hi craig, i like the thread. found this on yahoo and found it of interest:
• The consensus among investors seems to be that the
Federal Reserve’s aggressive easing program has started a
new cycle in the economy and in the financial markets,
even though there hasn’t been a recession yet. We differ
with that view. In our judgment, the economy remains in a
late-cycle stage, one that has been prolonged by the Fed’s
moves. Two late-cycle sectors that we continue to
emphasize are energy and power.
• Some aspects of the market’s performance appear to bear
out our view that the economy is in a late-cycle stage. One is
that the relative performance of traditional early-cycle stocks
such as retailers and autos has leveled out recently; indeed,
early-cycle stocks in general have been average performers for
the past two months. Second, and more disconcerting, the
S&P financials group has performed only in line with the
market since the Fed began easing, despite the size and
swiftness of the interest-rate cuts.
• Meanwhile, the steeply positive slope of the yield curve has
caused some investors to worry about inflation. Because we
believe that the economy is still in a late-cycle environment,
we also believe that inflation expectations are rising. Consider
this: it is difficult to square the mediocre relative performance
of the S&P financials with the expectation that the Fed is
going to be successful in stimulating economic growth
without re-igniting inflation expectations. Another point:
history shows that financial assets typically do well when
liquidity rises and inflation isn’t a worry. The performance of
financial stocks seems to suggest that something may be awry
this time around.
• That raises a question: why is the yield curve steepening? In
our judgment, the Fed’s aggressive easing in the absence of a
full-blown recession probably means that there is a fairly low
probability that the demand for energy will subside at current
prices and a fairly high probability that there will be further
increases in energy prices.
• Capacity utilization in the energy and power sectors was
tight when the Fed began its current easing cycle in January,
and it has gotten tighter since then. Only two sectors in the
economy are operating at 90% of capacity or higher: energy
and utilities. Moreover, data show that refining capacity
utilization is at 98% at a time when GDP is barely growing.
What would happen if economic growth were to rev up to
3%?
• Against that background, we think that investors should stay
with the energy and power sectors. The risk is that a recession
will come along and alleviate production bottlenecks by
reducing demand. For now, however, we think that the
liquidity that once flowed into NASDAQ tech stocks should
continue to flow into the energy and power sectors.
Richard Bernstein
Chief Quantitative Strategist |
