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June 15, 2006
U.S. economy is weakening, Thurs., 6/15/2006 10:18 AM
The Fed has reported that Industrial Production, which is a small but key component of GDP, actually fell -0.1 pct in May after rising by +0.8 pct in April, month over month.
This result is what Edward H.Y. Liu and I explained in the Bernanke paper we released on Tuesday. The implications for a severe U.S. slowdown will quickly spread around the world.
There has been just eight months of IP decline in three years.
So after the FOMC decides to raise on June 29, rather than pausing, which would have been the best course of action, there will be some sectors of the U.S. economy that will start breaking down. And after that I see that the $USD is likely to fall rather hard.
The present rally is a time to sell into strength all stocks that benefit from a higher $USD, such as financials, real estate, and importers of consumer discretionary and staples.
The energy, metals and exporting capital goods manufacturers will likely suffer less in the continuing bear, or possibly trade counter-cyclically to the majority of stocks.
I don't think the bond market is going to get worse off from this point, so those traders who jumped into the high-dividending, solid revenue-generating, utilities early are likely to do relatively well, which is not to say they won't drop some in a severe bear phase.
You are encouraged to read Evelina Tainer's report on Industrial Production at Econoday. The implications are that inflation will soon moderate, and interest rates will ultimately fall later in the year.
But that is a good time to buy Gold, which is a language that Chinese, Indians and Russians understand.
Posted by Posted by Bill Cara on June 15, 2006 10:18:18 AM | Category: Economics
Discourse
"stockman" I do agree that these so-called "chicken" stocks are the plays to be in, which also means that they are not the ones to discard in a panic at this point in the cycle.
When the Weekly and Monthly RSI is at a cycle low, your price risk (for long-term portfolio management) is relatively minor.
btw, the term reminds me of "Chicken Harbour" which is Georgetown in the beautiful Exumas of the Bahamas. Boaters know that this is (i) a safe haven from winter storms, and (ii) a place where you can say you are a world voyageur without having to brave the open Atlantic and Caribbean further south.
http://www.geographia.com/bahamas/bsexin01.htm
Sailors know of what I speak.
They may also have seen me being "chicken" at Two Turtles or Peace & Plenty!
Posted by: Bill Cara ![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
June 15, 2006 11:06 AM [link]
Bill
After visiting the site referenced above, thought about water as a possible defensive sector. Checked the water ETF--PHO. It has dropped over the last month like everything else.
No position, but may consider nibbling for the long term core position.
Posted by: Seamus at
June 15, 2006 11:38 AM [link]
Seamus:
Since you are more familiar with PHO than me, do you have an opinion as to whether it would be negatively impacted by higher interest rates? It appears to me that companies in this ETF would be large borrowers. But, since I do not know for certain, I am asking.
Posted by: lessmore at
June 15, 2006 12:13 PM [link]
From Bloomberg, in an article concerning The NY Manufacturing Output numbers:
"Futures traders, who at the start of the week saw no chance of an August move by the Fed, now put the probability at about 70 percent. The Fed's benchmark rate is 5 percent."
Posted by: MarkM at
June 15, 2006 12:24 PM [link]
lessmore--just returned from running errands
(Quarterly tax pyment). I'm not a pro, but like others, learning a lot here.
The PHO ETF is a relatively new. I quickly pulled up some info. It's not just water utilities, but also industries that have at least part of their business related to the water industry-filters, meters, engineering, conversion, drilling, etc. Besides water utilities, it includes companies like GE, MMM EMR. As of 3/31/06, approx. 15% of the fund was in companies outside the U.S.
I have it on my ETF watch list and thought of it after Bill mentioned the Bahamas and earlier cited utilities if U.S. interest rate increases stopped later in the year.
Bill has mentioned one of the companies in the past (CWCO) It operates in the Bahamas as well as the Carribean converting salt water to drinkable.
I haven't checked the financials of the companies in this ETF index, but in a bear market, they will fall too. Rising interest rates will definitely affect some of the smaller caps. If the dollar weakens, it should be suitable as some of the larger companies like GE & MMM reap a lot of revenue outside the U.S. As a long term holding, potable water will always be in demand.
Two quick things I noticed:
SZE is a large international French utility player that has some interesting clean water plays in China as well as other places including the U.S. I've had positions in SZE in the past, but none now.
A company I never heard of until now, LAYN drills not only for water, but also for miners. They pursue water resources, mineral exploration and geoconstruction. The company is now the PHO ETF's largest holding.
No position in any companies mentioned, but will explore PHO as time permits.
In a bear market
Posted by: Seamus at
June 15, 2006 3:52 PM [link]
Seamus:
Thanks for the thorough response.
Posted by: lessmore at
June 15, 2006 7:45 PM [link]
Bill
Chicken stocks?
Thoughts on high quality defensive names? WMT, KO, WWY, JNJ, BUD, PG, ACV... all trading at low end of ten year range on valuation metrics- PE, PS, PB. Most appear to have turned the corner on a RELATIVE if not absolute basis.
These names are generally weak today as fears are tossed to the side, I am using that weakness to scale into some exposure. These names (and others) have underperformed during the bull phase 4Q 2002-2005 but did quite well during the bear phase 2000-2002.
Posted by: stockman![[TypeKey Profile Page]](http://www.billcara.com/nav-commenters.gif)
at
June 15, 2006 10:26 AM [link]