IT’S A PANDEMIC, all right — a pandemic of bullishness that is sweeping stock markets here and elsewhere around the world. The Standard & Poor’s 500 has rallied more than 41%, to 946.21 (on June 12), from its intraday low of 666 in March, in celebration of the fact that the US financial system somehow survived the swinish behaviour of the past six years.

 

Asian markets have caught the bug, too, and are off to the races on hopes that a global economic recovery will spur demand for the stuff the region’s factories make. Commodities appear to be infected with a strain of the same ebullience; how else to explain why oil has more than doubled in price in the past four months, to US$72 a barrel?

 

 

Even the members of the Barron’s Roundtable aren’t completely immune, although a recent round of phone calls to our distinguished panellists confirms they’ve contracted a less virulent strain. Many predicted at our Jan 5 confab that the stock market, oversold and under-loved, was due for a major bounce. Now, they think stock prices have overshot corporate fundamentals and a correction is in order, but it won’t take the Dow Jones industrials, the S&P and other market measures back to the March lows. That’s because the US economy could get a much-needed boost in the coming months from the massive fiscal and monetary stimulus unleashed to support it.

 

Down the road, many of our investment experts fear there will be a bitter price to pay for today’s spending, in the form of hyperinflation and a run on the US dollar — hence their fondness for that great inflation hedge, gold. Here are their other best investment ideas for the back half of 2009, including some energy and technology stocks, a few financial shares, several emerging-market funds and much more. For the details, read on.

 

Hickey: The parallels are eerie so far, but what happens next is complicated. The market has rallied substantially off its lows, led by the riskiest stuff. A selloff is coming because the fundamentals don’t match Wall Street’s perception. US retail sales were terrible in May; two-thirds of companies reporting in America came in below forecasts. The rebound in stocks has been based on inventory restocking, but end markets haven’t improved.

 

If things were to follow the “little bull market” pattern, stocks would fall to single-digit price-to-earnings multiples, meaning 4,000 or 5,000 on the Dow, versus 8,800 now. But, that won’t happen; the variables are different today.

 

In the 1930s, the money supply was falling even as the US Federal Reserve cut interest rates. Now, not just the Fed, but other central banks are pumping money into the system like madmen. China’s money supply has grown by 25%. The money isn’t going into the economy; it’s going into asset prices. Oil has doubled from a US$32-a-barrel intraday low. Copper is up 80%. Russian stocks have rallied 80%. The situation is reminiscent of the past 14 years, when the Fed primed the pump and created bubbles everywhere.

 

Recently, there have been some signs the insanity might be ending: The US dollar has fallen and yields on US Treasuries have risen dramatically. But, to short assets in the next six months would be suicidal. I haven’t been short since October, even though the long-term direction is down.

 

Buy value, and protect yourself against the threat of the US dollar’s collapse and the return of inflation. I’ve been riding the gold wave for a decade, and the major secular bull market in gold isn’t over. I’m twice as adamant now as in January about the need to own gold.

 

I continue to like the mining companies. The Market Vectors Gold Miners ETF [exchange traded fund] is a diversified fund of some 30 mining stocks. I still like Agnico-Eagle Mines and bullion, which you can own through the SPDR Gold Shares ETF.

 

My favorite gold miner is Yamana Gold. It is based in Canada, but operates in Brazil, Mexico and Chile. It trades on the New York Stock Exchange. It rallied to US$11 a share from US$4, but is down from a year-ago peak of US$19, even though the price of gold has recovered to almost US$1,000 an ounce. The PER is reasonable. The company has new mines coming on, and it is benefiting from lower costs.

 

Microsoft is unloved at US$22, because of competitive threats from Google and an antitrust problem with the European Union. It is the best play in the tech world right now. It trades for 12 times earnings, something you don’t ever see. The catalyst for the stock is Microsoft’s best upgrade cycle ever. In the next 12 months, the company will introduce about a dozen new products or upgrades. Windows 7 will ship on Oct 22. It will kick off an upgrade cycle for the whole computer industry.

 

The other safe way to play tech is Verizon Communications. It will offer the Palm Pre in about six months, and new Nokia phones and probably the iPhone. Verizon has 87 million wireless-communications customers. It has the biggest network in the country, and the best. The company has mostly built out FiOS, its fibre-optic telecom service. It yields 6.3%.

 

Microsoft and Verizon are a lot safer than trying to catch Apple at US$150 a share.

 

Gabelli: The US consumer remains hamstrung by his balance sheet, the stock market and housing. He’s two-thirds of the US economy. About 11% of Americans are unemployed, going to 12% or 13%. The consumer sector isn’t providing the necessary ballast in the short term. But, on balance, the economic stimulus is coordinated and global, and powerful. The US economy will continue to improve in 2010, helped by an uptick in auto spending and improvements in housing and capital investment. Exports could improve as the US dollar weakens. There is upside leverage in earnings, partly due to cost cuts. In January, I said the stock market would end the year up 0% to 5%, and I’m sticking with that forecast.

 

I still like the stocks I recommended in January. Among new names, Legg Mason, which is selling at US$24. CEO Mark Fetting is doing a terrific job of overseeing the different businesses, which include Legg Mason Capital Management, run by Bill Miller, and other fund groups. The biggest, based on assets under management, is Western Asset Management, the fixed-income specialist. The businesses have benefited from coordinated marketing. Legg could earn 80 US cents for the year ending March 2010 and US$2 the following year. You have focused management, an improved balance sheet, the elimination of problems that were bogging the company down, and products that could enjoy significant growth. You could get a double in the stock.

 

I recommended O’Reilly Automotive, an auto-parts retailer, in January, and nothing has changed except the stock, which is up to around US$37.50 from US$31. The integration of CSK Auto, which it bought last year, is going well. In real estate, O’Reilly is getting better locations at more reasonable prices, to buy or lease. The company could earn US$2 a share this year. There are 250 million cars on the road. The guy who owns a 14-year-old car trades it for a nine-year-old car, and that guy trades his car for a six-year-old car. That is good for O’Reilly, the leader in the business.

 

Viacom, which owns cable networks such as MTV and Paramount Pictures. Today there are seven or eight motion-picture studios. A round of consolidation will occur in the next six to 12 months because of the costs of financing, prints and advertising, the benefits of globalisation and such. We hear talk of something going on. Paramount will merge with someone — maybe Sony Pictures or Universal Studios. This year, Viacom could earn about US$2 a share, going to US$2.40 next year. It could be a 20% grower for three or four years. It sells for 6.5 times Ebitda [earnings before interest, tax, depreciation and amortisation] and capital spending is de minimis. The company is a terrific cash generator and the balance sheet will improve. They might buy back stock.

 

Next is US Cellular, which has 6.2 million wireless customers, in contrast with Verizon and AT&T, which have 80 million-plus each. A next-generation technology is LTE, or long-term evolution. Smaller companies like US Cellular have to take advantage of it or sell out. US Cellular will earn US$2.50 a share in 2009 and grow by 15% a year for the next three or four years. It has a hidden asset, in that margins are well below the industry average. Capital spending is flattening and the balance sheet is in good shape. The stock is US$43, and the value of the company is close to US$100 a share.

Zulauf: Germany has structural problems, but virtually no cyclical imbalances. It is one-third of the European economy. The weaker parts of the eurozone — Portugal, Ireland, Greece and Spain — are trapped in a euro-denominated system and should devalue their currencies to help their economies. They can’t, and therefore will deflate. They’ll be the poor guys for the next 12 months. The UK hasn’t even started to adjust. Consumers there continue to borrow and spend. In the next year, they will go through the same thing US consumers have gone through.

 

Asia is the major beneficiary of the inventory restocking cycle. It will have the best production numbers, much as it had the worst declines before. The pick-up will run into the middle of next year. China is the big exception. It decided to breach the global economic slump by subsidising production and employment. It is playing a dangerous game.

 

Yes. We’ll enter another bear-market cycle. I don’t know how low it will go. In March, the market made a cyclical low in valuation, but it wasn’t a secular low. When the market makes a secular low, lack of interest in equities will be high.

 

Previously, I advised buying financials and metals. Now, the financials are done, perhaps for a couple of years. Bank balance sheets aren’t repaired; it’s just camouflage. Today, I like emerging markets and natural resources — after a correction of 15%. Investors believe in the long-term prospects for emerging markets, due to demographics and structural issues. That’s where the money will go that is on the sidelines.

 

Among ETFs, I like the iShares MSCI Emerging Markets Index, the iShares MSCI Hong Kong Index and the iShares MSCI Singapore Index. In energy I like the SPDR S&P Metals and Mining Index, and in oil services, the Oil Services HOLDRs and the Energy Select Sector SPDR. Again, buy on corrections. Also, you have to own gold because governments have no solution but to reflate. Currencies will be debased, and gold will go higher. But don’t buy bullion until it drops to around US$850 an ounce.

 

Schafer: I’m surprised the S&P 500 went up by more than 40% from its March low, because the companies we speak to have seen their business go down and stay down. In many cases, April was even worse than March. In addition, there has been a huge increase in bond issuance. The government has done a great job of liquefying the system, but that hasn’t led to a lot of lending.

 

We’ve removed a depression risk and are dealing with a recession. A huge amount of money on the sidelines has gone into stocks and other assets. Many people think the stock market is a discounting mechanism, and the recovery in the economy will be like past recoveries. But I don’t see it, given the leverage around the world and continued declines in home prices in the US and other developed nations. You could make a bullish case for 1% to 1.5% growth and 3% or 4% inflation, but that may not justify a 40% increase in stock prices.

 

There may be a setback as US interest rates rise and housing refinancings slow. The maximum impact of tax rebates probably has been seen. The US economy will grow slower than anticipated, which will surprise people, and therefore the discounting-mechanism aspect of the stock market will have to be rethought. Nevertheless, we still find good ideas on the long and short sides of the market.

 

Metavante Technologies recently announced it will be acquired by a larger competitor, Fidelity National Information Services [FIS], in an all-stock deal. The combined company will trade as Fidelity Information Services. It will have a pro forma market capitalisation of US$7.5 billion ($10.95 billion) and will be the largest provider of transaction and processing services to financial institutions. The combined company is in a much better position to take advantage of secular growth trends in process outsourcing by banks, as well as the global shift to card-based payments from cash.

 

Yes. One share of Metavante trades as if it were 1.34 shares of Fidelity. After the transaction, the combined company should trade higher.

 

Plum Creek Timber is overpriced. This REIT [real-estate investment trust] is the largest private owner of timberland in the US, with about 7.4 million acres in 19 states. The stock is trading for around 30 times consensus 2010 earnings estimates, and nearly 20 times estimated Ebitda.

 

At US$35 a share, the market is valuing Plum Creek at more than US$1,100 per acre. The company has tremendous assets and a high-quality management team, but investors are mispricing timberland as an asset class and Plum Creek as a stock. Our target price is US$10 to US$15 per share, or US$600 an acre. Investors have bid up timberland prices to irrational levels.

 

Black: On a bottom-up basis, the S&P 500 trades for 17.5 times earnings; top-down, it trades for 22 times. Either way, it is pretty expensive. Investors are chasing any glimmer of hope, such as fewer jobs lost in May, even though the US unemployment rate climbed to 9.4%. There was a lot of cash on the sidelines. The train started pulling out of the station in April, and a lot of people missed the passenger cars, so they jumped on the caboose.

 

The market is ripe for a pullback, though it won’t retest the 666 low. We screen 11,000 US equities. With the exception of special situations, the market is picked over. The US economy hasn’t bottomed. Most of the US$787 billion in stimulus money went to transfer payments and tax rebates, and hasn’t found its way into job creation. The savings rate has climbed to about 5.7%. That’s good for the US in the long term, but not in the short.

 

I’ve got two stocks, both dividend-oriented, because you ought to have some protection if the market pulls back. Boardwalk Pipeline Partners is about 73%-owned by Loews Corp, which is controlled by the Tisch family. It sells for about US$21, pays a dividend of US$1.94 a share and yields about 9.2%. The stock sells for 1.2 times tangible book, which isn’t expensive. The company has all new plant and equipment.

 

The stock could rally to US$28. That’s 33% appreciation plus a 9% yield — or an expected total return of 42%.

 

My next pick is Cal-Maine Foods, which is the No 1 egg producer in the US, with a 15.8% market share. The stock is US$24.81. In the May 2008 fiscal year, it sold about 678 million dozen eggs — 535 million dozen were produced inhouse. They have 22 million hens, whose laying life cycle is about two years. The stock fluctuates with the price of feed — corn.

 

In the past year, it has been as high as US$48.80 and as low as US$17. Earnings fluctuate, too. The company earned US$6.40 a share in fiscal 2008, and we estimate they did US$4.15 in fiscal 2009. The stock sells for 5.2 times earnings. That’s ridiculous. Return on equity is 31%, and they will generate about US$120 million in free cash. The company pays out a third of income as dividends.

 

The current dividend is $1.72, the yield, 7%. If Cal-Maine earns US$4.80 a share in fiscal 2010 and trades for just eight times earnings, you’ve got a US$38.50 stock, plus the yield.

 

Cohen: The concept of fair value can change based on assumptions about the market’s fundamentals. In January, even with a gloomy outlook for the economy and corporate profits, stocks were too cheap. In March, using an economic and profit forecast not too different from January’s, our models suggested the S&P was undervalued by 40% or more.

 

Our economics department is forecasting a sluggish recovery in US GDP. It will turn positive in 3Q, but grow only 1% or 2%. Given lacklustre profit expectations, our six-to-12-month S&P outlook is 950 to 1,050. Goldman is forecasting S&P 500 earnings before provisions of US$63 in 2009 and US$71 in 2010. [But], there is discontinuity in the data. Some S&P 500 companies have disappeared, and recent quarters have seen extraordinary write-offs. There will be a major inflection point for earnings in 3Q or 4Q. Our analysts believe risk may be to the upside — that is, profits may grow faster than previously forecast.

 

Our energy team recently raised its price forecasts for crude oil and other energy commodities. This lifted the earnings prospects for integrated oil and refining companies. Crude is expected to reach US$80 per barrel next year and US$100 in 2011 due to demand recovery in the face of non-Opec supply contraction. Hess benefits from the rise in prices and its ability to deliver growth in production while others are supply-constrained. The shares are down about 50% from year-ago levels. This year, the company could earn US$1.03 a share. Next year, earnings could surge to US$5.30, suggesting a PER of about 11 at current prices.

 

Lenovo Group is expected to benefit from recovering global demand. Lenovo’s market share is about 27% in China, where growth is expected to rebound due to economic stimulus, demand for 3G netbooks and subsidy programmes. Our analysts expect a global PC-upgrade cycle in 2010, bolstered by ageing corporate PCs and Microsoft’s introduction of Windows 7. Lenovo had large losses early this year and has restructured. It could break even in fiscal 2010, which began in March, and earn three US cents in fiscal 2011. The PER is about 13. The stock has doubled since March to HK$3.02, but is 45% below year-ago levels.

 

Gross: US Treasuries offer paltry returns relative not only to other types of bonds, but also other asset categories such as stocks, commodities or real estate. The 10-year is yielding 3.88%, and even the 30-year bond, at 4.68%, doesn’t offer much relative to the potential for greater inflation in 2012, 2013 and 2014. US Treasuries have had an enormous problem this year in terms of supply: There will be US$3 trillion of gross issuance and US$2 trillion of net issuance, four times last year’s number. That’s one reason yields have gone up.

 

None at all. But, the danger in injecting so much money to support the financial system is that the hangover, when it comes, could be worse than the original problem. The Fed is buying US$400 billion of US Treasuries. That leaves US$1.6 trillion of the net US$2 trillion to be purchased by you, me and the Chinese.

 

Agency mortgages have done so well since January that they don’t make much sense, either. They yield around 4.50%. High-yield bonds, corporate bonds and even municipals and Treasury inflation-protected securities have some attraction, but they too have done well in the past five months.

 

The one area that remains attractive is the hybrid-preferred market. These are similar to TARP [Troubled Asset Relief Program] preferreds — bank preferred stock the government bought with TARP money. The hybrids were issued to the public; they’re really subordinated debt.

 

I like a Citigroup issue with an 8.3% coupon and a maturity of Dec 21, 2057. The catch is that Citi plans to redeem it in two to three weeks with common stock priced at US$3.35 a share. The offer has been outstanding for maybe two months, but the conversion is shifting into high gear. This is more of a stock than a bond play. It’s an arbitrage play. There is 15% appreciation potential relative to the current price of the common stock, which trades around US$3.44.

 

Barclays has an attractive subordinated preferred with a 14% coupon and a 2049 maturity. It can be bought around US$110, so the current yield is 13%. We have been buying it recently. That’s an excellent yield for an A-rated security. So, yes, there are sporadic values, but high-yield and corporate bonds in general, and US Treasuries and even mortgage securities, are mediocre investments at the moment. An investor probably should expect 4% to 5% to 6% returns from the genre — nothing super.

 

MacAllaster: Most people will disagree with me about the financials, but they still are cheap. You’ll do well if you can hang on for two or three years. Bank of America trades for US$12 a share. The 12-month range is US$2.50 to US$39.50. The bank earned 44 US cents a share in 1Q and probably won’t do more than US$1 for the year. The dividend was cut to four US cents from US$2.56. Bank of America has the largest deposit base of any bank in the US: more than 10% of all deposits. It used to make more than US$4 a share and sell for US$52 to US$53, and yield 5%. The whole banking business will have to be run on a different basis, and relative to three or four years ago, Bank of America will be overcapitalised. In two or three years, it will earn US$3 a share, and sell around US$30. It might pay a dividend of US$1.50 a share.

 

My second pick is Protective Life. Like other life insurers, it has had problems with its investments; book value was cut in half in the past 18 months. In the past five years, earnings have varied between US$3.37 a share and US$4.05. Last year, they showed a net loss due to the re-valuation of investments, but operating earnings were US$3.37 a share. This year, the estimate is about US$3 — the worst operating results in six years. The company cut its dividend, but still pays 12 US cents per quarter. The yield is around 4%. The stock trades for about US$12.50. That’s four to five times earnings, and around book value. In two to three years, the stock could be US$30 a share.

 

Faber: The S&P 500 could correct soon, maybe from higher levels. If it rallies to 1,000-1,050 by July, that could be the high for the year, because the index is not inexpensive. But, we don’t see new lows. The 666 low is likely to hold, as is the Nov 21, 2008 low of 741. The market won’t fall below 800 for the time being.

 

It is hard to know what happens in the next year, because so much economic and financial volatility has been created by huge fiscal deficits and expansionary monetary policies. Governments can support economic activity through fiscal deficits. What concerns me down the line is the likelihood of much greater inflation because of this stimulus. At some point, the Fed will have to increase interest rates to combat inflation, and it will be very reluctant to do so.

 

The opportunities are far better than in the US. When hedge funds and funds of funds had massive liquidations last fall, Asian markets such as Taiwan, South Korea and Japan fell to generational lows. Investors should use setbacks in these markets to accumulate shares. Many stocks are yielding 6% to 10%. The world is also undergoing a major shift in consumption. In March, car sales in emerging economies began to exceed those in developed countries. China, Brazil and India have become important simply because of the size and growth of their populations.

 

There has been renewed interest in asset plays of all types. Stocks like Newmont Mining and Freeport-McMoRan Copper & Gold have soared. There is also renewed interest in Asian real estate, whose prices are lower than they were in 1997. I like Asian REITs such as Singapore’s Parkway Life and property-management firm ARA Asset Management. Hong Kong and Singapore will benefit from greater regulation of the financial markets in the US and Europe. Also, the US has large and highly sophisticated military installations in Singapore, and it doesn’t want to antagonise Singapore.

 

Demand for water is a big theme in Asia. Singapore’s Hyflux Water Trust pays out income earned from operating water-treatment plants. Education is a growth industry as well, and Raffles Education should benefit. Also in Singapore, I like Kingsmen Creatives, a marketing and communications-design company. In Thailand I like MCOT, a media conglomerate, and Dynasty Ceramic, which makes floor tiles, as well as two airline-related companies — Airports of Thailand and Thai Airways International. In Japan, I like Mitsubishi UFJ Financial and the iShares MSCI Japan fund.

 

Mining companies like Switzerland’s Xstrata are good trades. It got hit hard because it operates on leverage, but the concern was overblown. I like NovaGold Resources. Barrick Gold tried to buy them for about US$15 a share a year ago. There was no deal and NovaGold fell below US$2, although it has rebounded to US$5.50. NovaGold has enlarged its asset base significantly. Today, it is even more valuable than US$15. Natural gas is a buy here. It is extremely depressed and at a record low compared to oil. I would short US Treasury bonds when the yield declines to between 2.8% and 3% on 10- year notes.