Where I'm Changing My Investment Strategy, and Why

Early last week, CNBC was full of talk about recessionary possibilities. However, I did not at all feel vindicated given that I've been saying that for quite some time. Clearly, it was a case of overdue bearish sentiment finding a convenient thesis. In other words, the market was very much in the grasp of cycles of sentiment.

When optism ascends, people gravitate towards stories about robust consumer spending, stability in the credit markets and the next topic, the Fed ease. It is invariably followed by waxing pessimism when recession talks come to the fore. We just witnessed such a turn from the 360 point lost the previous Friday, to the rally last Friday in anticipation of a Fed ease. Make no mistake, the market is still in a bull phase: the down segments are much more swift than the up segments.

The corollary is that unfortunately, a recession is nowhere baked into stock prices. While a recession is not inevitable, the point of this post is to think prophylaxically, and figure out what sectors to be in for the next 3-6 months. I do not advocate shorting this market not only because I may be wrong about the economy, but also because of the 3pm ramp-up jobs we've witnessed this past week.

I remain bullish on precious metals for the next 6-12 months. I confessed to being "foaming in the mouth bullish" in the previous post. Translation: if I were underexposed to Precious Metals, I would buy some now. If it goes down, I would buy more, and if it goes up I would still buy more. In fact, I'll throw caution to the wind as long as spot gold is still three digits, and the Amex Gold BUGS Index (HUI) still doesn't have a 7 handle. The pullback this past Monday was snappy. We saw commercials covering from this week's COT report which had a cut-off time of Tuesday. Friday's $16 jump in gold undoubtedly made things interesting to the commercials who are still sitting on record level of shorts. I have a feeling that we'll have a show-down after the Fed meeting.

I just couldn't believe that oil is at $90+ a barrel. Make no mistake, it does wonders to my portfolio, but I much rather the increase be due to demand pressure than geopolitics which can turn on a dime. At least, refining margins seem have made a bottom which is good news to Tesoros (TSO) (which I own), and Valeros Energy (VLO). I'm also hoping that concerns about global growth will (temporarily) bring down base metal miners - enough for me to add to my positions. The same goes for agricultural commodities/chemicals, although arguable they are even less susceptible to an economic slow down.

Okay, I know that so far it's been a reiteration of my long-held positions. For a short time, I had some spare cash in long bonds, iShares Lehman 20+ Year Treasury Bond Fund (TLT). It's far from the worst place to be if a recession is indeed looming, but the Fed is almost certain to cut at least 25 basis points this week, and with oil at $90+, inflation expection may tick up again. So on Friday, I got out of TLT, and into Select Sector SPDRUtilities (XLU). Utilities is one of those classic defensive sectors, the others being pharma, with the Pharmaceutical HOLDRs Trust (PPH), and consumer staples with Select Sector SPDRConsumer Staples (XLP). Chart-wise I like XLU the most, although all three perked up last week. Besides the pricing power and yield of this sector, the non-oil based utilities should do especially well in this environment.

I'm under exposed to the tech sector. Right now, I'm not sure what to make of the divergence between the semis with the Semiconductor HOLDRs Trust (SMH), and the software/internet/gadget companies. The big names like Google (GOOG), Apple (AAPL), Research in Motion (RIMM), and Microsoft (MSFT) are fast becoming over-owned, and I'm not sure if they're immune to a consumer slow-down. So far, I've missed the big run-ups, so take my words with a grain of salt. In the end, I'm comfortable enough in the sectors I have followed for a long time that I don't feel the need to chase these big tech names.

Disclosure: The author owns TSO and XLU.

Comments

[Anonymous 2]

When do you plan an update on the "Skeletons" comments of 2 1/2 months ago...
since than a bunch of heads have rolled - 2 out of the 3 mentioned in the WSJ -
Most LOYAL EMPLOYEES would probably deem it appropriate that heads should roll when senior corporate officers and especially "the buck stops here" CEO's have a long standing record of not staying on top of prudent diversified corporate growth prospects in order to keep the company products and services diversified and competitive and thus undermine the personal career growth of loyal the company's employees.
That said, I would think that most INVESTORS would agree that the corporate COB head should roll (with no need to include non earned bonuses or non earned additional performance based stock options since the resulting huge stock losses absorbed by loyal employees and shareholders) when their long standing inattention to provide prudent corporate diversification strategies which should have taken into consideration macro risk management concerns which in turn creates mind boggling shareholder losses to the shares of the public company.
Since many of the publicaly held financial banks and financial service companyies make decisions as to performance based end of year bonuses during the last few weeks of their fiscal year (in almost all cases November), is there any reason to think that the remaining skeletons in the closet just might happen to come out of the Halloween closet AFTER the THANKSGIVING weekend and AFTER the close of business for these company's fiscal year next Friday?
By then, the many responsible for these above mentioned CEO/COB responsibilities, will have been granted such performance based expressions of gratitude by the shareholders who have only to thank their (sometimes not so independent) COB.
To answer my own question, I believe the turnaround in shareholder values will not take place until after the last of the heads (of the remaining skeletons are definitively revealed which will enable the financial effects of their strategic errors to be publicaly discounted) roll on toward retirement