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What the Pros Are Saying


Most of the experts we surveyed foresee the market going up a bit—but the climb will be tough

When it comes to investing, no one is right all of the time—or even most of the time. It pays to listen to a diverse set of voices, and make your own judgments. To help you think about investing for 2008, BusinessWeek surveyed a half-dozen market strategists with a cumulative 175 years of experience.

RALPH J. ACAMPORA, DIRECTOR OF TECHNICAL STUDIES, NEW YORK INSTITUTE OF FINANCE

According to the technical indicators that Acampora spent four decades on Wall Street analyzing, the five-year-old bull market is tired. The Dow Jones industrial average (DJIA) has forged ahead, albeit fitfully. But relatively few stocks are hitting new highs, says the recently retired Acampora, who continues to teach technical analysis. Worse, the Dow Jones transportation average is struggling.

That's often a sign something is amiss with the economy, says Acampora, who was dubbed the "king of the bull market" by CNBC in 1995 for predicting the Dow would soar from 4000 to 7000 within three years—a call for which his then-employer, Prudential Securities (PRU), rewarded him with a 1962 Corvette with "Dow 7000" on the license plate.

With the Federal Reserve cutting interest rates, Acampora thinks a traditional yearend rally will spill over into the New Year. But he expects stocks to run out of steam soon after, precipitating a 10% to 20% sell-off that will make this summer's 8% drop seem like a minor blip. In the second half of the year, Acampora looks for the bull to regain its strength, as economic growth, fueled in part by election year pump-priming, accelerates. Acampora's advice to investors? Stick with the large-cap growth stocks that are currently in favor.

STUART T. FREEMAN, CHIEF EQUITY STRATEGIST, A.G. EDWARDS & SONS

The winner of BusinessWeek's annual stock market forecasting survey last year, Freeman likes the outlook for stocks in 2008, mainly because he doesn't see much else to get excited about. By Freeman's reckoning, stocks are cheap today compared with U.S. Treasury bonds.

If the companies that make up the Standard & Poor's 500-stock index earn the $93.76 per share he expects them to this year, the index's earnings yield—its earnings divided by its price—is now 6.39%. That compares favorably with the 10-year Treasury bond's yield of 4.24%. U.S. stocks also look attractive compared with real estate. And Freeman expects overseas stocks to struggle, as foreign economies lose steam.

Still, Freeman is advising his clients to exercise caution. He expects the economy to avoid going into recession in 2008, but just barely. With investors fearful of an economic downturn, he believes the Dow will drop some 10%, to 12,120, by midyear. To play it safe, Freeman recommends sticking with large-cap consumer products companies, such as PepsiCo (PEP) and Procter & Gamble (PG), whose bottom lines typically hold up in tough times. These companies "are still generating earnings growth with a high degree of predictability."

ELAINE GARZARELLI, PRESIDENT, GARZARELLI CAPITAL

Best known for advising clients to sell just before the 1987 stock market crash, Garzarelli is a big bull today. Like many others, she expects economic growth to be sluggish in the first half of the year before the impact of the Fed's interest rate cuts starts to turn things around.

But while most are expecting modest stock market increases next year, Garzarelli is looking for something more: a 20% gain on the Dow and the S&P 500 stock index. Why? While most analysts are worried about negative earnings surprises, Garzarelli is betting that earnings will hold up: She says they will rise some 7%, as lower interest rates reduce the cost of borrowing for corporations and a weak dollar fuels strong export growth. Of the 14 indicators Garzarelli follows, which measure everything from investor sentiment to stock valuations, most are flashing favorable signals. "Our models show the S&P 500 is undervalued by 25%."

Garzarelli is advising investors to buy some of the most beaten-down stocks, including those of giant financial institutions such as Lehman Brothers (LEH), Bear Stearns (BSC), and Merrill Lynch (MER). What would cause her to turn bearish? Not much. "Our indicators are extremely bullish."

BEN INKER, DIRECTOR OF ASSET ALLOCATION, GMO

During the bear market that ended in 2002, institutional money manager GMO made timely bets on Treasury inflation-protected securities (TIPS), real estate investment trusts, and emerging markets equities. With the Boston-based firm anticipating a stock market decline in 2008, "there's nothing we love," admits Inker. Although U.S. stocks appear reasonably valued at 15 times next year's projected earnings, Inker thinks the market is a lot more expensive.

Why? Earnings are not measured the same way they used to be. While historical price-earnings data are based on net earnings, analysts now use operating earnings, which tend to inflate the collective bottom line by about 15%, he says. Of course, as the "e" in p-e rises, the ratio falls, making the market look cheaper. Moreover, with the average forecaster still looking for a modest uptick in earnings in 2008, Inker thinks "the market will be vulnerable" if the consumer retrenchment he expects causes earnings to fall short.

For 2008, GMO recommends building a defensive portfolio, with a 25% allocation to cash and a further 25% in bonds. It's putting only a tiny 13% slice into U.S. stocks. Instead, Inker favors foreign stocks. With lower p-e ratios than their U.S. counterparts, they have better odds of "surviving a disappointing profit environment," Inker says. Are emerging markets tapped out? After a strong rally, "we're less excited than we were. But if the world holds together, we could have another decent year."

ROBERT ARNOTT, CHAIRMAN, RESEARCH AFFILIATES

Widely followed on both Wall Street and in academia, Arnott has a reputation for thinking outside the box. While most prognosticators expect stock prices, corporate earnings, and economic growth to post small gains in 2008, Arnott, whose money management firm is in Pasadena, Calif., thinks all three have nowhere to go but down. Why? He expects sliding home prices and rising mortgage defaults to prompt consumers to curtail spending sharply in 2008, pushing the economy into a mild recession. Moreover, he adds, with "wages at their lowest percent of GDP ever" and corporate profits at their highest level in 40 years, "how likely is it that we will see earnings surge from current levels without a political backlash?"

Arnott advises riding out the storm in a portfolio that's 50% in bonds and 20% in cash. While most on Wall Street dismiss the threat of inflation, he recommends TIPS and commodities, in part to guard against the inflationary impact of a declining dollar.

He recommends putting just 20% into U.S. and international stocks. For now, he favors one of the most defensive sectors, utilities. But he predicts a "marvelous recovery" in financial stocks in the second half of 2008. Although Arnott likes emerging markets, he prefers the debt to the equity, since he believes the former is more reasonably valued. "A lot of these countries are in better fiscal condition than the U.S.," he says.

LASZLO BIRINYI, PRESIDENT, BIRINYI ASSOCIATES

A Wall Street veteran who landed his first job at a financial services firm, Auerbach, Pollack & Richardson, in 1972, Birinyi has seen many market crises. The current one doesn't faze him much: "Based on historical data, I articulated a principle some years ago that has been very profitable for me," he says. According to Birinyi's "Cyrano principle," "if the concerns of the market are as obvious as the nose on your face, the market and monetary policymakers will have an amazing ability to adapt and adjust." He believes the Fed will do what it takes to calm the credit crisis.

Birinyi thinks the bull market that started in 2002 is still very much intact. He expects the current economic expansion to continue, with 5% corporate earnings growth helping to propel the Dow to 15,000 by the end of 2008. The signs of a market top, which include speculative fervor and rising stock valuations, "really aren't present," he adds. At 15 to 18 times estimated earnings—the exact number depends on how you measure earnings—stock market values are neither cheap nor expensive. If the market were a traffic light, Birinyi says, it would be flashing a yellow signal now.

Birinyi sees "pockets of value." With risk aversion rising, he thinks investors will pay more for such predictable growth stocks as Google (GOOG) and Deere (DE). He expects commodity prices to keep rising "as the emerging markets continue to emerge." He also favors buying stocks which were "excessively punished" in the recent subprime-related meltdown. They include retailers Tiffany (TIF), Nordstrom (JWN), J. Crew (JCG), and financial giant American International Group (AIG).

To read forecasts from other stock market strategists, see "Where to Put Your Cash in 2008".

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