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|  | JANUARY 6, 2006
A Capital-Spending Bonanza?Joseph Battipaglia of Ryan, Beck & Co. sees tech stocks particularly benefiting from accelerating corporate outlays in 2006Look for business spending to be the power behind the economy in 2006, says Joseph Battipaglia, executive vice-president and chief investment officer of Ryan, Beck & Co. While he thinks consumer spending will continue to grow at around a 3% rate -- and account for 70% of economic growth -- corporate outlays are going up 9% now, and the rate should accelerate, he predicts. Much of that spending will go to technology, Battipaglia says, as 2006 and 2007 see "a new expanding technology cycle." In the stock market, among the beneficiaries of that trend would be Microsoft (MSFT ), Motorola (MOT ), Palm (PALM ), Cisco (CSCO ), and game-software makers Take Two Interactive (TTWO ) and THQ (THQ ), he says. For the market in general, Battipaglia forecasts gains of 7% to 10%, and even more in some emerging markets, where he particularly likes South Korea and Taiwan. These were among the points Battipaglia made in an investing chat presented Dec. 29 by BusinessWeek Online, in response to questions from BWOnline's Jack Dierdorff and Karyn McCormack. Following are edited excerpts from this chat: What's your macro outlook for the market in 2006? The stock market will benefit from ongoing strength from the U.S. economy, which we believe will grow by 3% in 2006. It will benefit from an ending to the Fed's rate-tightening cycle, this being somewhere between 4.5% and 5%, and it will benefit from an expansion of the capital-spending cycle that has been present throughout this recent expansion. As companies deploy more of their free cash to capital-spending projects, this will help a great deal. We're also bullish on the global outlook for growth, which when you put it all together means we could see U.S. stocks gain between 7% and 10%, and certain international markets do even better, particularly in the emerging-market arena. Are you worried about oil prices, inflation, housing, or anything else for the coming year? As far as a real wild-card concern, I would say that al-Qaeda is getting quite desperate, given that Iraq has had three successful elections, and it wouldn't surprise me if they tried to strike back at the U.S. as a wild-card event in 2006. But as for the run of-the-mill threats to a decent stock market in '06, we believe crude will trade between $40 and $55 a barrel, which would be lower than the prices we saw in 2005. Inflation hasn't been stoked in the general economy such that we believe inflation in 2006 will come in at or under 2%. As for housing, it seems that the housing boom is now settling down into a more normal level of activity…and there shouldn't be a significant adverse wealth impact on the economy at large as the boom comes to an end. Looking back at 2005, what do you see as the pluses and minuses for the market over the year? Well, clearly the pluses were the economy's resilience in the face of much higher energy prices, economic dislocation, and distress courtesy of the hurricanes, and a nasty political environment where the drumbeat was how bad things were for America and in America. Another positive in 2005 was that the Fed delivered on what they said they'd do: a steady, measured increase in interest rates and a seamless handoff in leadership from Greenspan to his successor Bernanke. Another positive was the maintenance of high profit margins and good levels of cash generation by U.S. corporations, which in turn fueled a significant rise in dividends and stock buybacks, which served to help investors. It's a combination of these events that kept the volatility in the market low, and so we avoided any serious sell-off in the course of the year. While we didn't make as much money as we would have liked, it's something of a relief to not have explosive volatility for such a long time. On the negative side, we had terrific outperformance by commodity classes from agriculture to metals to oil, we had the last flourishes of the last speculative boom in real estate, so we haven't seen any new money come charging into the stock market yet. Another negative is the ongoing preference of investors for hedge funds and other private-account investment vehicles, which may sow the seed for dislocations in the future, given the fact that returns in these categories are hard to come by, and many investments so made don't have a ready public market. So liquidity is an issue. This is a story to be written, perhaps, in '06 and '07. Do you think consumer spending will remain strong? Or will business spending be the bigger story for 2006? We believe that, based upon how the economy is doing and the large corporate cash positions, investment spending will be a bigger story for '06 than consumer spending. Consumers will stay on the 3% growth rate in spending, accounting for 70% of economic growth, but capital spending has been growing at 9%, and we expect that to accelerate in the new year, as companies become more bullish on their own outlooks and look at the technology structure and realize they're entering a new period of obsolescence they'll have to contend with. I don't think it's a coincidence that Microsoft (MSFT ) is introducing Vista in 2006, which could make '06 and '07 part of a new expanding technology cycle. Which emerging markets do you like for the coming year? Chief among them would be South Korea and Taiwan. I'm still bullish on parts of Latin America, though I'm concerned about growth rates in those economies due to the leftist tilt of the latest elections in various countries. Given your expectation for corporate spending on tech, what stocks should benefit? Clearly, software companies like Microsoft stand to benefit. In the cellular area, Motorola (MOT ) is in the uptrend with dramatic new products. We also like Palm (PALM ) -- we think they will be much more competitive with the BlackBerry [made by Research in Motion (RIMM )], with a higher-margin product. We like Cisco (CSCO ) in networking and Internet telephony, though the stock has been a disappointment for some time. We're bullish on the game-software makers, names like Take Two Interactive Software (TTWO ) and THQ (THQI ).
BW MALL
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