ALBERT HERTER

‘ THREE WAYS INVESTORS CAN NAVIGATE THIS MARKET,’ by Will Swarts, Smartmoney, 04-13-09. Good primer to study if you think this might be a good time to buy or think about it. You gotta stay informed, hip, at the ready, prepared. AND THEN YOU DECIDE WHEN TO PULL THE TRIGGER.

In Uncategorized on April 17, 2009 at 18:12

This week the heart of the first quarter earnings season starts to report its numbers. While the results during the next few weeks are widely expected to be dismal — at the conclusion it should be the seventh consecutive quarter of negative earnings growth — many investors are looking for signs in the corporate releases that show this 12-week period represents the low point in the economic downturn. The thinking goes that once it’s in the rear view mirror, the stock market will hopefully resume an upward trajectory. Investors have already seen glimpses of that. The Dow Jones Industrial Average (.DJI Loading… ) gained 22% during a four week period that started at the March 9 bottom of 6547 and cooled off shortly before Alcoa (AA Loading… ) announced its results last week, traditionally the start of earnings reporting. Along the way there have been streaks of triple-digit trading days that made headlines but not a lot of money for most long-term investors. The end result of that volatility adds up to little in a stock market that seems like it can’t sustain a rally — at least for now. For long-term investors, big swings don’t equal big gains, especially when fast-money hedge funds drive the action, profiting from moves on volatile stocks with prices that bear no relationship to their earnings fundamentals. Nevertheless, fund managers are making changes to their portfolios in this tricky environment, whether it’s to play certain broad trends, profit a little on the margins of a long-term strategy or because they are setting themselves up for what they believe will be a rebound later this year and in 2010. These are three different approaches, and you can easily follow them, too, even if your investment horizon is ten years out not ten minutes. The day-to-day volatility will certainly continue this week as the banking sector releases its results. Even a change in mark-to-market accounting rules won’t prevent these firms from posting miserable results. The inevitable knee jerk reaction will be to sell. Indeed, J.P. Morgan (JPM Loading… ) equity strategist Thomas Lee believes trading activity without solid fundamentals will keep the benchmark S&P 500 stock index (.SPX Loading… ) between 750 and 1100 until the housing and financial sectors bottom out and stabilize. “We still think a final low is ahead of us,” he wrote recently. Charlie Mercer, manager of the Aston/Veredus Select Growth Fund (AVSGX | Get Prospectus Loading… ), points out that throughout 2008, the market has endured 28 one-day swings of 4% or more. Between 1945 and 2007, he says, the S&P had 49. That’s “the type of volatility we see in frontier and emerging markets,” he says. “Not the biggest, most developed market in the world.” “That creates a different environment, and what you do depends on your appetite not so much for risk taking, but more about your desire to trade in a trader’s market,” he says. That’s not for everyone, particularly small investors who can’t be as nimble as professional traders. “The volatility bubble won’t last forever, and being long in it at this stage of the game is a very risky bet.” We asked Mercer and two other managers with long term perspectives how they were playing this market. Of course, we got three different answers. Mercer remains cautious about earnings, but he does see positive signs in how some sectors are performing. “Earnings are not good,” he says, adding that conventional wisdom predicts nine consecutive quarters of negative growth will come to an end in the third quarter of 2009. “But there are some sectors where estimates have simply been too low.” Technology has traditionally done well coming out of downturns as investors flock to stocks that have big growth potentials. That trend is playing out in a big way in 2009. Through last week, Lipper says the average technology fund returned 9.2% in 2009 vs. a 7% loss for S&P 500 index funds. Mercer says semiconductor stocks like Qualcomm (QCOM Loading… ), Broadcom (BRCM Loading… ) and Intel (INTC Loading… ) have been oversold. He’s also looking at low-end dining chains like Darden Restaurants (DRI Loading… ), Chipotle Mexican Grill (CMGB Loading… ) and Panera Bread (PNRA) as a way to play the cash-strapped consumer angle. These stocks have outperformed this year albeit against extremely low expectations. “The market is priced for near Armageddon,” he says. “People simply got too negative with those industries.” One option for long-term investors is to develop a keen short game, says David James, portfolio manager and senior vice president at James Advantage Funds, a mutual fund company based outside of Dayton, Ohio. James says investors should lower their overall stock allocation but shoulder a bit more risk with small sums of cash. “It’s more of a counterpuncher situation,” he says. “Remember not to fall in love with your stocks – you’re looking to buy them and hold them for a period of time, and enjoy a portion of the rally.” James Balanced: Golden Rainbow (GLRBX | Get Prospectus), the firm’s $533 million flagship fund, currently splits its assets between bonds (42%), stocks (33%) and a large cash position. Top equity holdings as of its last filing date include Hess (HES Loading… ), IBM (IBM Loading… ) and Western Digital (WDC Loading… ). The fund holds the top spot in its Morningstar peer group over the last decade and only lost 5.5% last year. Or, investors could look at these short-term blips as just that — temporary fluctuations that shouldn’t influence a long-term strategy. That’s an idea Adriana Posada recommends. Posada, who manages the American Beacon Large Cap fund (AADEX | Get Prospectus Loading… ), says it’s better to think years ahead, not get caught up in the moment. Her fund, whose major holdings include IBM, Verizon Communications (VZ Loading… ) and Wyeth (WYE Loading… ) (which proved to be a wise name to stay with – the pharmaceuctical company was bought out by rival Pfizer (PFE Loading… ) at a 32% premium at the end of March), has very little turnover despite current market turmoil. “If you have to take a beating, that’s what you do,” she says. “We think that a lot of the retrenchment is not permanent, not due to fundamentals. These companies are not broken. As long as they can have internal or alternative sources of short-term funding they can survive.”

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