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Global deflation may be coming

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No bull market in stocks in the past 65 years has begun with the S&P 500 selling at 24 times earnings, as it currently is, according to Growth Stock Outlook newsletter (P.O. Box 15381, Chevy Chase, MD 20825). "U.S. imports are down sharply and the economies of Europe and Asia are floundering as a result. It appears we may yet see global deflation, even though the Fed is pumping frantically on the inflation balloon trying to jump-start the U.S. economy."

Wasatch Core Growth Fund appreciated another 24 percent last year, despite holding lots of growth stocks in what was generally a value-stock environment. That's hardly surprising. Core Growth has returned an average 26 percent annually over the past three years by focusing on companies producing steady 15 percent to 25 percent earnings growth and whose stocks still seem modestly valued. Recent favorites: Rent-A-Center, AmeriCredit, Orthopedic Centers of America, Microchip Technology, O'Reilly Automotive, Lincare Holdings.

A diversified timber portfolio would have returned 13.3 percent annually over the past 40 years, vs. just 11.6 percent for the S&P 500, notes Paul Sturm of Smart Money magazine (1755 Broadway, New York, NY 10019). "Timberland is also remarkably low-risk, with volatility more like bonds' than stocks'. And it tends to perform best when stocks and bonds go down, making it an effective counterweight." Sturm believes timber stocks are particularly undervalued now. His favorites: Crown Pacific, Deltic Timber, Plum Creek Timber, Rayonier, TimberWest.

Many big-name growth stocks got hammered last year. The Turnaround Letter (225 Friend St., Boston, MA 02114), which has made a very profitable specialty out of separating the permanently moribund from the temporarily stunned, recently scoured the whole field. It recommended five battered issues that "despite genuine problems, all have decent long-term prospects." The five lost an average 70 percent of their value last year. They are: Cisco, Corning, EMC, Qwest Communications, Sun Microsystems.

The yield on the average money-market fund has dropped perilously close to 2 percent recently, vs. 5 percent last April. Don't expect things to get much better soon, even if the Fed doesn't lower interest rates further, warns Money magazine. "Money-market funds will have to reinvest in today's lower yielding notes as their older holdings, with durations as long as several months, mature."

Most stock funds just buy stocks. But some "short-selling funds" actually borrow shares and sell them, hoping to buy them back cheaper later, and thus make a profit. A handful of funds try to combine both these "long" and "short" strategies. Such so-called "market neutral funds" try to make steady returns regardless of the overall market's direction. Here, according to Morningstar Mutuals (225 W. Wacker Drive, Chicago, IL 60606) are the three most significant such funds: AXA Rosenberg Value Market Neutral (1-800-447-3332), Calamos Market Neutral (1-800-823-7386), Phoenix-Euclid Market Neutral (1-800-272-2700).

Site of the Week: The National Association of Personal Financial Advisors www.napfa.org requires that its more than 700 members guide their clients' financial destinies for a set fee, typically a percentage of the total assets under management. At this site you can search for a qualified "fee-only" adviser by state.

Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.