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Sunday, Jan. 11, 2009

Slow economy could make markets rife with bargains

The past year brought more pain than gain to Wall Street. The flailing economy, credit crunch and bursting of the housing bubble sent the economy — and stocks — tumbling to depths not seen in decades.

Though the forecast for the economy remains gloomy, there is reason to believe the markets will rebound later this year.

If history holds true, last year’s rocky ride should be followed by a decent year on Wall Street, said Raymond Smith Jr., president of Smith, Brown and Groover, an independent broker/dealer in Macon. He points to the Arab oil embargo of 1973 and the 11 percent unemployment in 1980 as rough times that were followed by several big years for the stock market. Even the Great Depression, he said, was good for investors.

“That’s because a great many companies had been priced as if they were going out of business, but they didn’t go out of business,” Smith said.

“There’s an old saying on Wall Street: The time to invest is when there’s blood on the streets. If you wait until everything’s all rosy, you’ve missed it.”

The Telegraph spoke with several area professionals to get their thoughts on what might lie ahead in 2009. None predicted a quick turnaround for the economy.

“We think the recession is going to last most of this year,” said Bill Miller, principal and director of investment services for Patton, Albertson and Miller, LLC, a Macon wealth management firm. “We think it’s going to be more drawn out because of so many excesses with the housing bubble and so many excesses with the financial sector.”

Wall Street, said Smith, first “has to deal with a wall of fear.”

“You have to get to the point where the people who are going to sell have already sold,” he said. “Now we have to get people to buy. Your human nature is not to buy, when that’s exactly the opposite of what you want to do.”

John Day of Day and Ennis, a fee-only financial planning firm in Macon, pointed to some encouraging early data for 2009. According to the Stock Traders Almanac, he said, when the Standard and Poor’s 500 index posts a gain the first five sessions of the year, the market ended higher for the year 85 percent of the time. The first five sessions of this year posted a return of 0.9 percent.

“That’s positive,” Day said.

Bill Miller, principal and director of investment services with Patton, Albertson and Miller, LLC, a Macon wealth management firm

Assets managed: $252 million

S&P 500 prediction: “I think we will be in a wide trading range for most of the year, fluctuating between 700 and 1,050, which is a pretty wide range. We’re in the process of forming a base. ... There will be a lot of up and down activity as world events unfold and we see some of the programs from Washington.”

Investment advice: “Classic defensive areas” such as consumer staples and health care, and large-cap (bigger) technology companies.

Miller expects the markets to show mostly “sideways movement, rather than a sharp downturn or robust bull market.” He is steering clear of sectors such as industrials, materials, consumer discretionary stocks such as retail stores and restaurants, and consumer financials.

“Some of the energy stocks are beginning to look interesting again,” he said.

The Federal Reserve will do more harm than good by keeping interests low and in effect penalizing savers, Miller said. He also is not optimistic about President-elect Barack Obama’s proposed economic stimulus package, which is aimed at creating jobs through infrastructure construction, saying it will be only “marginally useful.”

“We suspect we’re going to see a lot of wasteful spending and a lot of ‘bridges to nowhere,’ all under the guise that this is going to help the economy. ... Short-termitis is as prevalent in Congress as it is in the boardrooms on Wall Street.”

Bill Danner, owner of Security First Asset Management, Macon and Dublin

Assets managed: $25 million to $30 million

S&P 500 prediction: “We’ll see a lower S&P before we see a higher one.”

Investment advice: Alternatives to stocks and bonds, such as leasing, corporate paper and nontraded real estate investment trusts.

Danner advises retirees or people close to retirement age, a segment of investors who were hit particularly hard last year.

“They don’t have time to build their assets back,” he said.

Danner expects more volatility in the market this year and suggests shifting money to investments with the “least amount of negativity.” He recommends looking at alternatives, such as leasing and buying corporate or commercial paper — shorter-term bonds and money market securities sold by banks and corporations. He also suggests looking into non-traded real estate investment trusts.

“You’re talking about a Sears Tower, not a Macon Mall,” he said.

“These things still have risks,” he says, “but they’re not the risks associated with the S&P and the Dow.”

Danner also recommends diversifying 401(k) accounts into less volatile stocks. And, to guard against future high tax brackets, consider shifting some of the nest egg into Roth IRAs. Roth accounts offer no immediate tax breaks, but you don’t pay taxes when you withdraw the money.

“People need to be looking at a little more safety and not so much return, and at the sequence of when you take the money out of (a retirement) account. Markets are taking it away and you are taking it away, so it’s not growing. You’re going to outlive your money.”

Raymond Smith Jr., president of Smith, Brown and Groover, Macon

Assets managed: $300 million

S&P 500 prediction: Up 12 percent to 15 percent

Investment advice: “Buy quality. Buy the companies you know are going to make it who might be off 30 percent.”

Smith expects the markets to be ripe for bargains, but he warns investors to be selective.

“You tend to want to swing for the fence and hit a home run,” he said. “Buy the companies that you want to own and right now you can buy at a discount.”

Smith says it’s a little bit early to move on financials. “That’s where the money will be made eventually, but the bloodbath might not be over right now.”

One sector Smith likes a lot: “the retraining of America.” An example would be ITT Institute, which trains students for careers such as hairdressing and massage therapy.

“With the kind of job losses we have going on, there’s a whole lot of people who’ll have to be retrained,” he said.

He also suggests taking a hard look at municipal bonds, which are offering yields above 8 percent.

Smith says the housing market will not rebound as quickly as some experts believe, and it could be another eight years before the market gets back to where it was. He expects banks to practice very conservative lending practices, despite the bailout from Congress designed to get credit flowing again.

“Banks actually want to shrink right now,” he said.

Some good could come from the proposed economic stimulus package should it pass Congress, he predicts.

“With a little bit of luck, and everyone should keep their fingers crossed, this should be very inflationary, and that’s a good thing. ... Otherwise, the stuff we’re paying on is not worth anything. Inflation helps the debtor.”

John Day, partner at Day & Ennis, Macon

Assets managed: $175 million

S&P 500 prediction: “We’re in a fairly severe recession that will probably last on through the end of 2009 or early 2010. We would anticipate the market as a whole would tend to recover and show positive growth by the latter half of the year. ... We’ll see some pretty big swings from day to day.”

Investment advice: Mutual funds and exchange-traded funds.

Day’s firm does not trade in stocks, but it does invest in exchange traded funds, using broad market indexes and asset classes to determine where to put clients’ money.

“We’re looking for margin trends that last months or years. We’re not market-trenders. ... We try to eliminate the specific company risk so that you don’t have to worry about a company going bankrupt like an Enron or WorldCom or Delta Air Lines.”

He recommends that clients consider comprehensive financial planning that not only helps determine if and when they can afford to retire, but also manages their withdrawal rate.

“That’s just as important as the rate of earnings on their investment,” Day said.

Mary Burt, financial adviser at Edward Jones in Macon

Assets managed: Not available

Investment advice: “I don’t have a crystal ball. A well-diversified portfolio would cover all sectors and asset classes. There are no particular ones I would avoid or go after.”

“Historically, the good has always outweighed the bad. The average bull market has lasted three times longer than the average bear market,” said Burt, who’s worked at Edward Jones for 12 years.

“Now’s a great time to invest. Everything is on sale. Everything needs to be looked at,” she said.

While there are bargains to be had, Burt says investors should do their homework.

“I think everyone needs to educate themselves really well, or work with a professional.”

To contact writer Rodney Manley, call 744-4623.