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2006-07-09 :: The Short Week That Was

Maybe I should have stayed in Jackson Hole!

Friday was a terribly ugly day as 3M and Advanced Micro Divices both guided earnings estimates lower.  The market ended down 139 points with all sectors in the red.  Energy started the day nicely higher, but even it ended down.

There is so much negativity right now, but the fundamentals are strong for my favorite sectors:  energy, metals, and infrastructure.  Yes, the economy is slowing, but a recession seems unlikely at this time.    Absent a recession, we should see a soft landing that will keep corporate earnings positive in all but the consumer discretionary sectors.  The 3M report indicated that their earnings would be down due to the softness in the big screen TV business.  Consumer related companies will be the risky place to be in the coming months, as we’ll likely see earnings pressures continue.

Earnings season is nearing, and as I mentioned in an earlier entry, the late-July-early-August time frame is a seasonally weak one for stocks because of earnings misses.  Because of this, we have been generating cash in client portfolios in anticipation of making targeted purchases
during this period. 

Coincidentally enough, the Fed meets again in August, and we should get a clear indication of their intentions as far as interest rates increases go.  One of the indicators that the Fed relies fairly heavily upon is the Purchasing Managers Index.  It reported last week, and the numbers show that the economy is slowing markedly, reporting the lowest reading in ayear.  Additionally, manufacturing employment dropped for the first time to a reading that indicated a net loss of jobs.  The Fed will take this quite seriously, in my opinion.  The Fed will either announce at that meeting that they are pausing or raising in August and then pausing.  This will be initially very good for stocks –  longer term, we’ll just have to wait for the numbers to make sure we don’t drift into recession, but right now it looks like a soft landing is the most likely economic direction.

The lows this summer for some of our favorite companies will likely be the lows for these stocks for a long time to come.  We are going to capitalize on this opportunity.  If you have cash in your portfolios outside of our management, it may be comfortable to have it there, but start to put it to work before the opportunity passes you by.

Have a great week!

Mark