We believe that a modestly more cautious investment approach is advisable. While we recommend a reduction in equity exposure, that doesn't mean we're no longer bullish on the market. The economy is rebounding nicely from the recession. Corporate profits should start improving shortly. Interest rates and inflation are still low. Sizable cash on the sidelines represents potential fuel for an advance, and investment alternatives to stocks are not particularly appealing at this time.
We have lowered our forecast of where the S&P 500 will end 2002 from 1315 to 1225. But that still represents a gain of 9% in less than nine months.
Risks, however, are high. Escalation of the Israeli-Palestinian conflict or a U.S. attack on Iraq could lead to a major cut in oil availability and surging prices. Each $10-per-barrel rise takes a half percentage point off GDP after two years and adds three quarters of a point to consumer prices, according to S&P chief economist David Wyss.
Along with the possibility of higher energy costs, investors in the period ahead will have to deal with confusing first-quarter earnings reports that mention huge writeoffs of goodwill, the cumulative effect of an accounting change. Balance sheets will continue to undergo intense scrutiny in the wake of recent abuses. Bond yields have been creeping upward, and the Fed seems likely to begin tightening monetary policy in the second half.
S&P chief technical analyst Mark Arbeter sees seasonal influences as an additional concern. He points out that the market generally does much better in the six months November through April than in the May-October stretch.
With stocks today still trading at P/Es that are high by historical standards, we suggest lowering the stock portion of portfolios to 60% from 65% and increasing the cash portion to 20% from 15%. Bonds should continue to account for 20%.
Posted on Yahoo message board for GOLD:
Economy fraying at the edges by: CPQ_AT_7_DOLLARS_OR_LESS 04/09/02 01:08 am Msg: 6247 of 6255
"Economy fraying at the edges" By Charlie Minter from Comstock Partners, Inc 04-08-2002
For some time we have felt that the economic recovery would be short-lived and tentative, and now we are getting a number of hints that the economy is about to slow down soon. Refinancing activity (REFI), a major impetus to consumer spending, has plunged since spiking in the period following September 11. Factory orders were down in February and auto sales were off in March. DRAM prices have begun to decline again, the Philly Fed Index dropped, and the leading index for February was flat. A recent survey of more than 300 companies indicated that over 70% planned to cut costs aggressively as a result of weak profits. The tax refund season will end shortly and the warm winter, which exaggerated the seasonal adjustment calculations, is no longer a factor. Redbook survey retail sales were down 1.1% in the four weeks ended March 30. Although March layoffs were the lowest in 10 months, the number of layoffs was still higher than the monthly average for every year from 1989 through 2000. Although the March payroll employment number was up 58,000 against consensus expectations of 50,000, the February figure was revised down by 68,000, so overall payroll employment was actually 60,000 less than predicted. In addition let's not forget that the zero interest rate auto financing is behind us and that oil prices have soared in response to the Mid-East crisis.
In the financial area, mortgage rates have backed up significantly and liquidity has started to decline. The Fed pumped a lot of money into the economy after September 11, and has apparently been draining it back out. Money to zero maturity (MZM) soared at an annualized rate of 27.4% in the three months ended November 26, but dropped to a rate of only 4.2% by March 25. The figures for M2 show a similar deceleration.
The evidence of weakness is confirmed by a series of negative statements by various company managements, particularly in technology. Even in cases where earnings estimates are being equaled or exceeded, most corporate executives are seeing no indications of an upturn, and a many are downgrading their annual outlook. That the prospects for a softer economy are real is indicated by the fact that many observers have suddenly begun to downplay their fears of an imminent Fed tightening. In a comment on March 28, we said that investors shouldn't worry about the advent of tight money, but about a market that is selling at 46 times trailing earnings and a recovery that may fail to sustain itself in the period ahead. That period may be close at hand.