Looking On The Bright Side

6/8/2009


While attractively valued stocks are available, the typical U.S. stock is no longer cheap. Sentiment indicators show bullishness among investors up sharply, and technical indicators suggest stocks are overbought on a near-term basis.

We intend to take advantage of opportunities on a stock-by-stock basis, and our recommended cash position is being decreased to 25% to 35% to accommodate this week’s addition of Hospira ($36; HSP) to the Buy List. But we intend to hold a significant portion of our equity portfolios in a short-term bond fund until the Dow Theory returns to the bullish camp.

Cyclical strength
On the day General Motors filed for bankruptcy protection and was booted from the Dow Industrials, economically sensitive stocks led the average to a 210-point gain and a 20-week closing high. While the timing may have been coincidental, cyclical stocks’ ability to rally amid GM’s collapse says a lot about today’s market.

First, some companies related to auto manufacturing, which accounts for an estimated 3% to 4% of the U.S. economy, have benefited from confirmation that GM is headed toward government life support — not liquidation. Worries that the federal government is taking on more debt than it can support have weighed on the U.S. dollar and Treasury-bond prices, but for now stock investors seem inclined to look on the bright side. After all, it is clearly good news for some companies that taxpayers are going to “invest” $50 billion in auto manufacturing.

More important, such economically sensitive groups as oil and gas, chemicals, metals and mining, electrical equipment, and computer hardware have surged on signs of renewed growth in Asia. Chinese industrial production and electricity output have rebounded sharply in recent months, while manufacturing activity in India has rebounded to an eight-month high. Companies in the S&P 500 Index already garner more than half their profits overseas, and that proportion seems likely to climb.

Conclusion
Today’s massive budget deficits suggest Americans — already burdened by heavy debt loads, huge investment losses, and rising unemployment — will face rising tax rates. But the fortunes of the average American and the average U.S.-listed company seem likely to chart increasingly divergent paths. While you should pay close attention to economic news, don’t prejudge the availability of investment opportunities based on macroeconomics. Look for opportunities to get your portfolio into attractively valued shares of companies with superior growth prospects, and don’t hesitate to sell stocks no longer among your favorites.


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