Kiplinger Connection
Investing • Business Costs • The Economy

Investing: Stock tips to get ahead of the turnaround.
Business Costs: Package-shipper competition spells lower prices.
The Economy: Business spending falling to half of 2007.

Investing
On this crazy stock market ride ...
There are hints of a happier future: Stocks are no longer plummeting on every bit of bad news. And in anticipation of improvement in the economy later this year and into next, it’s time for the stock market to turn around.
But economic recovery will be slow, with a year or more of only sluggish growth.
And bad news will still slam stocks from time to time ... as it just did GE.
So tread cautiously as you buy.
If you’re moving cash back to stocks ...
Do so in steps, dollar-cost averaging. It’s true that market rallies typically start when affairs look bleakest, but bottom picking is a fool’s game that rarely pays off.

And look for the sweet spots:
Multinationals, especially U.S. firms. Pick high quality companies with steady growth and strong global positions, poised to benefit from the more robust growth of emerging markets and from export benefits generated by the dollar’s continued weakness. Some that are attractively valued are: IBM, Hewlett-Packard, Caterpillar, General Electric, Emerson Electric, Cisco Systems, and Colgate-Palmolive.

Energy companies. With crude oil prices likely to remain strong ... and a decline of even 30% from today’s prices would still be strong ... oil firms such as ExxonMobil, ConocoPhillips, and Chevron will prosper. Ditto, service firms ... Schlumberger, Weatherford Intl., Transocean.
Agribusiness. Spurred by biofuels demand and animal feed needs, prices for corn, soybeans, wheat, and other crops spell expanded acreage, bumper crops and bulging pockets for agriculture producers, processors, and handlers. Farm equipment makers, such as John Deere, and seed firms, including DuPont and Monsanto, should reap a healthy harvest.

Finally, consider playing defense. As long as the U.S. economy continues to sputter, consistent but unremarkable returns from makers and sellers of household staples and health-care companies are attractive. Some with particular appeal: PepsiCo, Eli Lilly, and Cardinal Health.

Mutual funds can offer much the same menu: Global investment, inflation hedging defensive stocks, energy, and agricultural offerings. A few no-load funds worth checking out: Marsico Global and CGM Focus, Vanguard Primecap Core, Marsico 21st Century, and Fairholme.

Business Costs
The slow economy spells distress for truckers, deals for shippers. Soaring diesel prices and lighter demand for freight hauling will squeeze truckers, putting many out of business. By year-end ... a drop of about 5% in hauling capacity, roughly the same as from 2000 to 2001. Independents and small firms will be hit hardest. They have little ability to buy fuel in bulk or to hedge purchase prices with futures contracts. And they’re often plagued by customers who drag their feet on paying.
Desperate to hang on, truckers will hold down base rates ... flat or even a bit lower than last year ... in contracts inked by midyear. But as the economy starts to pick up, so will rates, rising 5%-6% in 2009.

Package delivery services are scrambling for business as well, eager to grab bigger shares of a market that has stopped growing. FedEx, UPS, and DHL will duke it out, negotiating contracts to cut rates, despite an official 6.9% hike this year. Walk-ins will pay the full fare.

Even the U.S. Postal Service is giving discounts. Starting in May, the USPS will offer bargains on relatively short deliveries of parcels ... within a few hundred miles ... undercutting private carriers’ basic rates.
The USPS aims to be more competitive and quit losing share of the delivery market. Note this additional initiative under way:
It’s offering free shipping for recyclables ... old or broken PDAs, iPods, digital cameras, MP3 players, and other small electronics plus empty ink-jet cartridges, etc. The agency figures once customers come through its doors, they won’t head elsewhere to ship other packages.

Electricity rate increases will accelerate in another year or two.
Among the drivers: Financing woes squelching plant construction. Escalating costs ... both for materials and for skilled technicians ... combined with a more cautious lending environment mean utility companies are shelving plans for new power plants. Despite increasing demand, utilities fear they won’t be able to recover costs in a reasonable time.
On average ... 4%-5% annual rate hikes, compared with average jumps of 2% in 2007 and just under 3% this year. Another likely consequence:
Blackouts and brownouts will become more common at peak use times.

Overseas inflation is hurting low-cost U.S. manufacturers ... makers of footwear, apparel, toys, furniture, and housewares, for example. Rising costs for food and fuel in emerging markets where they operate are forcing employers to raise wages or risk strikes by angry workers. With the soft dollar, they face a double whammy. It takes more greenbacks to pay workers’ wages in the yuan, ringgit, or baht. As Asian central banks hike interest rates to contain inflation, the dollar will get even weaker.
Companies will pass their higher costs on to U.S. consumers.

The Economy
Business spending gains will drop to half of last year’s rate ... only 2.5% or so this year. Sluggish growth in corporate profits and doubts about a second-half economic pickup mean caution will rule. Signs of a broad pullback are evident in recent durable goods orders: Two consecutive months of declines and strong prospects of a third. What’s more, the weakening involves more than just housing and autos. But energy, aircraft, computers and agriculture are seeing increases.

Still, that’s better than in 2001 and 1991, both years when spending by businesses actually contracted.

If not for the stimulus package, providing swifter, larger write-offs for businesses that buy new equipment before the end of this year ...
The slowdown would be even worse, though only about a third of midsize and small businesses expect to benefit from the program of tax breaks.

Mortgage interest rates aren’t likely to ease in coming months.
The edgy credit markets are taking a toll, severing the link between yields on 10-year Treasuries, down a half point this year, and 30-year fixed rate home loans. They’ve dipped only a quarter point. Nervous investors flocking to Treasuries are trimming those yields, but equally nervous mortgage lenders aren’t loosening their purse strings.
Look for mortgage rates to end the year around 6%, up a bit from now. Why? Investors in bonds will fret about higher inflation and a mounting federal budget deficit, pushing interest rates upward.