Ron Baxby     Chief Investment Officer, AXIAN Asset Management

Comments & Outlook

Third-quarter earnings held up much better than one might expect given the crippling blows that consumers have taken over the past two years. That being said, we continue to expect the recovery to be sluggish at best. Although interbank lending conditions have improved drastically and quality companies have been able to access credit without much trouble, these trends haven’t trickled down to consumers.

We still expect a slight correction in the markets before the end of the year; the employment situation remains weak, and it’s becoming increasingly apparent that this holiday season won’t be as jolly as in previous years because of reduced spending. But we expect moderate improvement next year, with gross domestic product (GDP) growing in the mid-single digit range.

Recommended Strategy

We’re still avoiding anything tied to consumer discretionary spending; in many cases we think the markets are overly optimistic about the sector. Home prices are still on the decline and unemployment is rising, which isn’t encouraging.

The prospects for technology and health care names appear to be solid. We expect an uptick in technology spending, as many companies have the cash to upgrade their IT infrastructure. Health care stocks are attractive because the odds of a public option actually making its way into law become slimmer with each passing month; negative sentiment should ease if a bill doesn’t pass by year-end.

Yiannis Mostrous      Editor, Silk Road Investor

What to Buy Now

Investment-grade corporate bonds are extremely attractive right now, as earnings are stabilizing and companies have been able to access the capital markets. Yields on investment-grade corporate debt are much higher than municipals and treasuries, leaving little reason to dig into lower quality issues.

On the equity side, KB Homes (NYSE: KBH) looks extremely attractive right now–a prognosis that might surprise many people. It enjoys a strong pricing advantage, in many cases in line with foreclosures in the more troubled markets where it operates, so its earnings have held up much better than some of its peers. We also expect KB to restructure its debt in the coming months, creating substantial savings and providing further cushion.

Comments & Outlook

I expect stocks to pull back before the year is out, but absent any major blowups, investors should regard such an event as a buying opportunity. Any pullback in the US market should register somewhere between 5 and 10 percent, whereas emerging markets will likely sustain a bigger hit. Generally speaking, I expect markets to move higher through the first few months of 2010, with November, December and January being the “money months.” Looking at the macro picture, investors should anticipate the US recovery to slow, but accommodative monetary policies and improving demand should keep the global economy humming. Relatively low inflation, decent earnings growth and weaker US dollar will also be positive for global equities.

Recommended Strategy

For Asian markets the main worry remains the strength of earnings. Earnings in Asia haven’t declined as much as they did in 2001 or even the 1980s recession; now that recovery is underway analysts are in a frenzy to upgrade earnings expectations.

One of the main reasons why Asian companies command such respect these days is their clean balance sheets and low debt. The debt-to-equity ratio for Asian ex Japan companies as a whole is now around 26 to 27 percent, which, though not as low as the 24 percent registered in 2007, is low by global and regional standards. In other words, Asian companies enjoy extremely clean balance sheets, and will have the opportunity to lever up when they so decide.

To avoid big disappointments, investors should pay attention to valuations and overweight those sectors that offer the best value. At current levels, energy, telecommunications, financial, industrial, and material companies appear to be the cheapest in Asia.

What to Buy Now

Lower oil prices weighed on CNOOC’s (NYSE: CEO) profitability in the first half, but oil production is up 20 percent compared to a year ago and on track to meet management’s full-year guidance. Gas production dropped 6 percent in the first half, but the company should reach its goal of generating the equivalent of 225 to 231 million barrels of oil.

CNOOC management commented that Chinese gas prices should rally aggressively over the long term but expect only moderate growth over the short and medium term. In addition, the company noted that the market for buying liquefied natural gas (LNG) buyers is favorable, thanks to ramped-up LNG capacities and large gas discoveries in the US.

On the production side, the discoveries of the first half of the year should start coming into production within 2-3 years–a development that should ease concerns about CNOOC’s growth prospects beyond 2010.

Expect 2010 to be another year of strong production growth for the company; if oil prices remain elevated the stock price will also react positive.