Investors at crossroads

With signs the real estate boom is slowing, investors are expected to look elsewhere for profits. Will the stock market be the beneficiary?

Last year investors were asking "Who needs stocks?" when real estate prices were soaring and condo flipping was all the rage. As 2006 gets under way, they're wondering where to turn now that the housing market is slowing and double-digit gains are no longer a slam dunk.
For investors like Jan Fowler, a business broker who lives in Odessa, it's a pressing issue. Like a lot of others, she soured on stocks in the wake of the tech bubble and fled to the relative safety of real estate. Her investment, a rental house in Holiday, nearly doubled in price during the two years she owned it. After repairs and other costs, she walked away from its recent sale with a $55,000 profit.
"I would love to buy another Florida home for rental, but prices are too inflated," she said. Fowler said that with today's prices she wouldn't be able to collect enough rent to cover the larger mortgage and fast-rising costs for property insurance.
Now she's looking for alternatives, but isn't impressed by what she sees. Fowler said she recently bought some stocks and a little gold, but is keeping most of the proceeds from the house sale in a money-market account.
"The pendulum in real estate has moved away from euphoria, but that doesn't automatically make it the next golden age for stocks," said Rick Metzger, a broker for A.G. Edwards & Sons in Tampa. He said investors are neither "scarfing up stocks" as they were in the late '90s,nor despairing as they were from 2000 to 2002.
"We're pretty close to middle ground now," he said. "Maybe if stocks look like they are starting to break out of their trading ranges, investors will come back in."
As another new year begins, the financial markets face both opportunities and potential head winds. As a result, a lot of advisers and analysts are taking the middle road - optimistic, but not wildly so.
St. Petersburg money manager Timothy McIntosh offers a typical comment: "I think we're in a period where we just get very moderate returns," he said.
However, it's easy to find other views in both directions.
"I think the market is setting a stage to have an explosive move to the upside," said Tampa money manager John Bartoletta of High Street Financial. On the other hand, Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, is predicting a difficult year.
Both professional and amateur investors are taking cues from the economic and political backdrop.
One focus is the transition at the Federal Reserve Board, where Alan Greenspan is on his way out as chairman and Ben Bernanke is stepping into those extra-large shoes. Conventional wisdom is that the Fed's cycle of quarter-point increases in short-term interest rates is coming to an end - if not this month, then most likely by the end of the first quarter - with the federal funds rate between 4.5 and 4.75 percent.
The end of the tightening cycle that began in June 2004 will be a relief to the stock market. Rising rates put a crimp in corporate profits because they make it more expensive for companies to borrow money and if they get high enough, they even could push the economy into a recession. So far, profits are doing just fine. Analysts are expecting fourth-quarter earnings for companies in the Standard & Poor's 500 Index to be up more than 13 percent.
However, interest rates offer one ominous sign. Long-term rates have remained historically low even as short-term rates have risen. Last week, investors could earn a slightly higher yield (just under 4.4 percent) on two-year Treasuries than on the 10-year note, a situation known as an inverted yield curve, which often precedes recessions.
If long-term rates start rising, as some expect, that could create another set of problems. Mortgages would become more expensive, putting pressure on housing prices. It's positive for stocks if investors simply put new money in stocks instead of real estate. But if the real-estate market slows so much that investors can't sell properties or have to accept losses, that's negative for both stocks and the economy as a whole.
Most economists are predicting that the economy will slow this year, but not actually move into a recession.
"The economy continues to be stronger than most people thought it would be, particularly in light of the hurricanes," said Clearwater financial planner Ray Ferrara of ProVise Investment Management. He said key factors will be the availability of money for businesses borrowers and creation of new jobs. "I hate being a cynic, but it is an election year (for Congress) . . . the president will do everything he can to have the economy humming, people feeling good about themselves and being employed."
Many investors are watching commodity prices closely. Energy stocks were huge winners last year as oil prices soared and hurricanes disrupted supplies. Prices have come back down from their highs, but oil at $60 a barrel is far from cheap. Higher prices for gasoline and home heating put a crimp in consumers' ability to pay for other purchases, which could hurt retail stocks.
Other commodities, such as copper, zinc, aluminum, silver, gold and platinum have seen double digit increases this year. Overall, inflation was up 3.8 percent through November of last year, compared to 3.3 percent for 2004. In addition, consumers are being squeezed by higher prices in areas that don't show up in the inflation numbers, such as home prices and property insurance.
The war in Iraq and terrorism also are on investors' minds. The progress of the war, political and financial scandals, natural disasters and other news events all have the potential to impact markets during the year.
For investors who want to buy stocks, the pros have plenty of suggestions.
"Technology will be one of the good stories for 2006," predicted McIntosh at Strategic Investment Partners. "We think (companies) will spend a lot of money on technology next year." His picks include Microsoft Corp., Oracle Corp. and Hewlett-Packard Co.
Ferrara at ProVise Investment Management recommended going with stocks that pay dividends.
"Dividends are going to become very important," he said. "If the pundits are right about the stock market not increasing dramatically over the next couple years, you could see dividends representing 40 percent of that return."
The analysts at Raymond James & Associates in St. Petersburg put their heads together to come up with these top picks for the new year: Amdocs Ltd., Briggs & Stratton, Chesapeake Energy Corp., Chubb Corp., Dell Inc., LifePoint Hospitals Inc., Nabors Industries Ltd., Republic Services Inc., Ryanair Holdings, U.S. Bancorp. and UNOVA Inc.
If the economy does slow considerably, that would be good for defensive stocks such as utilities and food. If it doesn't, growth stocks could do better. Just don't bet too heavily on any particular stock or scenario if you want to keep risk in check.
"The one thing 35 years have taught me is that whatever the majority thinks is going to happen usually doesn't play out that way," Ferrara said. "The key from the investor's point of view continues to be a well-diversified portfolio."