Recession Called Off?

Since my last update the S&P 500 is down 8.92%. As of yesterday (1/22/2008), the S&P 500 was at its lowest P/E ratio in 10 years, lowest P/Book ratio in 10 years, and highest dividend yield in 10 years. Clearly if we aren’t headed for economic disaster this is a time to increase your equity allocations. Also, as a side note, with the 2 year treasury yielding 2.09%, 5 year at 2.64% and 10 year at 3.51% you probably want to be getting out of bonds (put the “non-stock” portion of your portfolio into a money market, the yield of which will go down along with these Fed rate cuts, but you won’t risk losing money if inflation takes off and interest rates rise). In general I expect companies with (long-term) growing earnings that are trading at a discount to the market should be the best companies to invest in, although this is the style I prefer in all markets.

Unfortunately for my returns several of the last recommendations made here turned out very badly (Alcoa and Boeing particularly), and my methodology for tracking returns in this blog do not take into account any sort of equity weighting (in other words I’m assuming that stocks are always 100% of this portfolio).

At this juncture, I expect the dollar to remain volatile but not continue the drop it experienced over the past several years, meaning that international should be trimmed back to 10% of your portfolio or so. Also, I believe that the selloff in financials and consumer discretionary companies have been overdone, and they seem to be regaining their footing since the Fed’s surprise ¾% Tuesday morning. The true value today lies in these unloved companies that cater to the American consumer (plus if everyone gets an $800 tax rebate check, and low interest rates combined with the thawing of credit markets allows prime credit borrowers to refinance their home, some of that money should flow to these sectors).

My prior recommendations [WMT (+6.0%), JNJ (-6.1%), BCS (-15.4%), BA (-17.9%), DIS (-12.1%), AA (-20.1%), AIB (+1.5%)] averaged a loss of 9.16%, which underperformed the S&P 500 by 0.24%. I recommend at this time BAC, C, WB, BBY, JOSB, BWLD. Note that this portfolio is only financials and consumer discretionary companies which may be too concentrated or risky for many investors.

Many Happy Returns, Mark Hanna.