Don't Be Surprised if You Are Surprised
We should not be surprised if we get surprised in 2006. Who would have imagined $60/barrel oil, a giant tsunami, one devastating storm followed by another in the gulf, and a huge earthquake in the mountains of Pakistan?
The Task Faced by Fed Chairman Bernanke
Under the able management of Chairman Greenspan, the economy provided steady, if not resilient, performance in 2005. The near-perfect management of matching the recovering economy with gradual raises in rates toward "normal" levels leaves the new Chairman of the Fed with a daunting task. Should new Chairman Bernanke assume the reigns of the Fed and "do nothing" or should he take some action to demonstrate his leadership.
The current actions of the Fed have served to slow the economy in several ways including raising the cost of short-term borrowing, floating-rate mortgages, and the costs of fixed-rate mortgages. Since a significant consumer liquidity source over the past few years has been home equity withdrawal, one should conclude consumer spending might be dampened.
Energy, the Hidden Tax on Consumers
Energy has also taxed consumers directly through gasoline and heating oil cost hikes and indirectly by raising the costs incurred in transporting finished and unfinished manufactured products.
Consumers Must Compete With the Federal Government
Moreover, the consumer will be forced to compete for lending capital against a Federal government that is borrowing to finance a war and the rebuilding of the storm-ravaged Gulf States.
Stock Are the Asset of Choice
Despite these negatives, stocks must compete versus real estate and bonds for investor capital. In the finale comparison, stocks possess better valuations and have been experiencing surprising earnings growth. Balance sheets are more conservative than the past decade. Corporate cash is at a record high. Opportunities for growth through mergers and acquisitions are abundant. Productivity (output per man-hour of labor) is surprisingly strong, leading to the ability to increase output while holding costs of manufacturing low.
Choose Your Poison: Economic Stagnation or Rising Inflation
The probable environment will be a continuation of the trading market environment of 2005 as alternating fear of economic stagnation and loathing of inflation pressures capture investor psyche.
Rabbitt's Rotation Report: Sectors, Style, and Themes
The likely downward pressure on economic growth from more restrictive monetary policy and higher energy costs will focus investors on growth, which they may view as a more precious (and rare) commodity than value.
One's strategies should be dominated by mean-reversion concepts. Look for excesses and take profits. Buy the price dips in securities with strong fundamentals.
Compared to market-neutral we are continuing our recommended portfolio overweighting in technology, basic materials, energy, and finance. We are underweighted in manufacturing, services, utilities, and consumer durables /staples.
will be available to take your questions until Monday, April 21. Please use the form below to submit your questions.