Commentary from Cappiello

05/27/2005 12:00 am EST

Focus:

Frank Cappiello

Chairman and Managing Director, Montgomery Brothers, Cappiello, LLC

Rarely, will you find anyone with more impressive credentials than Frank Cappiello, a graduate of Notre Dame and Harvard Business School, and one the most experienced and respected money managers in the nation. Here is his current outlook and some favorite stock ideas.

"We are stalled in this marketplace. On the positive side, the dollar seems to be basing and corporate earnings are better than expected. We also have enormous cash reserves on corporate balance sheets. We’ve never had so much cash. If you add up all of the corporations in America that file with the SEC, the calculation is about a trillion dollars in cash that is sitting there as potential buying power. It might not be unleashed tomorrow. But it’s there to buy in stock and increase dividends or to make acquisitions, which are all positives.

"On the negative side, we have an enormous deficit problem as well as a long-term US dollar problem. Terrorism remains a concern. Interest rates are going up. And inflation is rising. Oil prices are a significant determinant of where we are going to go with inflation. And while the oil uptrend may have been broken, it is still high. In addition, the ‘next dividend’ that will be handed to us will come courtesy of Alan Greenspan in the form of another few quarter point rate increases.

"Overall, there’s no question that the long-term outlook is getting better and the positives outweigh the negatives. But the biggest headwind we have is that we are fighting the Fed. So my belief is that if Alan Greenspan can negotiate the next quarter point increase, and then stop for a while, the market will rally. But if he continues to raise rates throughout the summer, then I think we’ll have real problems. No market can stand interest rate rises that create ongoing pressures on both consumers and corporations.

"I recommend that you watch the price of gold. If the price of gold goes through its old high from December of last year, I think you’ve got to be worried. Right now, instead of going up, it’s drifting down. That’s good. That’s probably the best indicator we have that things are not going from bad to worse. One final thing to note is that since 1885, every year ending in '5' has been an up year for the stock market. There are no exceptions. What is this year? 2005. I rest my case.

"Within this environment, I am still finding stocks to buy. In fact, we are 90% invested in the stock market in our managed equity accounts. I currently like some of the beaten down pharmaceuticals and I would recommend Pfizer (PFE NYSE). The big pharma stocks are trading at a big discount. You might have to wait for the outlook to improve, but long term, I believe Pfizer will work out. Another big pharma we like is Schering Plough (SGP NYSE). This is a company that has had everything negative happen to it over the past five years, and suddenly things are beginning to happen that are positive. We think the stock is headed higher. I also believe that investors should have some dividend-paying stocks now. Indeed, Pfizer offers a 2.7% yield, and that’s a nice plus. Also in the dividend area, Verizon (VZ NYSE) is my stock of choice, with its 4.7% yield. The dividend is not going to be cut. This company will continue to be an enormous engine of growth in telephone and related services. Among smaller companies, I’d suggest looking at China not the country, but the food. We like a domestic restaurant chain, P.F. Chang’s China Bistro (PFCB NASDAQ). This is the only Chinese chain that has been successful in its efforts to go national. The stock has a sense of ‘glamour’ and a positive outlook for earnings."

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