The stock market is unfolding pretty much as we expected. On Thursday, the Dow Jones Industrial Averages gained 85 points while the NASDAQ was essentially flat. All week, market pundits were out in force encouraging investors to buy Cisco and Dell ahead of the earnings reports. I have been cautioning you that the stock market cycle is gearing up to take a more defensive posture in the weeks and months ahead.
One of our bellwether stocks, Cisco Systems (CSCO), reported revenues that fell short of analysts expectations, and went on to say that revenues for the current quarter would also miss expectations. On Thursday, after the market close, Dell (DELL), another bellwether, said that revenue for early 2005 could fall short of analyst痴 predictions.
I have mentioned the importance of following the earnings of bellwether companies, and the implications they have on the various sectors of the market. It is becoming crystal clear that the economy is heading for a period of weakness, and a rotation into defensive stocks seems to be underway.
We will continue to prune our technology holdings in the 釘ig Picture Portfolio�. I am placing a 塗old� on our 5 technology stocks, Applied Materials (AMAT), Intel (INTC), Cisco Systems (CSCO), Texas Instruments (TXN), and Hewlett Packard (HPQ). I anticipate either selling some of these positions or selling 9 to 12 month call options on these positions in the weeks ahead.
Big Picture Portfolio
In our 70% allocation to stocks, 65% of the 釘ig Picture Portfolio� is made up of defensive stocks, while 35% are cyclical. The three remaining cyclical positions are Disney (DIS- up 24.5%), Citigroup (C- up 3.3%) and General Electric (GE- up 14%). All three of these companies have released good news in recent months, and I will be watching their progress closely in the weeks ahead as the market begins its anticipated rally.
In the healthcare sector, United Healthcare (UNH) is up 8% in 2 ｽ month痴, and the stock still looks attractive at current prices. Our pharmaceutical stocks are starting to come back to life after Merck痴 Vioxx debacle. We currently own Eli Lilly (LLY), Pfizer (PFE), Bristol Myers (BMY) and Johnson & Johnson (JNJ).
In my last journal update, I briefly touched on the massive cash hoards that US companies are holding in overseas accounts. Johnson & Johnson said this week it was bringing back $11 billion while Bristol-Myers Squibb Co. announced it was bringing back $9 billion this year. Pfizer Inc., the world's largest drug maker, has said it is considering whether to repatriate up to $38 billion in past earnings.
Our two telecom giants Verizon (VZ) and SBC (SBC) remain under pressure as they continue their quest to dominate the telecommunications industry in the US. Both companies continue to gobble up their competition, and are in the process of becoming the 900 pound gorillas in the industry. If you are a tried and true investor, sit back and collect your 4-5% dividend yield, and take comfort in knowing that you own the dominate telecommunications companies in the US.
American International Group Inc. (AIG), the world's largest insurer, said on Wednesday that fourth-quarter profit rose 11 percent as higher earnings from premiums and investments offset charges from storms and litigation. The company also said it finished an internal probe into the possible improper use of fees, and found no further wrongdoing.
AIG was named but not charged in Spitzer's October lawsuit accusing Marsh & McLennan Cos. (MMC), the world's largest insurance broker, of bid rigging. The strange twist here is that AIG痴 Chairman, Maurice "Hank" Greenberg痴 son; Jeffrey was just fired as CEO of Marsh & McLennan. Are you telling me that Spitzer could not find any connection in the probe? Oh, Okay!
We are up 8.8% in AIG, and I take great comfort in knowing that we own a company that knows how to make money, and has the clout to make serious problems disappear.
Looking Forward
The U.S. trade deficit ballooned to an all-time high of $617.7 billion last year. The Commerce Department reported Thursday that the 2004 trade imbalance rose 24.4 percent from the previous year and marked the third year in a row that the deficit had set a record. The imbalance with China grew 30.5 percent to $162 billion, the highest ever with any country.
In December, the deficit declined to $56.4 billion, but it was still the second worst monthly ever, down 4.9 percent from $59.3 billion in November. The deficit will continue to be a problem as long as China continues to peg its currency (Yuan) to the dollar. American manufacturers say this policy has undervalued the Yuan by as much as 40 percent, giving Chinese companies a huge competitive advantage. There is even talk that Chinese auto manufacturers are getting ready to introduce Chinese automobiles in the US.
I don稚 know who痴 running the show in Washington, but someone is obviously asleep at the switch. Unless China starts to comply with fair trade practices, the US needs to consider stiff tariff痴 on all imported Chinese goods.
Sector Focus & Strategy
Continue to underweight positions that may be severely impacted by a downturn in the economy. As the market rally unfolds, lighten your positions in Consumer Discretionary (Retail, Homebuilding, Home Improvement, Leisure, Appliances, Hotels & Restaurants, and Auto manufacturers), Financials (Banks, Brokers, and Insurance), Technology (with the exception of select software companies), Utilities, and Industrials (except for Aerospace & Defense, and Railroads).
Continue to overweight the Telecommunications Sector (Integrated Telecom Services), Healthcare (Pharmaceuticals, Managed Health Care, Health Care Facilities, Equipment, and Biotech), Consumer Staples (Soft Drinks, Food Chains, Packaged Food).
Lastly, I will continue with a neutral weighting on the Materials and Energy Sectors with every intention of adding to positions on weakness.
