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Where to Put Your Cash in 2008

To help you invest your money profitably in a rough year, BusinessWeek polled seven stock market analysts. Here's their best advice:

WILLIAM GREINER, Chief Investment Officer, UMB Financial

Greiner's crystal ball has a strong track record, having landed him at or close to the top of the list of 80-plus stock market strategists BusinessWeek has polled in past years. For 2008, Greiner says stocks will fall in the first half of the year as the economy slows. But after that, Greiner expects a combination of low stock valuations and lower interest rates to push the Dow up some 8% over today's levels. Moreover, he notes, "the market has a tradition of rallying pretty hard in the second half of a Presidential election year." Greiner favors companies that manufacture products consumers cannot do without, such as food and drugs. He expects such companies to deliver strong profit gains—of some 8% in 2007 and 10% in 2008—even as corporate bottom lines elsewhere stagnate. His favorite stock, Starbucks (SBUX), trades at about 23 times earnings—or "its cheapest level ever."

Greiner's Calls

DJIA: 14,400 (December, 2008)

S&P 500: 1520 (December, 2008)

Favorite Stock: Starbucks

Observation: "It will be much more challenging to make money"

TOBIAS LEVKOVICH, Chief U.S. Equity Strategist, Citigroup (C)

Citigroup's U.S. stock strategist is advising clients to buy beaten-down financial and retailing stocks and steer clear of stocks that have seen big run-ups. Of course, Levkovich's call amounts to good, old-fashioned investment sense ("buy low, sell high"). But there's no guarantee his timing is right. "Markets don't ring bells at the top or bottom," he replies. "If you wait, you will miss out." Levkovich believes bank earnings are likely to surpass analysts' ultralow expectations for next year. Why? A series of interest-rate cuts from the Fed, extending into 2008, will allow banks to reduce the rates they pay on deposits and repair damaged balance sheets. Meanwhile, he predicts retailers will benefit from healthy consumer spending, fueled by continued job growth. By Levkovich's calculations, stocks are at bargain levels seen in only 90 of the past 550 months. "In every single instance," he adds, "the markets were higher 12 months later." But while Levkovich expects the Standard & Poor's 500-stock index to rise 18% by midyear, he's looking for investors to give back some of those gains in the second half of the year, as uncertainty sets in over the U.S. Presidential election and rising wages squeeze U.S. corporate profits.

Levkovich's Calls

DJIA: 15,100 (December, 2008)

S&P 500: 1675 (December, 2008)

Earnings: expects a rise of 5.2%

Recommendation: Buy financial stocks

JASON TRENNERT, Chief Investment Strategist, Strategas Research Partners

Rated one of the best market strategists by Institutional Investor magazine in four of the past five years, Trennert has a strong following among the sophisticated investors who run pensions and endowments. His recommendation for 2008 is to stick with U.S. stocks. With corporate balance sheets strong and the U.S. unemployment rate low, Trennert figures the odds of a recession are low. He expects the Federal Reserve to cut the Federal Funds rate from 4.25% to 3.5% by midyear—averting a major credit crunch and fueling stock gains. At 15 times 2008 earnings projections, Trennert argues U.S. stocks are a good buy in comparison with bonds: The ten-year Treasury bond's 4.2% yield equates to a price-earnings ratio of 25. Trennert also sees more upside in U.S. stocks than in their international counterparts. The reason: If European central banks cut interest rates in 2008 to combat weakening economies, those currencies will depreciate against the dollar, reducing returns on European stocks when translated into dollars.

Trennert's Calls

DJIA: 15,150 (December, 2008)

S&P 500: 1680 (December, 2008)

Favorite Sector: Technology

Observation: Tech has the most cash on its balance sheet and has the most to gain from a weakening dollar.

BERNIE SCHAEFFER, Chairman, Schaeffer's Investment Research

Schaeffer—a past winner of BusinessWeek's annual stock market forecasting contest—remains optimistic about the outlook for stocks in 2008. He expects a series of "aggressive" interest-rate cuts by the Federal Reserve to bolster consumer spending, economic growth, and stock prices next year, and for a weaker dollar to inflate the overseas earnings of multinational companies.

Schaeffer also scrutinizes various technical indicators, most of which, he believes, are currently flashing positive signals. For instance, he cites indicators of negative investor sentiment which, counterintuitively, are positive for stocks, since they signal there's a lot of money on the sidelines waiting to move into stocks upon good news. Among them: analysts' expectations for corporate earnings, which in recent weeks have "fallen off a cliff" and a significant level of short interest, or bets against stock price gains. Schaeffer also thinks the market will continue to benefit from long-term trends. He points to the growth of hedge funds and the increasing prevalence of short-selling, the latter of which has "kept stock valuations from getting too far out of line." Hedge fund short-selling has also "created selling pressure in the market on an ongoing basis," leaving stocks less vulnerable to steep and rapid sell-offs.

Schaeffer's Calls

DJIA: 15,300 (December, 2008)

S&P 500: 1700 (December, 2008)

Earnings Growth: 7%

Asset Allocation: 80% to stocks

LEO GROHOWSKI, Chief Investment Officer, BNY Mellon Wealth Management

Among the stock market strategists BusinessWeek surveyed a year ago, Grohowski came closest to pegging where the Dow, the S&P 500, and the Nasdaq Composite would finish in 2007. He warns that 2008 could be a schizophrenic year for the stock market, as concerns about recession are replaced by fears of rising interest rates and the potential for inflation. "It's likely to be a tale of two halves of the year," he says. Overall, Grohowski is expecting the Dow to finish 2008 some 10% higher. But along the way, he warns, investors will be in for a choppy ride, as uncertainty about the economic outlook fuels "above normal volatility." Grohowski recommends a defensive portfolio. He likes U.S. stocks, because he thinks valuations are reasonable and because there aren't a lot of attractive alternatives. "At this time last year, there was a lot of interest in real estate, commodities, and private equity." With those sectors under pressure, he thinks equities stand to gain. Grohowski thinks growth stocks will outperform their value counterparts and recommends large-caps over small company stocks. His favorite, FCStone Group (FCSX), helps companies hedge their exposure to commodities and so should "capitalize on the volatility we expect."

When it comes to bonds, Grohowski favors municipals, which on an after-tax basis currently yield more than comparable Treasuries. "In almost any tax bracket, it makes sense to buy munis," he says. Later in the year, Grohowski thinks investors will be rewarded for taking more risk. He's expecting financial stocks to rebound. And he thinks international stocks still have room to outperform. "If you combine our expectations for a 2.5% rise in inflation, a 2% increase in GDP [gross domestic product], and 5% earnings growth, that's a pretty friendly backdrop for equities."

Grohowski's Calls

DJIA: 14,800 (December, 2008)

S&P 500: 1675 (December, 2008)

Asset Allocation: 37% in bonds

Favorite Stock: FCStone Group

THOMAS McMANUS, Chief Investment Strategist, Banc of America Securities

McManus is expecting the Dow to decline by 3% in the first half of 2008 before rebounding to finish the year a solid 10% above current levels. While most economists minimize the chances of a recession, McManus puts the odds of an economic downturn at 50/50 or greater. Why? Over the past 40 years, McManus counts eight instances in which the Federal Reserve has embarked on a series of interest rate hikes—the most recent of which ended in June, 2006. Six of those campaigns have resulted in recession, he adds. Whether we're heading for a full-blown recession or a period of slow growth, McManus expects stocks to head up in the second half of 2008. "Stocks usually bottom close to the beginning of a recession. Certainly by the time it's obvious that we're in recession, stocks have already bottomed."

For the coming year, McManus favors large-cap stocks over small-caps, growth over beaten-down value plays, and the stocks of companies with international exposure over those that cater to only the domestic market. He's particularly wary of companies that manufacture and finance consumer discretionary spending: "If there is going to be a recession, it's going to be a consumer-led recession." McManus also likes Treasury Inflation Protected Securities (TIPS), which he thinks should comprise about 15% of a portfolio: "2008 will be a time when investors will need to continue to look for ways to protect against inflation." While TIPS have rallied this year, McManus thinks they're still reasonably valued. He also recommends stashing 10% in either commodities or hedge funds that lack a strong correlation to the U.S. stock and bond markets.

McManus' Calls

JIA: 14,700 (December, 2008)

S&P 500: 1625 (December, 2008)

Asset Allocation: 15% in Treasury Inflation Protected Securities (TIPS), 15% in cash, 10% in commodity or hedge funds

Observation: "2008 will be a zig-zag year, more volatile than 2007"

DAVID BIANCO, Chief U.S. Equity Strategist, UBS Investment Research (UBS)

UBS's chief U.S. equity strategist expects economic growth to slow next year, to about 2%. But he believes the odds of a recession are less than 50/50, thanks to the Federal Reserve, which he expects to cut interest rates enough to provide relief to banks and, to a lesser extent, consumers. By yearend, Bianco sees economic growth heading modestly higher and the Dow at 15,250, or 14% above today's level. With the risks of a recession and a severe credit crisis still high now, Bianco is advising caution. He favors U.S. over foreign stocks, primarily because he expects growth abroad to slow more sharply than at home.

He's looking for U.S. corporations to post relatively healthy earnings growth of 10% in 2008, largely on the strength of U.S. exports and continued demand for high-technology products. For that reason, he favors large-cap companies with a global reach, which stand to benefit from exports. He's steering clear of U.S. corporate and high-yield bonds due to credit concerns and instead recommends British, euro zone, and Australian government bonds, which are cheaper than U.S. Treasuries. As the pace of bank write-offs slows and the threat of a recession recedes, Bianco says investors need to be ready to shift gears by buying distressed assets, such as the stocks of U.S. banks.

Bianco's Calls

DJIA: 15,250 (December, 2008)

S&P 500: 1700 (December, 2008)

Favorite Stock: Oracle

Observation: "2008 will bring clarity on U.S. economic health and the sustainability of robust earnings growth that the S&P 500 has generated in recent years"

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