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High spending may not continue, analyst warns

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Douglas Cliggott of the Swedish hedge fund Brummer & Partners was virtually alone among Wall Street analysts in predicting a down year for stocks in 2002. He still considers equities pricey, pegging the S&P 500's fair value at 640, a full 50 percent below recent levels. He also thinks that those counting on continued high consumer spending are in for a shock. "It would be unhealthy to assume that we can perpetually keep tapping our home equity and cutting taxes to sustain spending," he says.

Heritage Capital Appreciation Fund has made an average 11 percent annually over the past decade by focusing on stocks with growing businesses that have long product cycles, high free-cash flow, recurring income streams and dominant market shares. It tries to buy them for less than their businesses' fair market value and to hold them long term. Recent favorites: Viacom, Harrah's Entertainment, Freddie Mac, Fannie Mae, Westwood One, Univision, Cablevision, Intuit.

Given the carnage among data-storage stocks, The Turnaround Letter (225 Friend St., Boston, MA 02124) is intrigued by signs that a rebound may be taking hold. "While data-storage sales dropped 15 percent in 2002, recent quarters have shown gains over year-earlier periods. When technology spending picks up, these stocks could rebound sharply." T.L.'s favorites were recently down an average 75 percent from their bull-market peaks: Dell, EMC, Emulex, Hewlett-Packard, Hutchinson Technology, Maxtor, Oracle, Qlogic, Sandisk, Storage Technology, Western Technology, Western Digital, Veritas.

To identify growth stocks with moderate risk, Value Line (220 E. 42nd St., New York, NY 10017) recently went looking for those whose earnings have risen at least 15 percent annually over the past five years and are expected to rise at least 12 percent for the next three to five years. It eliminated issues it didn't expect to appreciate at least 90 percent over that period, and that it gave less than average ratings for safety, financial strength and stability. Only 14 made the cut: Cardinal Health, Cintas, Curtiss-Wright, Darden Restaurants, Fortune Brands, GreenPoint Financial, Harley-Davidson, Marsh & McLennan, Pfizer, Synovus Financial, Total Systems Services, United Technologies, Wal-Mart, Walgreen.

California's political turmoil has municipal-bond investors worried. But in the past33 years, only 18 munis out of 28,000 rated by Moody's defaulted. Essential service bonds, such as water and sewer debt, are safest because water will keep flowing regardless. "I don't think we'll hear the D-word — default," says Jan McCart, director of public finance for Northern Trust funds. "That's not going to happen."

Reviewing all the arbitration, regulatory and other legal actions taken against major retail brokerage firms in 2001 and 2002 that were decided by the first quarter of 2003, Weiss Research; www.WeissRatings.com, found that these five firms were the most frequent targets: Merrill Lynch (120 actions), Morgan Stanley (107), Prudential Securities (59), Salomon Smith Barney (59), Charles Schwab (47).

Site of the Week: Check out www.investor.msn.com, a free site that has added some new tools, including an enhanced stock screener that provides near-real-time screening. Other enhancements include stock-pick analysis, which allows users to monitor and analyze the choices of financial experts appearing on CNBC-TV; daily and weekly earnings announcements; corporate events; market statistics; foreign currency rates; and key index futures data.

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.