Tax cuts, rates cheer economist

Banc One chief economist Diane Swonk's optimism for the stock market is based on the mix of tax cuts, deficit spending and low interest rates that President Bush and Federal Reserve Chairman Alan Greenspan have used to prime the economy. "We have good, overzealous policymakers willing to overheat the economy to get it back on track," Swonk says. She believes the S&P 500 will rise 20 percent in 2004 and expects impressive returns from stocks through 2008.

The recently reopened Fidelity Low-Priced Stock Fund has limited itself to issues costing less than $35 to produce 14.7 percent average annual gains over the past decade. It prefers stocks with market capitalizations under $100 million that have recently experienced positive earnings surprises and have reasonable share prices, focused managements, market domination or other indicators of sustainable growth. Recent favorites: CVS, Lafarge North America, D.R. Horton, PMI Group, Safeway.

NYSE-traded limited partnerships are the safest play in the volatile but potentially profitable energy sector, says Utility Forecaster newsletter (1750 Old Meadow Road, McLean, VA 22102). "Our favorite LPs trade just like common stocks and recently yielded an average 7 percent. Best of all, they make their cash from fees paid by the energy giants who use their networks to ship and store energy. They get paid whether oil is $100 a barrel or $10. They are: Buckeye Partners, GulfTerra Partners, Kaneb Pipeline Partners, Northern Border Pipelines, Plains All-America Pipe, Sunoco Partners, TEPPCO Partners."

Preferred stocks also pay generous dividends, making them attractive to income investors in this yield-deficient era. But be sure that the preferreds you're interested in aren't callable. Many issuers have been buying back their preferreds in order to refinance with debt. William Hummer of Wayne Hummer Investments in Chicago recommends two high-yielding preferreds that recently sold well below their $100 call prices: Consumer Energy Series B and Union Electric Series D.

Speaking of yields, don't be tempted by the unusually large payouts recently offered by closed-end municipal bond funds. To produce those yields, almost all closed-end muni funds must employ leverage. That allows them to prosper when interest rates are falling. But they'll get pounded when rates rise. "If rates go up, you could lose 10 percent to 20 percent on them in a short time," says Mariana Bush of Wachovia Securities.

Owning dividend-paying stocks through mutual funds will produce the same new tax advantage as owning them individually, notes Kiplinger's Personal Finance Magazine (1729 H St. NW, Washington, DC 20006). "Funds that emphasize dividend-paying stocks tend to lag bull markets. But they're also less risky in bear markets. Many of these funds have 'equity income' in their names. Four of our favorites: Vanguard Equity Income, T. Rowe Price Equity Income, American Century Equity Income, Hennessy Cornerstone Value."

Site of the Week: Go to www.valuengine.com for a stock valuation service that estimates fair value based on trailing 12-month earnings, consensus forecasted earnings for the next 12 months and the current 30-year Treasury yield, all of which are updated throughout the day. Some of the site's material is free, while some comes with charges.

Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.

Copyright C 2004 Deseret News Publishing Co.
Provided by ProQuest Information and Learning Company. All rights Reserved.