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 What to Own if Economy Turns Sour

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Number of posts : 440
Registration date : 2007-07-01

PostSubject: What to Own if Economy Turns Sour   Sat Sep 15, 2007 9:57 am

What to Own if Economy Turns Sour


Published: September 15, 2007

CONCERN about a recession seems to have
swelled in recent days with each speech made by a Federal Reserve
official enumerating signs of economic weakness. Their aim may be to
telegraph the Fed’s intention to cut interest rates next week in a
pre-emptive strike against a recession, but if you doubt that one can
be staved off, there are steps you can take to inoculate your portfolio.A true recession, typically
defined as an extended period in which the economy shrinks, is rare,
but when one comes along, it almost always decimates stocks. Earnings
fall sharply, and share prices tend to fall even further as investors
anticipate slowed growth.Not every stock will fall in a
recession, but very few will rise. Investors who hold a significant
portion of their wealth in stocks through a recession risk seeing their
net worth diminish.“I don’t think there’s a way to recession-proof a portfolio,” said Tobias Levkovich, chief United States equity strategist for Citigroup. “There’s only a way to mitigate risk.”That
way is to shed shares of companies whose products and services people
are most able to do without or delay purchasing, known as consumer
discretionaries. They include makers of cars and electronics, as well
as airlines and hotel companies.Mr. Levkovich, who does not consider a recession imminent, said providers of essentials can be a haven.Citi has buy ratings on the food producer ConAgra and on Allergan, which makes Botox and other medical and cosmetic items.Walter
T. McCormick, lead manager of the Evergreen Fundamental Large Cap fund,
recognizes a wider set of needs. His list includes tobacco products,
alcohol and communication.If a recession were on its way, he said, he would put money into large defensive businesses like Coca-Cola, PepsiCo, the British liquor company Diageo, Verizon, AT&T, the tobacco seller Altria, and two makers of household and personal-care products, Procter & Gamble and Clorox.“All
of these pay pretty good dividends and will continue to grow through
thick and thin and have products that people use all the time,” Mr.
McCormick said.P. Brett Hammond, chief investment strategist at
the New York fund manager TIAA-CREF, said he considers the odds of a
recession to be less than 50 percent. Before seeing employment data
take a turn for the worse last week, he was more optimistic. Finding
investments that hold their own in a recession will be especially
difficult, he predicted.“Where do you hide?” Mr. Hammond asked.
“Do interest rates have a long way to go down? I don’t think so. Do
stocks have a long way to go up? In the short run, who knows?”IF
stocks and the traditional sanctuary of bonds are ruled out, then what?
Mr. Hammond’s suggestion is to consider a nontraditional refuge: real
estate.That idea might not sit well with homeowners trying to
stave off foreclosure, but he was referring to offices, industrial
buildings and rental apartments, not single-family homes. “We
haven’t overbuilt in the last 10 years the way we have with condos and
single-family homes in some areas,” Mr. Hammond said. If a recession
hits, “we may not have a huge run-up in office demand, but we have not
had a huge run-up in supply.”A recession may even give a lift to
apartment prices, he added, “as people who would have bought homes
start to think about rentals.”For those interested in real
estate, Mr. Hammond suggested real estate investment trusts, portfolios
of properties that trade on stock exchanges.But before investing
in real estate, he said, consider whether making wholesale portfolio
adjustments to anticipate a recession is a sensible move. “We
really believe that you shouldn’t be thinking about the next
recession,” Mr. Hammond said. “You should be thinking about the next
four full cycles.”The timing and duration of recessions are
notoriously difficult to predict. To come out ahead, “you’ve got to be
right twice,” he pointed out. “You’ve got to be right to get out of
stocks, and you’ve got to be right to get in again. That’s a pretty
hard call to make.”
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