Brief Thoughts
[BRIEFING.COM - Robert Walberg] Time again to take a brief look at a number of key issues facing investors. As you might have guessed, we will begin with...
Warnings Season
One thing we've learned over the past couple of weeks is that not all warnings are created equal. A warning from one of the usual suspects such as Hewlett-Packard (HWP), Maytag (MYG), Eastman Kodak (EK), Nortel (NT), Procter & Gamble (PG) is unlikely to have much impact on the overall market. On the contrary, when a Juniper (JNPR) or a Nokia (NOK) guides estimates lower the market takes notice. Others that would fall in this "sacred cow" camp include IBM (IBM), Citigroup (C), Merck (MRK) and Siebel Systems (SEBL), Wal-Mart (WMT) and Microsoft (MSFT). What does this pattern tell us? First of all it indicates that the market has discounted a lot of bad news, as most warnings are having very little impact on trading. Second, the sheer magnitude of the warning, and the fact that a couple of the sacred cows have already been slaughtered, suggest that economic conditions remain very difficult. Finally, ability to shake-off the bad news with only minimal damage sends message that market is less focused on current troubles than on probable turnaround. Consequently, as long as traders walk away from Q2 warnings season holding belief that the economy/earnings will trough over next few months, the underlying bullish bias will remain intact. According to the Briefing.com warnings database, 446 companies have already issued warnings for Q2 compared to 880 in Q1.
The Fed
Hard to believe given the lack of media coverage, but the Fed is due to meet in less than two weeks. Though market has started to look past the Fed for directional clues, Briefing.com thinks it is important for investors to remember that the Fed is still on your side. Given the soft domestic economy (especially the manufacturing sector), signs that the slowdown is spreading overseas, lousy corporate earnings, moderating energy prices and low inflation, Briefing.com looking for Greenspan & Co. to cut rates by another 25 basis points. Took the market awhile to come to our view, but funds futures contracts now pricing in nearly full odds for a 25 bp move at the June 26-27 FOMC meeting. If our assumption is correct, move will bring the funds rate down to 3.75% and the real rate (funds rate minus the inflation rate) slightly below 2%. It will also mean that the Fed has lowered rates by 275 basis points since the year began. Though aggressive by any standards, still high real rates (especially given state of the economy) leave Fed room to continue lowering the funds rate, albeit at a much slower pace. Briefing.com maintains that Fed's accommodating tone a) puts a floor under the market and b) provides foundation for next bull market. It may be a cliche, but it's also true - it doesn't pay to fight the Fed.
Rotation, Rotation, Rotation
If the key to success in real estate is location, location, location, then one could argue that the key to success in the markets is rotation, rotation, rotation. Being in the wrong sectors at the wrong times can prove devastating to your portfolio. Just ask anybody overweight the Networking, Telecom Equipment, Net Services and/or Computer Hardware groups last year. Conversely, an investor loaded up in Tobacco, Retail-Apparel, Food, Retail-Drug Store, Oil, Housing and/or Construction stocks has fared reasonably well despite the generally tough market conditions over the past 15-months. Given current economic conditions, how should investors be structuring their portfolios for the next 6- to 12-months? Briefing.com contends that the combination of low rates/inflation, accommodating Fed, easier monetary policy, softer earnings comparisons going forward and abundance of sidelined cash make it a good time for investors to take a calculated risk and increase their exposure to more of the rate/economically-sensitive sectors such as Chemicals, Papers, Metals, Software, Computer Hardware, Banking, Brokerage, Airlines and Autos. The current warnings season should provide investors one last chance to get many of the stocks in these areas at bargain prices.
Robert Walberg |
