Despite deep uncertainties in housing and financial services, investor opportunities remain in the tumultuous markets
Have the bulls stampeded for the hills? Plenty of bears have clambered aboard the market's bullet train, raising the question of whether the credit-market turmoil that has torpedoed Merrill Lynch and Citigroup presages the end of the bull market. The simmering cauldron of adverse news about the credit markets continues to unnerve investors. The ouster of Merrill Lynch CEO Stanley O'Neal on Oct. 30 (BusinessWeek.com, 10/30/07) and the resignation of Citigroup CEO Charles Prince on Nov. 4 (BusinessWeek.com, 11/2/07) validated investor fears that the breakdown in the financial world may be worse than everybody has projected.
Investors did an about-face from their optimism on Oct. 31, when the Federal Reserve Board cut the federal funds rate by another quarter point and the stock market surged. The very next day, on Nov. 1, investors abruptly turned bearish and drove down the Dow Jones industrial average by 362.14 points, or 2.6%, to 13,567.87. New worries about Citigroup's (C) financial state prompted one Wall Street analyst to advocate a dividend cut at the financial giant to offset huge losses in the credit markets. Weak earnings reports from ExxonMobil (XOM) (BusinessWeek.com, 11/1/07) and Credit Suisse Group (CS) also weighed on the market.
Wait for the Storm to Pass
But as dark as the skies over Citigroup and Merrill Lynch (MER) may be, it looks highly unlikely that a substantial market decline lies ahead. Yes, financials and housing look treacherous, sectors that most investors should probably avoid. But the underlying economy continues to show surprising strength, as evidenced by the 3.9% growth in gross domestic product reported on Oct. 31 (BusinessWeek.com, 10/31/07), the same day as the Fed's rate cut.
That should provide something of a safety net for investors. Many veteran Wall Street professionals assert that the bull market is intact and that the current corrections are necessary to reset expectations, particularly in certain sectors. "The best thing to do at this point is nothing—just keep still and stay cool" until the storm passes, says Wall Street veteran Robert Stovall, an investment strategist and managing director at Wood Asset Management. "We are still in a bull market. Some of the smart guys have taken profits and are staying with their cash—until it is time to bottom-fish again," says Stovall.
For the most part, the market will move sideways as some investors rake in the big profits they have amassed, while others begin to bargain hunt. This will cause the rising volatility to continue as the market tries to shake off investor jitters.
Some Bright Prospects
On Nov. 2 some of the market's angst appeared to have abated. The Dow skittered south for most of the day and then ended up closing with a gain of 27.23 points, or 0.2%, to 13,595.10. But expect the market to remain edgy, as it will continue to be highly sensitive to the flow of news about the turbulence in the credit markets. It should be particularly vulnerable to any headlines relating to financial companies.
While the news in housing and much of finance is disconcerting, and exacerbated by the persistent rise in oil prices, prospects appear brighter in technology, oil drilling, alternative energy, entertainment, gold, metal, medical devices, and industrial sectors, including the automotive industry.
Bernie Schaeffer, chairman and CEO at Schaeffer's Investment Research, says although the market is at a crossroads, some stocks in these groups should be snapped up at this juncture. He says Southern Copper (PCU) and SunPower (SPWR) are attractive buys and are selling at very attractive prices. He'd even take a chance on Mastercard (MA), given its relatively steady business compared with most of the other companies in financial services.
Carl Birkelbach, president of Birkelbach Investment Securities, says this may not be the time to try to find lots of bargains in the market. He warns that there are ample reasons why the market could still go lower, including the deteriorating housing problem and unchecked rocketing of oil prices. Nonetheless, Birkelbach says some stocks look attractive, including business software giant Oracle (ORCL), flash-storage provider SanDisk (SNDK), railroad industry supplier Wabtec (WAB), and Manitowoc (MTW), a maker of beverage dispensers and commercial refrigeration equipment for the food service industry.
Stephen Leeb, president of Leeb Capital Management, says a major issue rattling investors is whether inflation or recession will be the market's bogey. The Fed, he says, is bent on preventing the resurgence of inflation. On the other hand, the economy's modest growth, hampered by the housing slump and rising oil prices, could lead to a recessionary environment, he says. The huge move in gold has moved its price closer to its all-time high of more than $800 an ounce in 1980. And the surge in the price of oil is adding to inflationary pressures.
How should investors play this dual inflation/recession issue? To capture the improving gold fundamentals, Leeb recommends buying shares of Barrick Gold (ABX), a global gold producer with mines and development projects in the U.S., Canada, South America, Australia, and Africa; Kinross Gold (KGC), which produces gold in the U.S., Canada, Central America, South America, Africa, Australia, and Russia; and Agnico-Eagle Mines (AEM), which produces gold primarily in Quebec, Canada, and Nevada.
A Long-Term Focus
To participate in the robust growth in energy, Leeb favors buying shares of Schlumberger (SLB), the largest oil-services company, and Transocean (RIG), which owns and operates mobile offshore drilling units, inland drilling barges, and other assets used in the support of offshore drilling activities worldwide.
What sector should investors avoid? Leeb agrees it's too early to go after financial and homebuilding stocks. There are other fish to fry in the meantime, he says. Leeb, who says he remains a long-term bull, figures the market will coast along for a while, rising and falling within a 10% trading range. But the market's bias, he believes, is still on the upside.
In these times of near-extreme volatility, investors should avoid contributing to the market's turbulence by keeping their eyes on long-term goals. Pull the buy or sell trigger only when you are sure it will enhance your portfolio's long-term objectives. It is easy to be trigger-happy when the Dow plunges more than 300 points in a day. But it may be wiser to keep your finger off the trigger at this point—until the smoke clears.