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2006-09-08 :: Defensive Stocks Downgraded

What a wierd world.  Nothing is making sense.

All along I’ve been writing that the earnings on the defensive stocks don’t justify their current P/E’s and valuations.  We are now seeing that these same defensive stocks are being downgraded by the Wall Street firms in favor of technology.  Campbells Soup, General Mills, Pepsi, Coke, Anheuser Busch – earnings estimates cut and stocks downgraded.  So, what are they doing up today?

Technology is a beginning of economic cycle investment.  Defensive stocks are an end of economic cycle investment.  Is Wall Street saying that we are looking at the beginning of the next cycle in spite of what Fed President Yellen stated yesterday?

Schlumberger, Devon Energy, Phelps Dodge, Freeport McMorhan – energy and metals companies upgraded.  So what are they doing down today?  Earnings be damned?  Never!

When my stomach grinds like it is now, I have to revert back to the basics:  In the end, earnings matter.  Wall Street has it right that the defensives don’t have the earnings to support their valuations and that energy and metals do have the earnings to support significantly higher prices. 

So, who’s buying and selling in this market?  Most likely its mutual funds and hedge funds that want to have the defensives in their portfolios at quarter-end.  That is a decidedly short-term impact, but it still makes for an ugly day if you own oils and metals.

More later!

Mark