollar will be weak.

Rodriguez: What we are witnessing is the beginning stages of challenge to the supremacy of the dollar as an international unit of trade. The more the government abuses the balance sheet, the faster the erosion in the stability of the dollar.

Any other comments about interest rates?

They’ll start to pick up. That’s not necessarily a negative because that happens only with greater signs of economic stability. But rates will remain extremely low.

Gelinas: All the government has been doing is keeping interest rates low for five years on refinanced mortgages. People looking at investments should think of this as a huge problem that’s going to rear its head again in five years. Meanwhile, we will have vastly increased the federal debt.

Will employment begin to increase?

Fisher: No, unemployment will continue to rise. It typically lags the cycle, not leads it.

: I expect that unemployment will be rising into next year.

Buckingham: Because corporations got very lean, we’ll start to see the employment situation improve — not that we’ll go back to “Happy Days Are Here Again!” We’ll still have fairly high unemployment, and absolutely a consumer that struggles.

Any further thoughts about consumer spending?

Rodriguez: The American consumer is basically tapped out. Consumption domestically is coming down. We need to [focus on increasing] exports because if the consumer pulls back, business basically isn’t expanding through the domestic market. The only real way for the economy to grow is to expand exports.

Fisher: Actually, consumer spending as a percentage of GDP went up during the recession. It will be within the bandwidth of 69 percent to 72 percent of GDP no matter what.

Gelinas: We have an economy that’s far too dependent on consumer spending and not dependent enough on investments and saving. It seems that Washington wants to keep up borrowing at all cost; meanwhile, [consumers] want to cut their spending.

Which sectors do you like for next year?

Fisher: The ones that got beaten up the most in the bear market, including materials, industrials, technology, energy and emerging markets — categorically non-U.S. over U.S. That is, everything foreign but led by emerging markets.

Rodriguez: We’re focusing [mainly] on energy and technology. We like energy longer term. Within three to five years energy prices will be at least $100 to $150 higher.

Buckingham: Values are in health care, such as managed care provider Aetna. We like pharmaceutical makers, like Abbott Laboratories and Bristol-Myers. Larger-cap names — Walmart, for example — will do well independent of what happens in the overall economy.

In the telecom space, we like Verizon; in the selective supermarket area, Kroger and Supervalu. There are opportunities in financials, such as major banks — Bank of New York Mellon, for instance.

Gelinas: Again, it’s very important to keep in mind that we have an economy that’s distorted by government guarantees of the financial sector. The sector is based on a too-big-to-fail guarantee, and it comes at the expense of other sectors of the economy.

John, any more sectors that interest you?

Buckingham: We love technology and are holding lots of names, like Intel, Apple, Applied Materials. Cisco Systems is a favorite.

Overall, how bullish are you for next year?

Fisher: This has been a great year. I don’t know if next year will be as good, but it will be a nice year.

Buckingham: On a bullish scale, if “1″ is bearish, I’m in the “8″ range. I might be super-duper bullish if we weren’t up 70 percent from this year’s low.

Rodriguez: We’re being very cautious in our capital deployment. [The U.S.] has moved into a new financial system — a new era — and I distrust it. I look not at what people say; I look at what they do.


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