Bailout may be slow to save market, experts say

Local stock pickers see more volatility ahead in 2008

STORY SUMMARY »

The Federal Reserve and the Bush administration are trying to rescue a faltering economy with steep interest-rate cuts and a whirlwind $161 billion economic stimulus package.

But several local stock experts aren't convinced that the urgent measures will stop the bleeding.

Participants in the seventh annual Star-Bulletin survey of best investment ideas aren't expecting too much from the market in 2008. They see it remaining volatile and lackluster with the housing sector continuing to slump. Two of the experts see better investments abroad.

Dwight Melton, co-founder of the Hawaii Stocks and Options Group, is back to defend his crown after winning the 2007 contest with a 13.3 percent return. Melton has won three titles in six years.

The other three participants from last year are back again as well. They include Richard Dole (up 0.7 percent), chief executive of Honolulu investment adviser Dole Capital LLC; Norm Caris (down 15.3 percent), who lives on Kauai and is managing director-institutional sales for Caris and Co.; and 2006 champion Barry Hyman (down 37.3 percent), vice president-management team for the Maui branch of Michigan-based FIM Group Ltd.

Each of the four experts began 2008 with a hypothetical $20,000 portfolio.

What's ahead next year

Hawaii stock experts are mixed on whether the major indexes can increase this year.

COMPANY	DOW	NASDAQ	S&P 500
Norm Caris, Caris and Co.	13,500	2,700	1,475
Richard Dole, Dole Capital LLC	13,200	2,700	1,500
Barry Hyman, FIM Group Ltd.	12,000	2,200	1,300
Dwight Melton, Hawaii Stocks and Options Group	14,860	2,970	1,650
2007 close	13,264.82	2,652.28	1,468.36
2008 consensus	13,390.00	2,642.50	1,481.25

Star-Bulletin

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FULL STORY »

The Federal Reserve and the Bush administration are doing their best to bail out the economy.

But two interest-rate cuts in a span of nine days totaling 1.25 percentage points, and a proposed $161 billion economic stimulus plan, likely won't be enough, according to local stock experts.

Barry Hyman, vice president-management team for the Maui branch of Michigan-based FIM Group Ltd., said the Fed and the Bush administration face some very difficult choices ahead.

"Unfortunately, any action from both will likely offer only temporary support for the U.S. stock market," Hyman said. "Years of reckless lending, financial voodoo and excessive U.S. consumption have had impacts on the economy and markets that now are only just beginning to reverse."

In short, stock experts participating in this year's Star-Bulletin survey of best investment ideas aren't expecting too much from the market in 2008. They see it remaining volatile and lackluster with the housing sector continuing to falter.

Two of the four experts in the seventh annual contest are looking overseas for 2008 winners, while the other two are trying to pick their spots among U.S. companies.

Dwight Melton, who won the 2007 contest with a 13.3 percent return, is back to defend his crown. Melton, co-founder of the Hawaii Stocks and Options Group, has won three titles in six years.

The other three 2007 participants are back again as well. They include Richard Dole (up 0.7 percent), chief executive of Honolulu investment adviser Dole Capital LLC; Norm Caris (down 15.3 percent), who lives on Kauai and is managing director-institutional sales for Caris and Co.; and 2006 champion Hyman (down 37.3 percent).

Each of the four experts began 2008 with a hypothetical $20,000 portfolio and made their picks at the start of the year even though they're not being published until February due to time constraints. Just like last year, the experts will be allowed to change their picks at the end of each quarter.

Melton, who had success in 2007 with country index funds, is going back to that area again with iShares Brazil (up 75 percent last year due to higher commodity prices) and two Chinese holdings, Powershares Golden Dragon China and iShares China. Powershares invests at least 80 percent of its assets in companies that derive a majority of their revenue from the People's Republic of China, while iShares China holds 25 of the largest and most liquid Chinese companies.

China's economy expanded 11.5 percent during the third quarter -- the fastest among the world's 10 largest economies -- and is expected to expand 10 percent this year.

Melton also likes Powershares Clean Energy, which is focused on green technology and alternative energy, and United States Oil Fund, which reflects the performance of the spot prices of West Texas Intermediate light, sweet crude oil.

"The economy faces an uncertain road ahead even with further Fed rate reductions," Melton said. "The problem is that it normally takes six months, or more, before a reduction in borrowing costs helps stimulate the economy. Investors could remain on edge for sometime, reflecting the uncertain economic outlook and the tense global situation."

Still, Melton, who prefers fast-growing momentum stocks, said that if earnings and interest-rate forecasts are on the mark, "the current pessimism might prove excessive."

Hyman, who has favored international stocks over U.S. companies for several years, is the antithesis of Melton with a penchant for value stocks.

While Melton's 2008 picks had gains last year ranging from 47 percent to 75 percent, Hyman's selections for this year's contest were down from 19 percent to 43 percent.

Hyman prefers to be defensive.

"The greed-to-fear migration usually takes many months, if not years, to play out, so buying 'the bottom' indiscriminately here after only a few bad months is a bet that 'this time it's different,' " Hyman said. "The better strategy is to rotate from speculative investments into defensive ones, those whose prices are below their intrinsic value and thus offer upside even in an overall weak market environment."

One of Hyman's foreign picks is Toyota, the world's No. 2 auto manufacturer, which trades at a price-earnings multiple of about 10 times next year's earnings.

"Thanks to the weakening U.S. economy, Toyota hasn't been this cheap in some time," he said. "Cost cutting and emerging market growth should help provide ongoing earnings growth despite slower global economic growth."

His other international selections are Mitsubishi UBJ Financial, a Japanese megabank that should benefit from normalization of Japanese interest rates and growth in fee income; RMR Asia Real Estate Fund, which is trading at about an 11 percent discount to its net asset value and should benefit from the Asia reflation theme; and Transmedian Exploration, a Kazakhstan oil explorer selling at a deep discount to its net asset value.

Hyman also has a contrarian play in Proshares Ultrashort QQQ, a double-inverse Nasdaq-100 fund that will go up if the Nasdaq 100 goes down.

For the third year in a row, Dole and Caris have opposing view on Honolulu-based Alexander & Baldwin, which is the parent of Matson Navigation Co. and has extensive land holdings in Hawaii and on the mainland.

Dole, who likes A&B, said that declining interest rates and reasonable strength in the Hawaii economy should help both A&B's commercial real estate segments and its pricing power for its Hawaii shipping business.

"The company's advantage in real estate development is its lower-than-average cost of capital, primarily due to its strong balance sheet," Dole said. "Its China business remains strong, together with capabilities of combining its real estate and logistics businesses to further enhance its shipping business."

Caris, who has been negative on A&B and doesn't hold a position in the stock in this contest, said that housing is still a sector to avoid, especially in the Hawaii market, which is still catching up to the slowdown in the mainland market.

"Companies exposed to the Hawaiian market, and Alexander & Baldwin in particular, should be avoided," Caris said. "Oil and energy will also likely have a difficult year, as a global economic slowdown reduces demand and prices inflated by speculators deflate."

Besides A&B, Dole likes three other holdover picks from 2007 -- pharmaceutical giant Pfizer because of the aging U.S. population; Newport, a scientific and technical instrument company that has exposure to the growing solar-energy market; and PowerShares QQQ, which tracks the Nasdaq-100 index.

His other pick is iStar Financial, a real estate investment trust that has been hurt by the recent financial industry turmoil but which pays nearly a 13 percent dividend.

Dole favors technology, health care and infrastructure in 2008 because he thinks that growth will be in areas that improve productivity and reduce costs. He also thinks there will be "fire sales" by both lenders and borrowers because of the housing meltdown, and that those who pick up the pieces will benefit in time, such as Bank of America's acquisition of Countrywide.

He expects the moves by the Fed and the Bush administration to be viewed as positive even though he still expects continued volatility in the market.

"The administration does not wish a financial panic in an election year, and financial panics historically have been more disastrous to financial markets than recessions," Dole said.

Caris sees the unwinding housing bubble, coupled with a slowing global economy and political uncertainty, as keeping a lid on prices in 2008. He's high this year on turnaround stories.

He likes Sharper Image, which fell 70 percent in 2007 after investors became disenchanted over several issues with the company's top-selling product, Ionic Breeze, an air purifier that customers claimed in a lawsuit didn't remove dust and other particles from the air as promised.

"Management has taken steps to refocus, cut costs and grow the brand in key areas," Caris said. "The worst is likely behind this company and I think current investors in the stock can look forward to some market-beating returns."

Caris also is high on footwear retailer Collective Brands, formerly known as Payless Shoesource, which has former executives from Nike and Cole Haan now running the company and has "synergies with the recently acquired Stride-Rite brand that I think investors have yet to fully account for."

Once again, Caris also has one local company in Hawaiian Holdings, the parent of Hawaiian Airlines.

"Hawaiian Airlines is the top competitor in the Hawaiian market, and their recent successful lawsuit against Mesa Air Group's go! will serve to solidify the prospects for Hawaiian, not only providing a large cash infusion, but likely knocking out a successful competitor."

His remaining picks are Unifi, a textile company that Caris calls "a great turnaround story" with a new management team; and Novellus Systems, a semiconductor equipment maker which is taking market share from competitors and is poised to take advantage of an upturn in the market for semiconductor capital equipment.

Caris said stocks are near-term oversold and that support from the Fed will enhance investor confidence.

"This will not help the housing market, however, as the recent record speculative run will take some time to unwind, and the rate cuts cannot specifically target the structural issues that the mortgage/housing market is facing," Caris said. "The Bush stimulus plan will not have a lasting effect on the market. What would have an effect is more long-term, fundamental changes in tax policy."

Best investment ideas of 2008

Hawaii stock experts began the year with a $20,000 hypothetical portfolio:

NORM CARIS
Caris and Co.

Position:
Managing director for institutional sales

2007 return:
-15.3%

Company	Ticker	Sector	2007 Close	Shares	2007 Total return	Starting value
Hawaiian Holdings	HA	Airlines	$5.10	750	+4.1%	$3,825.00
Unifi	UFI	Textile / apparel	$2.42	1,600	-1.2%	$3,872.00
Novellus Systems	NVLS	Semiconductor equipment	$27.57	150	-19.9%	$4,135.50
Collective Brands	PSS	Footwear retailer	$17.39	200	-47.0%	$3,478.00
Sharper Image	SHRP	Retail / Mail order	$2.80	1,500	-69.7%	$4,200.00
Cash						$489.50

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RICHARD DOLE
Dole Capital LLC

Position:
Chief executive

2007 return:
+0.7%

Company	Ticker	Sector	2007 Close	Shares	2007 Total return	Starting value
Alexander & Baldwin	ALEX	Ocean transportation / real estate	$51.66	75	+19.0%	$3,874.50
PowerShares QQQ	QQQQ	Index fund	$51.22	70	+19.0%	$3,585.40
Pfizer	PFE	Medical / drugs	$22.73	200	-8.1%	$4,546.00
Newport	NEWP	Scientific and technical instruments	$12.79	300	-38.9%	$3,837.00
iStar Financial	SFI	Real Estate Investment Trust	$26.05	150	-39.8%	$3,907.50
Cash						$249.60

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BARRY HYMAN
FIM Group Ltd.

Position:
Vice president of management team

2007 return:
-37.3%

Company	Ticker	Sector	2007 Close	Shares	2007 Total return	Starting value
Toyota	TM	Automobile	$106.17	37	-19.4%	$3,928.29
RMR Asia Real Estate Fund	RAF	Asia real estate	$15.07	265	-22.9%	$3,993.55
Mitsubishi UFJ Financial	MTU	Banking	$9.33	428	-24.2%	$3,993.24
Ultrashort QQQ Proshares	QID	Double inverse Nasdaq-100 index	$37.98	105	-27.3%	$3,987.90
Transmedian Exploration	TMY	Oil exploration and production	$1.97	2,030	-42.9%	$3,999.10
Cash						$97.92

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DWIGHT MELTON
Hawaii Stocks and Options Group

Position:
Co-founder

2007 return:
+13.3%

Company	Ticker	Sector	2007 Close	Shares	2007 Total return	Starting value
iShares Brazil	EWZ	Country fund	$80.70	55	+74.8%	$4,438.50
Powershares Golden Dragon China	PGJ	Country fund	$34.25	120	+64.6%	$4,110.00
Powershares Clean Energy	PBW	Environment fund	$27.69	150	+59.9%	$4,153.50
iShares China	FXI	Country fund	$170.45	20	+54.7%	$3,409.00
United States Oil Fund	CDIS	Commodity-oil	$75.76	50	+46.8%	$3,788.00
Cash						$101.00