Briefing.com - Stock Brief - Follow the Money 05-Jan-01 03:28 ET
[BRIEFING.COM - Robert Walberg] Greenspan & Co. woke up to reality earlier this week and cut the funds rate by 50 basis points. The size and timing of the move was an admission by the Fed that the economy had decelerated faster than they had expected, and that the risk of recession had grown intolerable. The Fed Chairman may have been slow on the draw, but at least he showed up with a loaded gun and proved that he remembered how to use it. Briefing.com expects him to fire off a few more rate cuts in the weeks and months to come.
Now that you know the Fed is in the game and on your side, how do you make that information pay off in the marketplace. The first thing that's important to understand is that the change in policy is a big deal. Markets historically move materially higher in the 3-, 6- and 12-months after the Fed begins cutting interest rates. Put simply, Wednesday's rate cut marked the beginning of a new bull market. So do not let the noise of disappointing Q400 and Q101 earnings prevent you from moving off the sidelines and back into the game. To miss the early stage of a new bull market is to miss the most explosive stage.
Once you accept the argument that this week's rate cut was the catalyst for moving from a bear to a bull market, and decide to take the plunge back into stocks, the next step is to figure out which sectors are likely to benefit the most from the change in the rate picture. Fortunately, you don't have to do a ton of research to come up with the answer. The simple solution is to follow the money.
Professional money managers (at least the good ones) wasted no time rotating assets in response to Wednesday's surprise announcement by the Fed. Recognizing these shifts and being on the front end of them is crucial to maximizing your return potential. Lower rates mean that investors will be willing to pay a higher premium for each dollar of earnings - in other words p/e multiples will expand. It also means that investors will accept more risks in exchange for greater growth potential.
Consequently, it was no surprise to see utility, tobacco, food, drug, health care and household product stocks lag behind the rest of the market over the past couple of days. These stocks, and to a lesser degree the oil group, had outperformed in recent months due largely to the following perceptions: 1) they were less sensitive to dips in the economy and 2) they were "earnings safe havens." However, after rallying for several months many of the "defensive" stocks had become overextended. At the first sign of change in the economic underpinnings - read Wednesday's rate cut - the big boys started rotating out of stocks like Philip Morris (MO), Eli Lilly (LLY), Colgate (CL), Procter & Gamble (PG), Pfizer (PFE), Humana (HUM), WellPoint Health (WLP), Hershey Foods (HSY), Ralston Purina (RAL), Oxford Health (OXHP), Noble Drilling (NE) and Exxon Mobil (XOM).
Where did they start to buy? The rate sensitive sectors of course, with the most obvious being the financials - primarily the banks and brokerages. However, we also saw plenty of buying action in the consumer cyclicals: retail (despite some soft sales figures for December and a number of earnings warnings), airline, trucking, housing; the industrials: machinery, autos; and the basic materials: paper, chemicals and metals. Finally we saw mixed action in the techs, with big gains on Wednesday followed by quick profit-taking on Thursday. Nevertheless, look for techs to be one of the top performing groups once more investors start looking past current troubles to the better times ahead.
Some of the names Briefing.com likes in these groups include: UAL (UAL), American Airlines (AMR), Northwest (NWAC), Nordstrom (JWN), Best Buy (BBY), Circuit City (CC), Coldwater Creek (CWTR), Abercrombie & Fitch (ANF), Target (TGT), Gap Stores (GPS), General Motors (GM), Daimler Chrysler (DCX), Yellow Corp. (YELL), Alcoa (AA), DuPont (DD), Dow Chemical (DOW), Ingersoll Rand (IR), Caterpillar (CAT), International Paper (IP), Weyerhauser (WY), Centex (CTX), DR Horton (DHI), Wachovia (WB), Goldman Sachs (GS), Wit Capital (WITC), Merrill Lynch (MER), Citigroup (C), Nextel (NXTL), Sprint (FON), Vodafone (VOD), Cisco (CSCO), Corning (GLW) and EMC (EMC).
Whether you like these or other names within the aforementioned sectors, the point is to get into these groups early as they historically are among the best performers once the Fed starts lowering rates. Continue to pay close attention to our Short Stories, In Play and Story Stock pages for up to the minute information and analysis on which sectors/stocks are experiencing the greatest inflows of cash and then follow the money.
Robert Walberg
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