Research Roundtable: Gundlach, Rodriguez, Others

Rodriguez: [Forecasts] are too optimistic. [Considering] what a lot of corporations have done to enhance their profit margins over the last several years, there aren't many more rabbits in the hat.

Fisher: Earnings have been very strong and will continue strong.

Gundlach: I don't find it useful to predict corporate earnings in understanding the way the market goes. These days, it's based upon seismic shifts of policy and politics — choices made at a political level rather than: Is someone going to beat the Street by a few cents?

Do you expect inflation or deflation next year?

Rodriguez: Right now, we have deflation and inflation simultaneously: deflation in home prices and inflation in commodity prices. If we do not address our fiscal issues within no longer than three years, you could see long-term monetary inflation taking hold. Congress has been irresponsible.

Gundlach: The deflation forces are pretty [strong] — home prices deflating, unemployment high and global competition. Without inflation, nominal GDP growth isn't very high.

What's your outlook for bonds?

Rodriguez: They are absolutely terrible. We continue to run a very, very short duration bond fund, which is killing us. But we don't like the risk in the bond market and haven't for many years.

Gundlach: Government bonds are no longer what I would consider an investment; they're now a hedge. It's impossible to see yields fall on short-term bonds because they're at zero. Painfully low interest rates will be with us as long as there's economic malaise and rhetoric about addressing the deficit.

We've been focusing on the higher yields available in areas of the mortgage-related market. We made more money this year in government bonds than in anything else. But going forward, the yield isn't there in junk government bonds. Corporate bonds will be a good buy.

Next year is a presidential election. What will its impact be on markets?

Fisher: Election years are almost never negative for the stock market, and this one should be particularly good. Normally, when we initially elect a Republican, the market is gangbusters. When we reelect a Democrat, it's pretty darn good. And next year we'll do one or the other.

Gundlach: This election is going to be the most significant one for politics and financial markets in our lifetime. It's the taxes-are-too-darn-low party running against the spending-is-too-darn-high party. Whoever gets a mandate will have to start implementing it in February 2013, and either one will be problematic for the economy almost immediately: if you cut spending a lot, it leads to negative economic growth; raising taxes by a lot takes money out of the private economy, which has a similar effect.

Which sectors and stocks do you like for next year?

Buckingham: Companies that offer dividend yields above that of the benchmark 10-year Treasury. The sectors include industrials (Lockheed Martin, Eaton, Waste Management); energy (Total Energy, Enersis SA [ENI], Tsakos Energy Navigation); information technology (Seagate Technologies, Intel, United Online); consumer discretionary (Cooper Tire, Whirlpool, Staples); and healthcare (Abbott Laboratories, Merck, Novartis).

Fisher: Moving forward, the things that should do best are economically sensitive. The focus needs to be on stocks that will benefit from an improved perception about the economy — sectors such as materials, industrials, technology and energy.

Gundlach: I like producers of resource commodities. What really holds value are companies that produce things that are necessary, like copper, food, cement.

Rodriguez: No one sector shows up yet. [We've] invested in a couple of stocks in technology, one in financial services and one in health care. One stock [I'll mention] is Oshkosh Corp., a specialty vehicle manufacturer involved with the military and some municipalities. It's setting new lows.

What's your forecast for international investing?

Buckingham: Foreign markets have suffered bigger declines than the U.S. market, and that makes me a little more optimistic than I usually might be about foreign. That potential strength abroad can be played by investing in companies that trade on the U.S. exchanges.

Fisher: I'm not optimistic about emerging markets stocks because we had too much optimism, and people are looking for a bottom. If they don't get the bottom, they stop looking for it.

Gundlach: One of the most important things to look at is the Shanghai stock market. China is slowing down in growth, and you can see it in the Shanghai market — it seems to never go up. It's been dropping week by week pretty much all year.

Rodriguez: In the last month or so, some raw materials currencies, like the Australian dollar and Canadian dollar, have been getting hit. That signifies there is a perception of greater risk in raw materials internationally — and that implies slower growth.

What impact will increased financial regulation have on the markets in 2012?

Fisher: All bad. Our salvation has never been regulation. As Adam Smith said, the greatest regulator is competition itself.

Buckingham: I don't see it having real negative impact on the stock market, even if it does have a modest [negative] effect on profitability. 

What investment strategy do you recommend for next year?

Rodriguez: Make real selection decisions. In this kind of slow-growth environment, a diversified portfolio of securities and being pretty much fully invested isn't going to get you there.

Much of what goes on in [professional] money management is a form of "closet indexing." If they're bullish on an industry and it represents 10 percent of the index, they'll own 11 percent or 12 percent. If negative, they'll own 8 percent. I'm being a little too critical about the percentages — but the diversified portfolio has not been a winner.

Gundlach: The strategy that has succeeded in our bond funds: a mix of assets where you have some government credit to hedge against volatility.

Do you expect the unusually high level of volatility to continue?

Buckingham: Yes, because these days we're dominated by the whims of speculators, and so much is driven by high-frequency traders. [But] I love volatility because that's what gives me the opportunity to buy. This kind of market will favor individual stock pickers who are nimble.