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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Giordano Bruno who wrote (107884)	6/3/2007 11:13:55 AM
From: Giordano Bruno	Respond to of 132070

Here Comes The Bear Vahan Janjigian 06.18.07, 12:00 AM ET The S&P 500 and the Dow Jones industrial average have hit new highs. Wonderful. But let's not get lulled into the false sense that what goes up must keep going up. Despite the occasional rough patch, we have been enjoying a bull market for the past four and a half years. All good things must come to an end. For the rest of the year I am bearish. Now is the time to take money off the table. Why the gloom? Three things: 1) slowing earnings growth, 2) rising interest rates and 3) higher taxes. Without any doubt, earnings are strong, for the moment. Standard & Poor's analyst Howard Silverblatt says earnings growth for the index came in at 8.2% for the first quarter. Companies that do a significant amount of business abroad have been performing particularly well. Some of this is due to vibrant foreign economies, but much of it stems from a weak dollar that makes overseas earnings look bigger on a U.S. profit-and-loss statement. Now look a little more closely at those fabulous earnings. Their growth is off the torrid pace of yore. While 8.2% sounds good, it is down from the double-digit growth that has been the norm. Furthermore, the growth in net earnings is significantly less than the growth in earnings per share. That is because of all the share buybacks going on: Fewer shares divided into an earnings pool make for an inflated number. Corporations, no fools, know investors focus on EPS. Gross domestic product growth has slowed considerably, and the most recent employment figures are disappointing. Results like these should make the Fed feel leery of a recession and thus more comfortable about easing. Still, we've learned in recent years that the Fed has little influence on the longer end of the yield curve. One reason: Energy prices are marching upward again. Although I expect gasoline to back off a little from the $3.20 level we're seeing now, it certainly won't go back to $2. Higher gasoline and heating oil prices feed inflation, causing the yield on the ten-year Treasury note to rise. The ten-year serves as the benchmark for corporate loans, meaning that companies will be less willing to tap the capital markets to expand their activities. Finally, there are taxes. I laugh when liberals rail against the Bush tax cuts. I really haven't noticed any tax cuts. When you factor in my state and property taxes, which I can't deduct on my federal return because of the alternative minimum tax, my taxes have risen quite a bit. All George Bush did was to make the situation less onerous than it otherwise would have been. Now that the Democrats control Congress, odds are heavy that federal taxes will not be going any lower. Even if the Republicans manage to hold on to the White House come 2008, the best we can hope for is a veto of any new tax increase. The tax increase built into the statute books for 2011 will take place as scheduled. So why do stocks keep ascending? Blindly optimistic investor sentiment has a lot to do with it. Then there are hedge funds using lots of leverage, private equity firms buying public companies, the new merger wave and all those share buybacks. The stock market, though, is an instrument that reacts to where it thinks the trend will be. When the negative influences I just outlined start hitting, the market will get hurt. The economic slowdown will bite consumer-oriented companies first, since consumer spending makes up 70% of the GDP. A harbinger is Wal-Mart (nyse: WMT - news - people )'s flat same-store sales, blamed on higher gasoline prices. But not all companies will see growth crimped. Through mergers AT&T (nyse: T - news - people ) (41, T) has become the world's largest telecom; its trailing price/earnings multiple of 21 is just a little higher than the S&P 500's 17. AT&T's scale is daunting. So is its new, exclusive deal to sell Apple (nasdaq: AAPL - news - people )'s iPhone. FEI (37, FEIC) makes gear for the burgeoning nanotech market; orders are expanding nicely. The 37 P/E may look high, but the growth rate justifies it. Church & Dwight (49, CHD), with a P/E of 23, makes two recession-proof products: detergent and condoms. Buy these three stocks. Given that the bull run is soon to end, here are three stocks to short. S tarbucks (29, SBUX) and Whole Foods Market (nasdaq: WFMI - news - people ) (40, WFMI) are off their highs and have further to fall. Premium-price lattes and arugula won't move as fast in a slump. Absurdly overpriced Google (nasdaq: GOOG - news - people ) (474, GOOG) lives off rising demand for its ads--but that demand will flag as consumers pull back. If you can't stand the risk of a short position, buy at-the-money puts with at least five months to expiration. Vahan Janjigian is the editor of Forbes Growth Investor and Special Situation Survey and coauthor of the Forbes Stock Market Course. Visit his home page at www.forbes.com/janjigian.