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(For other news from the Reuters Investment Outlook Summit. June 13 (Reuters) - With inflation worries pressuring U.S. equities. investors may find a safe haven in healthcare. consumer staples and financial stocks. Banc of America Securities' chief investment strategist said on Tuesday.
Tom McManus told the Reuters Investment Outlook Summit in New York that he has been raising his allocation in defensive stocks. which tend to perform better in periods of uncertainty.
"That has underscored our desire to add defensive stocks -- the bonds of the stock market -- steady companies with strong earnings and geographic diversification. who declined to identify individual stocks.
The recent sell-off in equities has seen investors shifting from energy. and precious and base metals stocks. the key drivers of the stock market as commodity prices hit record highs.
An S&P index of health-care stocks <.GSPA> is down about 1.5 percent while the broad Standard & Poor's 500 <.SPX> index is down 7.6 percent since early May. just before the recent routing of stocks began.
Economic data has investors fretting over the prospect of further increases in interest rates. Until May. the market was awash with talk of a likely pause in rate hikes. but that has dissipated as U.S. price pressures mount.
Even though stocks have fallen sharply in recent weeks and Wall Street thinks the stock market is in a funk. individual investors who focus on picking stocks for the long-term are still poised for growth.
stock investing
NEW YORK (Reuters) - Despite increasing signs the economy is headed for slower growth. corporate earnings should see double-digit growth in the second quarter and in the second half of the year. chief investment strategist at Prudential Equity Group. said on Monday.
He told the Reuters Investment Outlook Summit in New York that earnings growth could be what propels the stock market higher from its recent rut. with the Dow Jones industrial average <.DJI> last week breaking below 11.000 for the first time in three months.
"The first quarter turned out to be close to 15 (percent). and it looks as though the second quarter might keep us in double digits." Keon told the summit. "In the second half of the year. despite the fact that we expect an economic slowdown. I still expect we might well see double-digit earnings."
The market has had about four years of double-digit earnings increases. with the energy sector showing the biggest year-over-year profit gains in recent quarters as oil prices have risen.
Even though stocks have fallen sharply in recent weeks and Wall Street thinks the stock market is in a funk. individual investors who focus on picking stocks for the long-term are still poised for growth.
NEW YORK (Reuters) - Gasoline at nearly $3 a gallon is sending America's ethanol industry into overdrive. with about $2 billion committed to corn processing plants since the start of the year.
stock investing
(For other news from the Reuters Investment Outlook Summit. June 12 (Reuters) - Even with the recent sell-off. U.S. stocks remain a compelling investment and may be poised to see better returns than bonds as earnings growth stays strong. chief investment strategist at Prudential Equity Group. said on Monday.
He told the Reuters Investment Outlook Summit in New York that he has been bumping up his weighting on equities over the past few months as valuations "have in fact fallen to what I think are very cheap levels."
From last July to Feb. 6. Keon's asset allocation was 100 percent stocks. but worries about inflation and weak earnings growth caused him to cut exposure to stocks to about 55 percent. he told the summit.
Wall Street has enjoyed four years of double-digit earnings growth. helped in part by historically low interest rates. by record profits from the energy sector amid record crude oil prices.
"The biggest single thing is that earnings have been much better than I thought they were going to be. I think in the second half of the year. despite that we expect an economic slowdown. I still think we might well see double-digit earnings growth." he said.
Even though stocks have fallen sharply in recent weeks and Wall Street thinks the stock market is in a funk. individual investors who focus on picking stocks for the long-term are still poised for growth.
stock investing
NEW YORK (Reuters) - Strategists from top Wall Street Investment firms visited Reuters U.S. headquarters on Monday for the first day of the Reuters Investment Outlook Summit to discuss upcoming trends and risks for global markets.
"Odds of getting an excess return out of the technology sector is pretty small. Some of the big PC stocks are acting a bit more like consumer staples stocks."
"The Fed has never. never gotten the tightening cycle right. It has just never happened. What has amazed me in this cycle is people's confidence that they're going to get this right. They don't realize how unique that would be."
"Individual investors have a monstrous advantage. in that institutional investors time horizons have shortened so dramatically. Individuals can take positions. find undervalued assets and wait 2-6-8 years for the investments to build. Individuals are wasting immense opportunities to build wealth. and I find that disconcerting.
Chief strategists from the leading investment banks will visit Reuters U.S. headquarters for our Mid-Year Investment Outlook Summit. Reuters clients and visitors to our Web site Reuters will be able to read exclusive stories about the equity. credit and foreign-exchange markets based on interviews with the strategists.
stock investing
HONG KONG -- Most Asian markets ended flat on Monday. though India's benchmark index tumbled 3.4 percent and Japanese stocks rose for a second consecutive session. lifted by news that the economy grew faster than expected in the first quarter.
The Tokyo Stock Exchange's Nikkei 225 index rose 82.17 points.833.01 points. Stocks advanced after the government reported the economy grew at an annual pace of 3.1 percent in the first quarter. up from a preliminary 1.9 percent.
Businessmen watch the stock update on the board outside a Tokyo securities firm. 2006. Japanese stocks bounced back moderately Friday after plunging to six-months lows the previous day. helped by a report showing better-than-expected machinery orders. The Nikkei 225 index rose 117.81 points.750.84 points on the Tokyo Stock Exchange. (AP Photo/Katsumi Kasahara)
Indian shares fell sharply on selling of blue chips. The 30-company Sensex of the Bombay Stock Exchange closed 334 points down at 9.476. On the rival National Stock Exchange. with weakness on interest rate concerns offset by bargain-hunting and gains in Swire Pacific following news its Cathay Pacific unit is acquiring rival Dragonair.
The Hang Seng index has fallen nearly 10 percent since mid-May due to massive declines in global equities triggered by interest-rate concerns and commodity prices.
The lingering interest rate concerns hurt property companies. including New World Development. which dropped 1.03 percent.
Top gainer of the day was Swire Pacific. the parent company of Cathay Pacific. which announced a takeover of rival Dragonair last week. Swire shares rose 5.02 percent. while Cathay shares gained 7 percent.
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HONG KONG'Renewed worries over the outlook for US interest rates sent Asian and European shares tumbling again yesterday. with the Japanese stock market posting its biggest fall since the Sept. 11. 2001 terrorist attacks.
South Korean shares dropped 2.9 percent to a seven-month low. while Australian stocks sank 2.6 percent. their biggest one-day fall since September 2001.
Asian markets. which until early May had been among the world's star performers this year. had suffered a similar sell-off last Thursday. also on concern that higher US rates would trigger a global slowdown.
European stocks skidded to their lowest in more than six months on Tuesday. tracking a sell-off in global equity markets. as concerns about interest rates and economic growth continue to gnaw at investor sentiment.
Mining stocks dragged the market lower as base metals prices retreated. while Europe's technology stocks weighed heavily as they slid on the heels of their global peers.
The market tumbled before the closing bell into a selling frenzy first set off by another fall on Wall Street overnight due to anxiety about the outlook for US inflation and so interest rates. they said.
With investors on the defensive from the opening. sentiment was further hit by Bank of Japan Gov. Toshihiko Fukui's surprise admission that he had invested in the fund of Yoshiaki Murakami. who was arrested last week on charges of insider trading.
It was the biggest single fall since Sept. 12. 2001 when the market shed 682.85 points in the wake of the terrorist attacks against the United States.
Traders in Tokyo said stocks faced heavy selling due to market speculation that US Federal Reserve might raise interest rates further. stoking fears that the US economy may slow down and hurting Japanese exporters. A decline overnight on Wall Street also hurt sentiment.
'Wall Street is expecting a blood bath for inflation figures. and that's spooking foreign investors in Japan who are selling their most liquid holdings. as they price this in. head of equity trading at Dresdner Kleinwort Wasserstein in Tokyo.
The European markets were set to remain under water ahead of key US May producer price data at 1230 GMT. which investors hoped would provide some clues for the outlook on U.S. interest rates.
stock investing
Just before the market closed. BHP Billiton announced that it is forming an alliance with Russia's biggest miner. MMC Norilsk Nickel. to carry out exploration and develop mining projects in the Russian Federation.
Banks also fell. with ANZ leading the pullback with a 65 cents or 2.5% fall to $A25.65. National Australia Bank was 85c poorer at $A33.95; the Commonwealth Bank offloaded 87c to $A42.22; while Westpac reversed 45c to $A22.00.
The market's initial decline was kicked off by a fall in the US overnight. where the the Dow Jones industrial average lost 99.34 points to 10.792.58. Asian markets all lost ground today.
The benchmark index lost 2.35% last Thursday; which until Tuesday. was the biggest fall since September 17. when the market lost 4.69% in the wake of the September 11 terrorist attacks in the US.
The NZX50 index lost 12 points to close at 3.600 on total market turnover of $NZ99 million. Telecom accounted for almost a third of that activity; dropping 2 cents to $NZ4.37.
Japanese share prices dived by 4.14% on Tuesday. hitting a seven-month low. following further losses on Wall Street and the prospect of higher US interest rates.
Market sentiment was further dampened by a surprise admission by Bank of Japan Governor Toshihiko Fukui's that he invested in the fund of Yoshiaki Murakami. who was arrested last week on charges of insider trading.
Overnight. US stocks dropped amid persistent worries about rising interest rates and slower economic growth after the latest warnings on inflation from US Federal Reserve officials.
The Dow Jones industrial average fell 99.34 points to 10.792.58 on Monday; Standard & Poor's 500 index eased 15.90 points to 1236.40; and the Nasdaq Composite Index lost 43.74 points to 2091.32.
Investors around the world have dumped equities in recent weeks on concerns over rising inflation and the prospect of further increases in the cost of borrowing in the United States.
Stocks nose-dived last week after US Federal Reserve chairman Ben Bernanke delivered an unexpectedly strong inflation warning. which was taken as a sign that a further rate rise could be coming soon.
On Thursday. the European Central Bank raised interest rates and warned it would be prepared to move again. India. South Africa and South Korea also raised rates on Thursday. Turkey did so earlier in the week.
The ECB raised interest rates by 0.25% to a three-year high of 2.75%. and President Jean-Claude Trichet warned it would move again whenever necessary to curb inflation.
stock investing
NEW YORK (Reuters) - The month-long slide in global stocks has wiped out at least $2 trillion in wealth. leaving investors few alternatives to preserve their holdings aside from bonds and money markets.
Investors have been dumping stocks. commodities and emerging market assets on growing concerns that economic growth will suffer from higher inflation and interest rates.
"It is essentially one consistent story worldwide. starting here in the U.S. There is a fear that the Fed's repeated commitment to limiting inflation demonstrates a willingness to risk economic activity." said Christopher Low. chief economist at FTN Financial in New York.
Stock markets have been punished since the U.S. Federal Reserve raised interest rates for 16th time in a row on May 10 and issued a hawkish statement saying it may need to do so again to fight inflation. Investors had expected some sign of an end to the tightening cycle.
Global markets have suffered since. and strategists show little agreement about how deep and how long the sell-off will go. Bonds have been the most direct beneficiary of the equities route. with benchmark U.S. 10-year Treasuries staging their longest rally of the year since mid-May.
On Tuesday. Tokyo's Nikkei average booked its biggest one-day percentage fall in two years. wiping out more than 16.56 trillion yen ($145 billion) in market value from the Tokyo Stock Exchange's first section. It was the biggest one-day point drop since immediately after the September 11. attacks on New York and Washington.
In Europe. the FTSEurofirst 300 index of top European shares has fallen about 11 percent since May 11. The index finished at 1. its lowest closing level since November 30.
Since its year high hit in early May. the MSCI World Index of global stocks has lost $1.9 trillion in market capitalization. nearly 12 percent of its value and more than the economic output of the United Kingdom.
As global central banks in Europe and United States have raised interest rates to cool inflation. investors are aggressively slashing their exposure to emerging markets as well.
Investors pulled out about $8.5 billion from emerging equities in the three weeks ending June 8. according to data from EmergingPortfolio Funds research. The benchmark MSCI emerging market stock index has lost about 24 percent since May 10.
"We've seen a lot of panic selling by people who have gotten into emerging markets and commodities later in the game -- pessimism is high. a senior equity strategist with A.G. Edwards & Sons. "People are sitting on a lot of cash and are afraid to get back in the market."
Tom McManus. chief investment strategist with Banc of America Securities said investors should look at "the bonds of the stock market. Steady companies with strong earnings and geographic diversification."
These shares have been out of favor since about 1998. and are the kind of companies Warren Buffett has been known to own -- companies with top-quality balance sheets and diversified earnings streams.
Shares held by Buffett include Coca Cola Co. . American Express Co. . Wal-Mart Stores Inc. . Wells Fargo & Co. and Anheuser-Busch . Each of these has retained their gains even as the S&P 500 has erased its advance and now stands 2 percent lower on the year.
The global sell-off. is not over and may only be just starting. according to JPMorgan Chase & Co.'s global equity strategist Abhijit Chakrabortti.
"This is nothing compared with what we may see late in the summer and early October -- once slower growth finally sinks in and expectations for higher benchmark rates. at 6 percent or even more." Chakrabortti told the Reuters Investment Outlook Summit in New York.
"Sectors most dependent on growth and the companies most dependent on volume and price declines. which also includes tech companies. should be avoided." he said.
"We like the big telecom providers such as Verizon and AT&T . as well as Colgate ." he added. All three have soundly outperformed the market this year. respectively.
Among U.S. mutual funds. investors pulled only $1.9 billion out of equity funds in the week that ended June 7. not a huge amount compared with outflows of $7.1 billion during the previous week. research firm TrimTabs reported late last week.
At Boston-based Fidelity Investments. the world's biggest mutual fund company. "we have not noticed unusual activity during the past several days but we had strong money market inflows in May." said Vincent Loporchio.
stock investing
This is a partial edited reprint of my article entitled 'The Fed and Pavlov's Sheep' that was written and published in May of 2004. The topic is especially appropriate today.
Ivan Petrovich Pavlov was a brilliant Russian Physiologist whose experiments on animals led to discoveries that would make the demented doctors in World War II. in both Germany and Japan. very jealous. Some of Pavlov's early work was done on sheep. Unfortunately for the sheep. the experiments on them were so stressful they eventually died of heart attacks. Pavlov's work on sheep. analogous to stock market investing. is critical for this article because speculators. and particularly retail stock investors. do tend to act a lot like sheep.
Pavlov's work on the conditioned reflex reaction of sheep to stimuli should be of the utmost importance to the Federal Reserve and world central banks at this juncture in a world where signs of speculative excess 'C even to the bubble level 'C clearly remain in all major risk asset classes including housing. and even major stock markets.
In Pavlov's research. he discovered that if he gave the sheep a mild electric shock. it would bother them very little and their life would go on pretty much as if nothing had happened as long as the shocks were random. Warning the sheep in advance of a shock by ringing a bell. affected their behavior and it changed radically. The sheep were just smart enough to realize that if they heard the bell. the shock was coming. After repeating this exercise a few times. the poor sheep lost control of bodily functions and after a few more warning bells. they started dying of heart attacks.
What Ben Bernanke and the Federal Reserve Governors should know. and are likely to find out the hard way. is that markets driven by speculation will react just like Pavlov's sheep. Indeed. the major market participants and speculators. particularly greedy retail investors. are there to get 'sheared at market tops'. Somebody has to buy when the smart money wants to sell and take their winnings out of the casino. Moreover. to keep the herd of retail investing sheep grazing on financial investments including commodities. there needs to be a steady stream of 'feel good' press for stocks about how great productivity is and how the nomination of the new Treasury Secretary. will be good for the dollar. All the while. stock analysts and market touts are claiming 'there has never been a better time to invest'.
With fears about a rising core inflation rate and slowing economic growth. Bernanke and the Federal Reserve Governors understand too much money was printed up over the last decade. They're not alone. The central banks in Europe are not done raising interest rates either and Japan is just beginning to raise their rates from zero to drain excess liquidity. After 16 rates hikes. the Fed announced it is not done raising rates. This 'ringing of the bell' has the sheep sensing that more shocks are coming. This could be downright ugly for the financial markets! We would recommend that the Fed have plenty of tranquilizers and lots of liquidity available to bail out the markets if they keep on scaring the sheep.
The market participants that started running like lemmings for the edge of the cliff are led by the market professionals! They have been heard shouting 'get out before the sheep panic!' Over the last few months. easy money trades are down. and some Middle Eastern markets have crashed while other emerging markets are in a bear market. Commodities are also in a serious correction. including gold and silver.
All too often central banks tighten until the financial markets suffer a significant failure. The Federal Reserve and Treasury have regular practice 'fire drills' on what to do during a market crash. and given their behavior and what Pavlov taught us about sheep. they will more than likely create an opportunity to fight a real financial market fire. However. when the Fed has to fight a market event 'C and cuts interest rates in an effort to save the lives of some of the sheep 'C you can kiss the dollar goodbye. So. while the dollar has gotten a technical lift over the past week or so. my cash is still going into 'non-dollar cash'. The U.S. trade deficit is so massive. and our debt is so large. we believe the dollar will have to fall much lower.
While a general stock market crash may pressure all stocks (including precious metal stocks) to go lower. precious metals and precious metal stocks are being offered now at significant discounts (much of the excess that causes sharp drops in price has been washed out).
In the years ahead. the high prices we have all seen in gold and silver will be surpassed many times over. In addition. leaving your money in short-term cash with no price risk while receiving 5 percent. looks a lot better than losing money in stocks or real estate! risk is a four letter word and cash is not trash.
- Richard Benson. is a widely published author on securitization and specialty finance. and a sought after speaker at financing conferences on raising equity for mid-market companies. Prior to founding the Specialty Finance Group in 1989. Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's and started in the securitization business in 1983 at Bear Stearns. and helped build the early securitization businesses at Citibank and E.F. Hutton. Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math. and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach. The Specialty Finance Group. LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer. Previous Articles by Richard Benson
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stock investing
Bond traders were up in arms that a new Fed chief had dared to insinuate a pause in the two-year campaign to normalize short- term rates. which as recently as June 2004 were at 1 percent.
That he should suggest a hiatus with current inflation readings uncomfortably high was not at all acceptable to the bond vigilantes. those guns-for-hire who have been scouring the globe in search of employment opportunities for the last two decades. (Help wanted in Zimbabwe. I hear.)
Bond traders poured out their venom to reporters eager for juicy quotes on how Bumbling Ben was mucking things up. Long-term interest rates rose. market-based measures of inflation expectations deteriorated. and analysts who were in diapers in the '70s talked with furrowed brow about the loss of Fed credibility.
Methinks they protest too much. Fed officials heard their dissatisfaction nevertheless. and pretty soon they were out on the stump. vying for the hawk-of-the-year award.
Over in equity land. a different scenario was unfolding. Investors weren't worried that the Fed was behind the curve; to the contrary. the message emanating from stock prices was that the central bank had already done too much to slow economic growth.
The sell-off since May 11 has been led by cyclical stocks. or shares of companies whose fortunes ebb and flow with the business cycle. In the past month. the Morgan Stanley Cyclical Index has fallen 11.5 percent compared with a 3.4 percent decline in the Morgan Stanley Consumer Index of stable growth companies.
``The underperformance of cyclicals versus staples is the market's way of saying the odds have increased for a more severe slowdown.' says Steven Einhorn. vice chairman of Omega Advisers. ``Bernanke's language' -- the shift to tough anti-inflation rhetoric -- ``has frightened investors into thinking a hard- landing is more of a possibility.' a view Einhorn does not share. (Full disclosure: Einhorn and I have a bet -- and a box of Krispy Kreme donuts -- riding on the degree of the slowdown.)
The bond market has come around to the stock market's way of thinking. albeit via a different. more circuitous route. For anyone who is paying attention -- Fed officials. listen up -- the yield curve is saying. the yield on the 10-year Treasury note quietly slipped below the yield on the funds rate for the first time in more than five years. (I say quietly because there was an outcry when the spread between two- and 10-year notes inverted early this year by a few basis points without producing an immediate recession.)
For those with no sense of economic history. it is not a positive sign for the economy when the policy rate is above the long-term rate. Inverted yield curves -- the depth and duration of the inversion are key -- portend recession.
So reliable has the yield curve been as a leading economic indicator that it was anointed as one of 10 select components in the Index of Leading Economic Indicators.
Stock prices -- specifically the Standard & Poor's 500 Index -- are another leading indicator. The interest rate spread and equity prices. along with the real M2 money supply. comprise the intangible or financial components of the LEI.
Business cycle economists at the Conference Board. keeper of the LEI. claim the financial indicators lead the non-financial ones: things like jobless claims. building permits and capital goods orders.
And guess which is the leadingest of the leaders? which has anticipated the turn in the business cycle by almost a year at the trough and 27 months at the peak on average over the last 50 years. according to the Conference Board.
Whether they realize it or not. the Fed is on the verge of creating a feedback loop that keeps on giving. Consider the following: In talking tough. policy makers have succeeded in lowering long-term rates and reducing inflation expectations as measured by the spread between nominal and inflation-indexed Treasuries. They are now confronted with a pancake-flat yield curve. which threatens to invert if they deliver on their tough talk on June 29 with another 25-basis-point increase in the funds rate.
The flat curve is causing some consternation among stock investors who fear the Fed has gone too far. leading to an exodus from risky assets (emerging markets. for example) and flight into Treasuries. which will invert the curve even more.
The Fed is giving the bond market what it wanted. even as the reflection of those wishes (the long rate below the funds rate) sends the message that the Fed has gone too far.
Policy makers want to be free to choose what they do. In order to gain the confidence of the markets and earn the credibility to do so. they have boxed themselves into a corner.
stock investing
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