Go With U.S. Defensive Stocks and Multinationals Benefiting From China

Markets are defying gravity yet again, this time because April's retail sales slumped in the wake of higher petrol prices and lower home prices. But don't think that this is the end to higher Fed Funds just yet.

The FOMC concluded at its meeting on 9th May that inflationary pressures remain - but that they did not warrant a further rate hike just yet. So Fed Funds remain at 5.25%.

Meanwhile, Mr. Greenspan stuck to his assessment made this March, that there is a one third probability of a recession. He (correctly) pointed out that a slowdown keeps going on in America.

I must say that I find it a bit strange for a man with the credibility of Mr. Greenspan to keep pronouncing on the US and global economies after his retirement - we have not heard of such large names ever doing this. But that is a personal view.

Our view is unchanged: more Fed Funds hikes, say another 50 basis points, by Christmas. Then no more. Reasons:

• our siren song, that unit labour costs keep rising, is alive and well;
• the Fed wants to get the rate hikes done with well before the electioneering heats up in America next year, and
• the Fed would prefer to err on the side of caution.

How to Make Money off This
As trite as it sounds, go with the flow. I would be involved in:

• US defensive stocks, e.g. consumer staples and utilities;
• takeover targets, say in the tobacco industry;
• any US companies benefiting off the Asia boom, e.g. gambling counters in the US who are being impacted strongly by their overseas operations in Macau, or large US multinationals making lots of money off their China operations

Comments

[Richie:]

Dr. Pfeil,

I respectfully disagree with your position. My sense is that we are clearly ALREADY in recession. Raising interest rates at any time this year will be seriously counter-productive. If we are not ALREADY in recession, why do we not have any meaningful inflation given:



Deficit financing of the war (annually $300 - $400 Billion)
Massive budget deficits (always inflationary)
Massive trade deficits (that should cause importation of inflation)
Explosive money supply growth (>8%) vis-a-vis GDP growth (

2007 May 14 02:16 PM