Looking Forward
The Fed does not want the short term inflation scenario to get out of hand. The only way to bring down the high price of energy is to cool demand. Unfortunately, history shows that Supply Shocks can only be dealt with by decreasing demand. This usually results in slowing the economy.
Greenspan will continue to raise interest rates until they choke off economic growth, this lessoning demand for energy. The consumer is already feeling the effects of higher costs due to escalating energy prices. A slowdown in consumer spending will become evident during the Christmas selling season.
The question that remains is will Greenspan begin to reveal his hand. Given the effects of energy prices on the economy, Uncle Alan may pause after the next Fed meeting. As an observer, I would expect that Greenspan would like to get to 4% before upping the periscope to take a look around.
The market has handled well the negative the onslaught of negative news remarkably well. This adds to my opinion that the November-January timeframe will remain positive for the markets. This being said, I have tempered my enthusiasm for a robust, breakout rally. While it could still occur, I would be a seller of many equity positions at the S&P 1250 mark. At a minimum, we could see Dow 9000 (or lower) sometime in 2006. After this nasty correction, the markets can revert to a new bull market phase.
Commodity Prices
I think it is safe to assume that commodity prices and oil will remain under pressure until monetary policy changes. Longer term, any substantial pullback in natural resource and energy stocks has to be viewed as buying opportunities. Our lone natural resource play Cemex (CX) has wonderful prospects in the years to come, and we remain very fond of Exxon (XOM), Marathon (MRO), Chesapeake (CHK), and Schlumberger (SLB).
Equities
It is becoming clear that slower economic growth and rising interest rates are beginning to hit the market. Earnings expectations have been to high given the prospects for a slowing economy.
Given that consumers must shop for necessities, companies like Wal-Mart (WMT) will continue to prosper as the economy softens. We also received good news from Best Buy (BBY) when they announced they were hiring 27,000 new employees to its work force for the holidays.
Our Favorite Sectors
We continue to look very favorably on the Consumer Staples Sector. I like Coca-Cola (KO), Anheuser Busch (BUD), Nestle (NSRGY), and the ETF Consumer Staples iShares (XLP). When the Fed stops raising rates, the Financial Sector will also be the next to benefit. Since most stocks move in anticipation of an event, attempting to time your purchases in conjunction with the final rate hike may be too late. It has been my experience that Wall Street likes to stay well ahead of the game, and purchasing the next sector to benefit when no one is interested.
I like Bank of America (BAC), J.P. Morgan (JPM), and CitiGroup (C) at these levels. If the go lower, dollar cost average in.
Once the economy bottoms, we will begin looking at the Cyclicals and Technology sectors.
