Saturday, October 27, 2007

Where to hide now?

CNBC was full of talks about recessionary possibilities earlier this week. 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 pt 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 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 PMs, 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 HUI doesn't yet have a 7 handle. The pull back 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 the Tesoros and Valeros. (I own TSO) 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.

Ok, so far it's a reiteration of my long-held positions. For a short time, I had some spare cash in long bonds (TLT). It's far from the worst place to be if a recession is indeed looming, but Fed is almost certain to cut at least 25 basis points next week and with oil at $90+, inflation expection may tick up again. So on Friday, I got out of TLT and got into XLU (utilities ETF). Utilities is one of those classic defensive sectors, the others being pharma (PPH) and consumer staples (XLP). Chart-wise I like XLU the most although all three have 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 (SMH) and the software/internet/gadget companies. The big names like GOOG, AAPL, RIMM and 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.