As we end this trading week, I think its important to give a "Birdseye View" of the picture before us. We will try and summarizes the impact of a variety of subjects as well as their economic and market impacts.
Katrina: The longer term impact on the economy will probably be higher energy costs. This effects from this could be pressure on corporate earnings, and a slowdown in consumer spending. Energy equipment and services should benefit, and this is the reason the IA portfolio has a position in Schlumberger (SLB). In addition, the IA portfolio is short the Consumer Descretionary Sector (XLY), and also has a position in the Rydex Tempest Fund (RYTPX).
The rise in energy prices, and a boost in growth to rebuild the Gulf Coast may further increase inflation. Further negative effects will continue to be felt in the airline, retail, alcoholic beverage, and insurance sectors. The IA portfolio has 2 integrated oil stocks Exxon (XOM) and Chevron (CVX).
Interest Rates: Due to higher energy costs and continued inflation threats, I feel interest rates will continue to rise.
What Will Stop The Consumer?
1)Gasoline Prices
2)Home Heating Cost/ Natural Gas & Heating Oil
3)Higher Electric Bills
4)Higher Raw Materials Costs
5)Higher Services Costs/Plumbers,Electricians,Builders, etc
6)Higher Food Costs/Resturants Included
7)Higher Travel Costs/ Hotel, Motel, Condo Rentals
8)Increase in Unemployment
This translates into Less Decretionary Income.
Bonds: I am looking for the yield curve to invert, but not for very long. If we do get an inversion, one of two senario's could unfold.
If inflation continues to be a threat, longer term bond yield will drift higher. If inflation comes under control, Greenspan will have dodged a bullet, and have room to lower short term rates to dig the economy out of recession. I do not know which one will occur.
Equity Markets: The US equity markets have not yet fully discounted a slowdown in economic growth. Any weakness in the US economy will have a spillover effect in the foreign markets as well.
I would avoid Consumer Descretionary stocks. I do like Wal-Mart(WMT), though we may be a little early. That said, I still like the risk reward relationship at current levels. Early still, selective tech companies who dominate their niche like Oracle (ORCL)look very compelling.
I am also interested in buying the group of stocks that have already declined quite a bit from recent Fed tightenings; the Financial Sector In partcular, Bank of America (BAC), JP Morgan (JPM), and Citigroup (C).
