On Wednesday, February 17th, Alan Greenspan stated that interest rates were still fairly low, and that two more quarter point rate hikes to 3% are pretty much a given. This being said, interest rates under 3% are still considered an accommodative policy, and a fed funds rate of 3% to 5% would be considered neutral. Once the fed adopts a neutral bias in fed policy or the market senses a neutral bias is in the cards, the stock market will celebrate with a big rally. It is during this big rally that we will begin to get concerned, and in turn, more defensive.
A big stock market rally has a way of increasing economic activity, consumption and consumer confidence. It is during this time that the fed will once again re-examine the prospects for inflation, and after adopting a neutral bias for brief period, the fed will begin raising rates again. This is why I feel it is vital that we be ALERT for opportunities to reduce our weightings in the cyclical areas of the economy, and prepare to profit from an eventual slowdown in the economy. Interest rates above 5% would be considered a clearly restrictive policy, and the stock market will react negatively well before the economy actual slows down.
Peaks in the Cycle
During most stock market peaks, the Energy and Basic Materials sectors rally sharply. This rally can continue for 3-6 months before topping out. In the weeks ahead, you will see the Consumer Discretionary sectors give way to selling as Consumer Non-Cyclical and Healthcare begin to rally. Although we may see another 5-10% move up in cyclical stocks like Financials, Technology, Consumer Discretionary, and Industrial stocks, the trend is clearly shifting in favor of Consumer Non-Cyclical and Healthcare.
On Friday, we saw a big move up in our pharmaceutical and healthcare stocks, specifically Pfizer (PFE), Bristol Myers (BMY), and Baxter International (BAX). We have already registered big gains in United Healthcare (UNH) and Johnson & Johnson (JNJ). Our two laggards Eli Lilly (LLY) and Boston Scientific (BSX) have been building a nice base and should begin to rally soon.
Several companies within the Consumer Non-Cyclical sector are already fully priced and we are focusing our attention on companies that have yet to make their big moves. Specifically, Coca-Cola (KO) looks very attractive at current levels. Coke announced earnings this week and beat analysts estimates by .06 cents. Coke announced it would buyback $2 billion dollars in stock, and would repatriate $6.1 billion dollars in overseas earnings to the United States.
I have a few more undervalued Non-Cyclical stocks on my radar screen, so stay tuned to Johns Journal for important updates.
Oil
Rising oil demand from China continues to keep pressure on demand and prices. The days of $20-$25 per barrel of oil are gone, and OPEC has all but ensured that oil prices will remain above the $40/bbl level for a very long time. OPEC previously thought that increased production would eventually lead to a glut in supplies, but demand from China has continued at a rapid clip.
Our two oil stocks Conoco-Phillips (COP) and Chevron-Texaco (CVX) have spiked in recent weeks. COP is up 20.5% since our recommendation in January, and CVX is up 13%. I am looking for more gains ahead, so hold on tight.
