Making Money in this Market Environment

09/06/2007 12:00 am EST

Focus: MARKETS

Joe Battipaglia

Market Strategist-Private Client Group, Stifel Nicolaus

In this four-hour intensive program, Wall Street pros Joe Battipaglia, Frank Cappiello, Charles Payne, Jon Markman, and Mark Hulbert shared their market forecasts, as well as strategic, realistic tips that investors can use to profit in the current volatile market environment.

Joe Battipaglia, from Stifel Nicolaus, addressed the subprime financial crisis, noting that he anticipates further tightening of credit, as the market shakes out the excess.

He told the attendees that the environment for mortgage money will change significantly, and–in the near-term–borrowers will have to say good-bye to no-income qualification loans, as well as no- or little-down payments for mortgages. Battipaglia expects prices to drop at least another 15%, saying that homes in the US are overpriced by a whopping 60%! Homeowners will be forced to recognize that they can no longer use their homes as an ATM and will drop selling prices accordingly.

As the subprime problems spread into the commercial financial sector (maybe to the tune of $300 billion), credit issues will continue to plague the economy going into 2008, resulting in a slowing of earnings growth.

Battipaglia also warned of too much reliance on the recent phenomenally rewarding global investments. In fact, he particularly sounded the alarm for the Chinese sector, opining that this will be the next big bubble to burst.

However, not all is doom and gloom. Battipaglia is optimistic in the long run; he sees 1430 on the S&P 500 before we begin another upward trend.

For now, he advocates that bond investors keep their portfolios relatively short and that equity investors beware of high multiples, and look to growth stocks and larger caps with global diversification and multiple business segments.
 
Battipaglia offered ten appealing equities and suggested that investors do their homework, as these may get cheaper in the near-term: American International (AIG), General Electric (GE), PNC Financial Services (PNC), United Technologies (UTX), American Express (AXP), Amgen (AMGN), Dell Computer (DELL), Plantronics (PLT), Lincoln National (LNC), Cardinal Health (CAH), and Weingarten Realty (WRI).

Frank Cappiello, of Montgomery Brothers is a bit more optimistic on the market, forecasting 1,600 on the S&P 500, in the near-term.

He told attendees to look for companies whose stocks are making new highs when the overall market is suffering–citing companies such as Google (GOOG) as a great example of a franchise worth owning.

Cappiello warned investors of risky emerging market equities in Ecuador, Argentina, and Bolivia, as well as sub-emerging markets such as Syria. However, he thinks investments in Peru hold some promise.

Russia also catches his eye, particularly Russian exchange-traded funds. He is attracted to the country’s leadership in the energy sector, anticipating that Russia will soon lay claim to the tenth largest reserves of oil, gas, and energy in the world.

To take advantage of global opportunities, Cappiello recommends investors take a look at the Central European ETF (CEE), as well as the equity, Central European Distribution (CEDC), a global beverage distributor of wines and spirits in Poland.

He does caution, however, that investors should note that all emerging market investments are speculative.

Mark Hulbert, of The Hulbert Financial Digest gave attendees an analysis of the market, as well as some of the newsletters he has followed for the last 27 years.

As for the market, Hulbert noted that while we have seen a very volatile period since mid-July, the market is actually in the midpoint of its historical range (calculated since 1990), as measured by the VIX Volatility Index.

Hulbert tracks some 200 investment newsletters and has spent quite a bit of time analyzing why the best are the best. He asked whether the reason for winning performance is because those newsletters have better strategies; the ability to respond quickly to market conditions; smarter editors; or a better investment approach.

Instead, the key is simply this: Discipline. The best-performing newsletters stick to their knitting, maintaining their strategies–even when it doesn’t look like the strategy is working, from time to time.

That’s why newsletters such as NoLoad Fund*X have posted an average 15.3% annual return–for many years. Additional newsletters with good records that Hulbert follows are: The Value Line Investment Survey, The Prudent Speculator, Growth Stock Outlook, and Dow Theory Forecasts.

The absence of discipline often results in buying high and selling low–the exact opposite of an investor’s goal. And the primary tenet of a disciplined strategy is setting rules for dealing with every contingency. This doesn’t mean you never change: instead, you change courses according to rules agreed upon in advance. And that effectively takes the emotional response–an investor’s worst nightmare–right out of the investing equation.

Jon Markman, of Strategic Advantage and Trader’s Advantage presented his unique strategy for picking bargains–From Worst to First!

This method relies on what Markman terms ‘making a killing’ on mad money stocks–spin-offs, reverse splits, bankruptcies, IPO’s and other hidden gems.

These are America’s most hated businesses–those in trouble or who will be in trouble. But Markman has found that these investments can often outperform the market, if purchased with an awareness of their risk. That means–don’t make them the largest portion of your portfolio. They should be resigned to the speculative slice of your investment holdings.
 
Markman first addressed spin-offs. He noted that companies like GE, Tyco, and American Express often throw out their orphans, encumbering them with a lot of debt. Many times these divisions have unexceptional products, lagging personnel, and end up as the graveyard where previous management ideas go to die. However, many–contrarily–do very well.

Academic studies show that most outperform the market and their parent in their first one to three years, since their management usually collects hefty incentives to get going quickly. His best proscribed method of trading spin-offs, for the maximum profit: monitor weekly and pounce on them after one to three months. And then watch the charts for new breakouts or breakdowns. Some of the spin-offs he noted:

IdeaArc (IAR); Genworth (GNW); Coach (COH); Ameriprise Financial (AMP); Chipotle (CMG), and still a buy; Hanes (HBI) and Embarq (EQ). Markman also recommended shorting companies at the beginning of a spin-off.
 
Next, reverse splits took the stage. Highly risky, these mechanisms generally bring a ton of bad news, followed by share prices decreasing more than 75%, and many companies simply going out of business. Management often tries to time the split before some fundamental catalyst like expanded funding, a new product, or decent earnings.

And sometimes these fewer outstanding shares mean enhanced EPS power to the remaining shareholders.

Markman cited several examples of reverse splits, including Avis (CAR), a spin-off and reverse split that he still classifies as a buy; Foster Wheeler (FWLT); and Micro Strategy (MSTR).

Lastly, Markman discussed companies who prospered, post-bankruptcies: equities like Mirant Energy (MIR) and Armstrong World Industries (AWI). He noted that there are several types of bankruptcy procedures and that it would be wise for interested investors to determine which one the company is undergoing, prior to investing.

Charles Payne, of Wall Street Strategies remains bullish, and sees the current financial shake-out as a necessary evil that will fortunately, reduce the number of hedge funds.

Payne sees new laws and restrictions if the Democrats win the 2008 election, but believes that our financial problems will be settled by then.

His bullishness stems from the country’s decent unemployment figures and better-than-expected corporate profits (he noted that last quarter, 68% of companies beat their estimates). He believes that a GDP of just 3% will continue fueling earnings and a good market, and he is forecasting 4Q GDP of 3.3%, which should provide some pricing power. Payne is also looking for two rate cuts by the Fed, prior to year-end.

For investors, his advice is to buy stocks from the top down, looking for sectors and individual companies that are prospering, with great earnings.
 
Companies he likes on weakness include: Deere (DE), Garmin (GRMN), Baidu.com (BIDU), Research in Motion (RIMM) and Fluor (FLR). For momentum plays, he recommends Las Vegas Sands (LVS), PetroChina (PTR), China Southern Airlines (ZNH), First Solar (FSLR), and LDK Solar (LDK).

Value investors may want to take a look at Goldman Sachs (GS), CSX (CSX), and Toll Brothers (TOL).

Payne suggests that investors practice defensive actions such as puts and shorts in this market. He is watching to see if the Dow holds at 13,200. If not, he’ll look for a test of a double bottom and recommends that investors consider OEX puts on overvalued stocks, or writing calls on stocks that they own that may be vulnerable.

Lastly, Payne is looking for an upside 13,650-13,700, for an ultimate breakout in the Dow.

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