Federal Reserve Chairman Ben Bernanke told Congress earlier this month that the economic recovery is "close to faltering."

But no one has to tell that to the local stock experts in the Star-Advertiser’s 10th annual investment contest.

Barring a fourth-quarter turnaround, the hypothetical portfolios of all the experts will end the full year in the red for only the second time since the contest began 10 years ago. The only other time that happened was in 2008 when Norm Caris of investment bank Caris and Co. led local stock pickers with a negative return of 13.8 percent.

Ironically, Caris is once again leading the way in a down year for the stock market with a negative 7.7 percent return after three quarters. The decline has reduced his hypothetical $20,000 portfolio to $18,465.62. But Caris, a Kauai resident and manager of institutional sales for Caris and Co., said depending on what happens in the political arena, the stock market could rise 5 percent to 10 percent over the final three months of this year.

Richard Dole, chief executive of Honolulu-based investment adviser Dole Capital LLC, was in second place with a negative 8.9 percent return that shrunk his portfolio to $18,215.68. He was followed by Barry Hyman, private client group vice president for the Maui branch of FIM Group Ltd., with a negative 23.4 percent return to $15,312.14, and Dwight Melton, with a negative 46.2 percent return to $10,767.65.

Caris, who said technology is still the best sector in which to invest, made no changes to his portfolio for the final quarter. Tech stocks — Broadcom (off 0.8 percent in the third quarter), Marvel Technology (down 1.7 percent) and Intel (off 2.8 percent) — make up three of his five holdings.

He expects the market to be slightly higher in 2012.

"It depends on several factors, including the resolution of the European debt crisis and interest rates," Caris said. "Real estate looks like it may be in a bear market for several years, which is good for stocks."

Dole, who also is keeping his portfolio intact, said lower price inflation from a rising dollar should give consumers more purchasing power next year if present trends continue.

"The government is doing its best to stimulate a sputtering economy," Dole said. "Right now there seems to be a disconnect between those looking for work and places like Silicon Valley that can’t find workers. While the market may bounce back from its depressed levels, I think the direction of the stock market is highly dependent on relief from the credit crunch."

Not one of the 19 investment picks held collectively in the experts’ portfolios produced a gain last quarter. Dole’s best performer was Honolulu-based Territorial Bancorp, the parent of Territorial Savings Bank, which fell 7.2 percent in the July-September period.

Banks continue to suffer mostly because of lack of confidence, he said.

"The biggest asset a bank has is confidence," Dole said. "Banks aren’t lending and borrowers are not borrowing. There is concern on how solvency and liquidity issues in Europe will affect U.S. businesses. There is also concern on how new regulations and capital requirements will affect the lending capacity of banks."

He said housing remains a concern for banks with more possible foreclosures.

"Without a healthy banking system, it is difficult for businesses to make plans and function," he said. "I believe that stock market improvement over the course of the year is contingent on a healthy banking system."

Hyman, the contest winner for the past two years, said he sees undervalued investments in most sectors.

"I still like investing in undervalued companies that provide products and services people need regardless of the economy, including technology, energy, health care and food," Hyman said. "There are also some tremendous bargains in international commercial real estate, especially in Asia. I would continue to avoid leveraged companies, especially in the financial sectors. And finally I would favor carefully selected mining and associated companies over gold or other pure metals."

Hyman, who is holding on to all the picks in his portfolio but rebalancing the share ratios, said he feels limited by the rules of the contest that require participants to hold no more than five investments that are listed on U.S. exchanges.

"A portfolio with only five or even 20 stocks is not sufficiently diversified," he said.

In addition, he said, two-thirds of the world’s stocks are listed outside of the U.S.

"I believe many of the world’s best risk-adjusted opportunities lie in foreign-listed securities," he said.

His best performer last quarter was Cisco Systems, the world’s largest network equipment maker, down 0.3 percent.

Melton, an aggressive growth investor, took a financial bath in the third quarter as his portfolio plunged 48.7 percent to wipe out a 4.9 percent gain he had through the first six months of the year.

"Investors are now on edge, with consequent high levels of volatility in the stock market," he said. "Unfortunately, this volatility has been to the downside for the most part, with many now fearing that a recession could be near or will be shortly. I think such pessimism is overdone, but I do acknowledge that the recession risk is out there."

Melton, who is not making any changes to his holdings, saw all four funds in his portfolio sink more than 40 percent in the quarter with the worst fall taken by Direxion Energy Bull 3X, an energy index fund, which declined 57.2 percent.

"My sense is that a gloomy economic eventuality is baked into stocks at these levels, which recently have approached bear market terrain," Melton said. "If I am right, and if such a downturn does not occur, and I think there is an even chance we will sidestep a recession, stocks may be poised for a nice bounce later on in 2011 or in 2012."