At the height of the technology-stock bubble, Vladimir Zlotnikov, then Sanford C. Bernstein's technology strategist, warned that a big shakeout was coming. Now, as Bernstein's chief market strategist, Zlotnikov has transferred his pessimism to the general market. Valuations are high, he says, and this isn't a normal economic recovery, since capital spending remains low. He's also worried about the rising budget deficit and the prospect of higher interest rates.
Federated Capital Appreciation Fund, which has produced 12.26 percent average annual returns over the past decade, is a true "blend" fund. Half of its holdings are large-cap stocks; half are small-caps. Half are growth stocks; half are value stocks. Federated also balances its non-dividend-paying stocks with a touch of income. And it never lets one stock constitute more than 2 percent of its portfolio. Recent favorites: Citigroup, ExxonMobil, GE, Hewlett-Packard, Intel, Microsoft, Pfizer.
Consolidation in the utility industry, which has slowed to a trickle, could be on the verge of a comeback, thanks to a provision in the Bush administration's energy bill, says Utility Forecaster newsletter (1750 Old Meadow Road, McLean, VA 22102). "The provision repeals the Public Utility Holding Company Act of 1935, which was passed to prevent energy monopolies. Repeal would allow investment banks, oil companies, foreign investors and individual speculators to acquire publicly traded utilities. Our favorite potential targets: Dominion Resources, NiSource, Southern Company, Westar Energy."
One way to ensure future profit growth is to become the dominant player in your industry. Standard & Poor's recently surveyed America's major business sectors, looking for industry leaders that can stay industry leaders, and thus propel their stock price steadily higher. It identified seven standouts: Apollo Group (adult education), Best Buy (consumer electronics), eBay (online auctions), Gannett (newspaper chains), McCormick & Co. (spices), Peabody Energy (coal), Sealed Air (specialty packaging).
Rising interest rates will hurt long-term bond prices. But the economic strength that causes rates to rise will help bond issuers. Two funds to consider when contemplating this trade-off, says Money magazine, are Vanguard Short-Term Corporate, which has a low 0.23 percent expense ratio and a 20-year record of superior returns, and Evergreen High Income Municipal, whose high-yield focus is less vulnerable to rising rates because junk bonds tend to do well in a reviving economy.
The American Association of Individual Investors recently asked its members which discount brokers they preferred. The association found that trade price, the price at which an order was filled and how close it was to the stock's price when the order was placed, was the key determinant of customer satisfaction. The discounters AAII members rated best in this key measure (in order): Scottrade, BrownCo, Fidelity, Ameritrade, Charles Schwab, Vanguard, TD Waterhouse.
Site of the Week: When, and how much, the Fed raises interest rates will depend on the strength of the recovery. The Bureau of Economic Analysis site at www.bea.gov provides detailed data, articles and analysis on the state of the economy.
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.