Patrick Galley CIO, Portfolio Manager, RiverNorth Core Opportunity Fund (RNCOX)

Outlook

Our outlook is fundamentally bearish but technically bullish. Fundamentally, corporate profits are strong but margins are stretched and consumers remain deep in deleveraging mode.

When we perform our technical analyses we look at money flow and sentiment. The tides are changing in mutual fund flows. Over the past three years we saw record inflows into fixed-income funds. But equities have gained traction over the past few months. There’s a wall of money sitting on the sidelines that could fuel a continued bull market.

Recommended Strategies

Investors who were fortunate to participate in the bull market should trade to higher quality. Look to companies with strong balance sheets, sustainable earnings and diverse revenue sources.

Investors who sat out the bull market should look to closed-end funds that trade at a discount to net asset value (NAV). Many of these funds provide value and are managed with a strategy that can succeed in various outcomes for the economy and markets.

What to Buy Now

Clough Global Opportunities (AMEX: GLO) is managed by Chuck Clough, the former chief investment strategist for Merrill Lynch. The fund runs a flexible strategy, can invest anywhere in the world and can hedge its bets by shorting stocks. Approximately 60 percent of its investable assets are allocated to equities. Fixed-income securities and cash account for the remaining 40 percent. The fund will benefit from a rising market, but still offers downside protection. It trades at a 12 percent discount to NAV.

First Opportunity (OTC: FOFI) trades on the over-the-counter market. More than 50 percent of its assets are invested in hedge funds directed by Wellington Management, the investment management firm where Jack Bogle, founder of the Vanguard Group, got his start. This closed-end offering is an opportunity to gain exposure to hedge funds without a minimum investment or lockups.

If there’s a fund that warrants trading at a premium to NAV, it’s First Opportunity. However, the fund currently trades at a 20 percent discount to NAV.

BlackRock Credit Allocation Income Trust III (NYSE:BPP) has the flexibility to invest in various sectors of the fixed-income market, with a 50 percent allocation to investment grade bonds, 20 percent to preferred shares, 20 percent to high-yield bonds and 10 percent to cash and government securities. The fund yields about 6.2 percent and trades at a 14 percent discount to NAV, which provides a margin of safety and enhanced yield.

Dan Genter CEO and CIO, RNC Genter Capital Management

Outlook

The economy will experience moderate growth as the unemployment rate remains elevated and the housing market is mired in recession.

Originally, we forecast that US gross domestic product (GDP) would grow 3.5 percent in 2011. But if the price of oil stays higher than $100 per barrel, economic growth could slip to 3 percent.

The Federal Reserve will maintain a loose monetary policy. The economy needs 4 percent GDP growth to stimulate employment, and the Fed is willing to accept inflation of about 3 percent.

The S&P 500 should record top-line growth of 8 to 10 percent, and earnings growth of 8 to 10 percent.

Recommended Strategies

Cyclical stocks will fare better. We’re clearly at the beginning of a technology replacement cycle; many companies have technology that is three to five years old and even smaller companies will buy more software and hardware.

We also expect a resurgence in dividend growth and are focused on a number of names that offer high yields. Baby Boomers will need income. They grew up with stocks and 401(k) accounts, and many will always keep a minimum of 40 to 60 percent of their investable assets in equities.

The S&P 500 will probably grow dividends by 12 percent this year.

What to Buy Now

Taiwan Semiconductor Manufacturing (NYSE: TSM) is a play on the economic recovery. The firm’s cost structure is efficient and their manufacturing process is extensive, a significant competitive advantage.

The firm isn’t making a better mousetrap, but when the mousetrap business improves, the firm will be part of it. The firm’s shares trade at a price-to-earnings (PE) ratio of 13 and yield 3.82 percent.

The energy sector will fare well. Our No. 1 pick, Chevron Corp (NYSE: CVX) isn’t a play on high energy prices; the firm’s production will rise by 6 to 8 percent over the next three to five years even if the price of oil falls back to a more natural equilibrium of $85 per barrel.

We recently swapped out Wal-Mart Stores (NYSE WMT) for Target Corp (NYSE: TGT). As the economy recovers, consumer spending will migrate up the food chain. Target is a diversified retailer that sells to a higher-margin client without relying on the high end merchandise. The firm’s shares trade at a PE ratio of 12, and the company should grow earnings by 12 percent this year.