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Portfolio strategy update Editor’s Note: The following portfolio update is from David Gottstein’s monthly Dynamic Research Group’s newsletter. It was compiled in early April. David Gottstein
OUR CURRENT RECOMMENDATIONS
BERGEN BRUNSWIG (BBC) $20.625
FRANKLIN RESOURCES (BEN) $28.1875
BEMIS COMPANY INC.(BMS) $31.4375
CURRENT MARKET NEWS Earnings and interest rates
We have said many times that these two factors are what drive the markets in the long run. There is always a level of uncertainty regarding both, and it still holds true today.
The economy continues to add jobs, and generate corporate and personal income growth. There is debate about amplitude, but generally the feeling on Wall Street is that we will continue to see moderate growth in all of these areas.
Corporate earnings on aggregate continue to be positive. The interesting thing is that the big companies seem to be outpacing the smaller ones, with technology and service-oriented companies, such as retail and financial services, holding up well.
Because of soft commodity prices (except oil as of late) and weak labor costs abroad, many industries lack the pricing power necessary for margin expansion. This means that some sectors, such as heavy machinery and farm equipment, may still need time (meaning stronger demand) to see substantial improvement.
Even though there are many strong companies in the capital-intensive sector, we think there still exists potential for profit weakness as well as repudiation by market participants until Wall Street sees distinct improvements in demand and profits. We believe this despite a growing domestic economy.
The interest rate picture is a little less clear. Most believe that long-term interest rates will not rise above the 5.75-6 percent level, adding stability to rising fair values in the equity market, it may be on this side of the equation.
If the 30-40 percent rise in oil prices in the last few months sticks, and if perhaps other commodity prices bottom just as some parts of Asia begin their recoveries (Japan being the possible exception here), there may begin to be a strengthening of inflation concerns. This would be especially true if domestic wage pressures continue to rise while the unemployment rate remains very low.
The Federal Reserve has not yet reacted, but with a strong economy, any sign of inflation will most likely result in a modest interest rate hike to slow down the economy. We are not yet predicting an interest rate hike, but if there is a prejudice, that is it. At these lofty market prices, any move toward higher interest rates will certainly affect the averages negatively. THE WORLD ACCORDING TO DRG A shift towards conservatism
As NATO continues to pound Yugoslavia, as it should, we believe the short-run risk of negative surprises has increased, since most of the good news is already reflected in prices.
The good news is that continued money flows into stock mutual funds remains an all-important catalyst for higher markets.
Even so, because of a drop in overall money supply growth, a slowdown in the growth in production, high valuations, higher oil prices, and weakness in bond prices, we are decreasing our equity exposure to 85 percent invested.
This is still a healthy investment posture, but one representing an incremental increase in uncertainty. As such, stock selectivity becomes even more important.
Good luck this month!
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