By Tonn, Rebecca
"The forecast gods smiled on us -- we've been pretty much bang on for the past several years," said Bill Greiner, chief investment officer for UMB Asset Management, and the Business Week stock market forecaster of the year for 2005 and runner-up for 2007.
The economy moves on a cyclical basis, he said, and will bottom out and improve by the fourth quarter, as it shifts from Wall Street to Main Street.
"We're in the depths of contraction now -- going through the pits -- and unemployment will rise through the majority if not all of the year," Greiner said.
The stock market tends to front-run the economy by a five-month time frame, "however, the timing and magnitude of the turnaround is in question," he said.
"This is the 11th recession since the end of World War II. But the banks have written down unprecedented (since the Great Depression) amounts of bad debt, and driven by fear, have been buying bonds instead of lending," Greiner said. "So, the amount of currency out there and lendable capital in the banking system didn't explode like normal, in reaction to the Federal Reserve's lowering of interest rates."
But, the market will probably start to recover between now and the end of the second quarter -- give or take a month or two.
"The last 12 months was just deeper and deeper into the morass," Greiner said. "Now the building blocks are being laid for the stock market to find a real bottom -- although I'm not sure we're there, yet."
He anticipates another 30 to 60 to 90 days of unpredictability.
In this "fraught with volatility" environment, investors should "be agile and nimble; stay with quality in all decisions; and maintain a certain amount of liquidity to capitalize on opportunities as they present themselves."
That said, it's advisable "to start finding good stocks now and buy them -- don't wait for them to 'bottom,'" he said. "In 12 to 24 months you'll be glad you bought now," because the majority of risk is already built into the stock market.
According to UMB's Economic and Market Notes, "The market is currently priced at 12.6 times 2008 earnings, and at 14.2 times expected 2009 earnings," which is not a particularly low or high valuation level (that's a "good" thing, by the way).
Greiner said the market is already reflecting an earnings decline, and is already down 40 percent from its high, and down -- on an absolute basis -- for the last 10 years. Historically, when these conditions occur, he said, stock prices tend to move upward.
Although we are experiencing the first worldwide economic contraction in years (if ever), and gross domestic product growth is expected to be negative 2 percent to negative 2.5 percent during 2009, we still cannot whine about having it worse than our predecessors.
Here's why.
During 1930, 1931 and 1932, annual average real GDP contracted by 8.6 percent, 6.4 percent and 13 percent (egads!), respectively.
Besides, as Maya Angelou wrote, in her book, "Letter to My Daughter," "Whining lets a brute know that a victim is in the neighborhood." So cut that out, already.
Instead, here's something productive to do -- invest in companies that have the ability to initiate and grow dividends, Greiner said.
During the past five years, companies that increased dividends by at least four times are up an average of 11 percent in price, compared to Standard & Poor's 500 Index, which is down 18 percent for the same period. These same companies have grown dividends by 17 percent, versus 10 percent for the average company in the S&P 500.
Companies that consistently increase dividends currently yield 4 percent in dividends, while the market overall yields 3 percent.
"Historically, companies that pay dividends perform well -- I see no reason that trend won't continue," he said.
Greiner also recommends buying stock in "early-cycle companies" that tend to do well "coming out of a recession" -- such as financial service organizations, retailers, airlines, auto manufacturers and companies in the housing market.
Companies that "historically do well under rising inflationary pressure," include raw material, oil and mining companies.
The five characteristics to look for in a company before investing, Greiner said, are: five-year historical data (earnings growth rates); stability of EGR; revenue growth rate (more rapid than average company); return on equity; and debt to total capitalization (less than average company).
Companies with these five characteristics are "more than likely to have the financial wherewithal to steadily increase dividends going forward," he said.
Therefore, while wary, saddle-weary (or perhaps I should say, "hanging-off-a-cliff-weary") investors are waiting for stock-price gains, they can reap "good, solid dividend gains," Greiner said.
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.
Credit: Rebecca Tonn
(Copyright 2009 Dolan Media Newswires)
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