Minyan Mailbag: Rusty's Nail
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent and nothing written below is intended as advice.
The market awakens from its Valentine's Day hangover faced with multiple market issues. After repatriating $250 billion in corporate cash in January, the short-lived dollar rally is going to reverse itself as recent money supply numbers point to an easy Alan Greenspan. Money supply numbers are up dramatically and point to higher stock prices. The flattening of the U.S. Treasury yield curve over the past ten weeks reflected a softer economy than the six interest rate increases suggested. Today, Fed policy suggests a worry that the economy needs a little help from Alan. Very positive for an upside move in the market.
Just as weather began to warm-up, energy traders were ready for a price decline in oil. However, an ever depleting daily supply of crude makes the world oil markets vulnerable for higher prices, not lower. An eight billion dollar net income by Exxon points to higher capital expenditures by the big five oil companies as reserves may not be as plentiful as once reported. We especially favor the oil service companies over the big oils, but big oil holdings should remain core holdings. We expect the big mutual fund companies to pour money into this sector after they rise another 20% since they are underweighted in this sector. We believe the energy sector remains the big play for 2005.
Cyclicals remain attractive as profit margin increases are on the horizon for 2005 and beyond. As many look for Cisco or Intel to move, leaving the back door in the middle of the night are papers, forest products, chemicals, heavy industrials, steels, and other back page industries which do not sound very exciting. But, a year from now, maybe the financial press will be discussing the likes of Dupont or Dow Chemical in a much different light. These too are underowned by major mutual fund managers and will receive attention once they have appreciated in price another 20 or 30%.
Finally, profit margins for banks and insurance companies will continue to erode in this fierce market transition. Twenty years of disinflation died sometime when the World Trade Center fell. However, tax implications have forced many to hold on to the beloved financials as the true dividend yield remains high if one has held them for ten years or more. We do not see a disaster scenario in financials, just be aware the profit margins will lessen when real interest rates rise. Be aware that big institutions are equal or overweighted in financial stocks.
Minyan Rusty Robinson
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