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Investing • The Economy • Business Tech

Investing: Stock prices dangerously high?
The Economy: Boom regions still healthy.
Business Tech: Laptops getting better, not cheaper.

Investing
Are stock prices dangerously high? The recent strong rally has defied evidence of a tepid economy and slowing earnings growth, raising concerns about a steep reversal.
We do see room for more gains in 2007.
But they'll come at a far slower pace.
And there will be more volatile swings as bouts of profit-taking rein in the advance.
Reasons for concern seem pretty solid:
A sluggish pace of U.S. economic growth of 2% to 2.5% likely for the rest of 2007, putting a damper on companies' domestic sales.
A near halving of average profit growth for S&P 500 firms this year to about 8%.
And stocks that aren’t exactly cheap by historical standards, with the average ratio of price to earnings now hovering around 16.

But other factors will buoy stocks:
Mergers and acquisitions. Deal volume is on track for a record $1.8 trillion in 2007. Investors are shopping for takeover targets.
The lower dollar, which makes U.S. shares cheaper for foreigners. They spent $150 billion on them last year, almost double the 2005 total.
U.S. businesses' strong foreign operations. The S&P 500 companies post about half of their sales abroad, fueled by brisk foreign economies and the weak buck. This helps ease worries about U.S. economic prospects.
Dividend income. As the housing slump takes a toll on investors, they are refocusing on dividends and other sources of steadier returns.
Lessening inflation dangers. Oil prices are calm and wage gains are slowing, reducing the odds of market-roiling interest rate hikes.
Plus other investment classes aren't much of a draw right now. The housing market is far from bouncing back. Bond yields are ho-hum. Commodities, though still on the rise, have considerably less momentum.

Another support for the market: Share buybacks by cash-rich firms will total about $460 billion this year, up $30 billion or so from 2006.
Overall, we see the market gaining another 3% to 4% this year. Adding a 2% average dividend yield, returns will just hit double digits.
Our favorite plays: Large, global, dividend-paying companies, such as Coca-Cola, Hewlett-Packard, GE, Avon, and Caterpillar.
Some funds to consider in large caps: T. Rowe Price Growth Stock. Selected American Shares. Marsico 21st Century. Vanguard Primecap Core.
Defensive sectors tend to outperform the pack in a slow economy: Health care, pharmaceuticals, utilities, food, and other consumer staples.

The Economy
Despite all the talk about housing tripping up the economy ...
Former boom regions are emerging in relatively healthy shape. The markets may have lost the frosting, but they’ve still got the cake.
One reason: Their job growth should top the national average of 1%, expanding about 2% in Florida, 3.1% in Arizona, and 1.3% in California.
Credit the diversified economies of the slump-afflicted areas. For example, Phoenix is drawing strength from aerospace and electronics. California continues to thrive in high tech, energy research, health care, and entertainment. In Las Vegas, tourism revenue isn’t missing a beat. Washington, D.C., and its Maryland and Virginia suburbs will post 1.5% job growth. The capital region’s biotech and federal contracting sectors are intact.
Contrast this with the nation’s laggards, many with house prices that haven’t tanked but aren’t gaining much, either. The Upper Midwest, burned by automakers’ cutbacks, will see the worst job growth numbers: Flat for Ohio, up just 0.8% for Illinois, down 0.7% in Michigan. Other states ... Maine, Kentucky, Connecticut, Rhode Island, Vermont, New Jersey, and West Virginia...will see gains below 1%.

Dismal April retail sales make it look like consumers are sunk.
But they’re still swimming. This year’s relatively early Easter pushed a lot of holiday sales into March, revving up that month’s tally. Colder-than-normal April weather also kept some folks out of the stores.
Consumer spending is still headed for a 2.5% to 3% rise this year, enough to keep the economy from becoming trapped in rough waters.

Office markets are gradually loosening up as job growth slows.
Nationally, expect rent hikes to average 2.5% through year end, for a 5% gain this year. That’ll be down from last year’s 5.7% advance. Vacancies will remain highest in Detroit, Cincinnati, Dallas, Cleveland, and much of New Jersey. As in the job market, once-hot housing locales are among the tightest: Washington, D.C., Miami, and Southern California.
A similar trend in warehouse rents ... on track for a 4% hike, vs. 1.5% last year. Construction outstripped demand growth last year.

Business Tech
Need a laptop? Faster, more-power-efficient models are arriving.
Most new notebooks have Intel’s Centrino vPro technology package, which cuts battery use, allows much wider reach for wireless signals, boots up more quickly, and offers enhanced Internet security features.
Don’t expect prices to fall very much in the near future. Rapid price declines for laptops in recent years were fueled by a surplus of the chips and monitors they use. These markets are now more in balance.

Prices for multifunction printers, on the other hand, will drop as manufacturers compete for the small business market. By next year, prices on devices with color laser printing, copying, faxing, and scanning from Xerox, Samsung, and Hewlett-Packard will fall by $100 to about $350.