The Flameout's Smoke Signal

Sunday, October 12, 2008

This flameout in the stock market is actually telling us something. That is, something besides the sorry news that our 401(k)s are now mostly little piles of ash.

To hear chief investment strategist Richard Bernstein of Merrill Lynch tell it, the market is sending us a message we should all heed. "Many times in the past, we have highlighted that volatility, although extremely trying for investors, as a signal that leadership within the financial markets is changing," Bernstein wrote in an investment strategy update last week. "Investors can use that signal as an opportunity to look for the next wave of growth stories."

In the past five to 10 years, most investments that fattened portfolios were linked in some way to the credit bubble. Consider the list: real estate, commodities, energy, emerging markets infrastructure, China. These were all capital-intensive stories that flourished on easy credit. Well, now that access to easy credit -- make that credit generally -- has dried up, investors should be looking for investments that have a special advantage in the new tight-credit environment.

These groups tend to be the traditional defensive plays in times of turmoil and economic weakness. According to Bernstein, you want to look for companies that have stable cash flows and steer clear of those that tend to be highly leveraged. Attractive companies in this environment, Bernstein said, tend to be those in the consumer staples sector -- such as food and beverages, tobacco, prescription drugs and household products.

Bernstein also recommends a diversified portfolio that includes high-quality bonds. "The operative words," he wrote, "are 'diversified' and 'high quality.' "

-- Steven E. Levingston

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