Bears finally catch up: Rest of the year outlook

Here is the extract from and email that I sent to my friends and old college mates.

After today's fall any buy will look good, but I feel Dow has a little more to go next 3-5 trading days. So, be on look out for good buys.

Lets start with overall market:

Positives arguments:
1> P/E is very low compared historically.
2> Corporate profit margins are high
3> Fundamentals are still good & Earnings estimates are low and achievable.

4> Productivity is good
5> Market still doesn't have any liquidity problem

6> Consumer confidence is high.
7> Unemployment rate is historically low

Negatives arguments:
1> P/E and corporate Margin can turnaround in 3 months and stock market is forward looking

2> Money in current markets can move (flight to bonds) very quickly that will affect liquidity.

3> Consumer confidence is the only thing that will keep the economy going. I believe this & unemployment are the key indicator to predict whether US economy will have a soft landing or recession.

4> Capital investment is low. Companies are investing in buying their stocks rather than investments.
5> Government spending will go down as congress puts in fiscal discipline and Iraq wind down
6> I have kept the best for the last, Housing and Auto are down.

The scenario that I have been putting in my blogs that will show up as recession.

Doom Spiral:

First let me point out. Till now consumer has been quite confident and despite housing falls have kept spending. Why ?? Unemployment is historical low. Many economist consider 5-6% as natural unemployment rate. last one year we have been as low as 4.37% unemployment. An important point in this is that if we maintain unemployment rate, it means that there is more money coming to GDP from wages. How? every year 2-3 millions (net) of new people join the workforce. Besides new graduates & immigrants , there are people who have come back to wage force after they left it due to the last recession. So, maintaining unemployment means, we are adding $50-100billion (before inflation adjust) to the GDP annually .

Unemployment rate increases>>unemployment along with housing and auto crash leads to decrease in consumer confidence>> Consumption (70%) reduces or can't increase to take out the effect of low capital investment and government spending >> GDP declines>> Companies starting reducing productions>> Companies fire people>>unemployment rate increases.

I have seen some firing by the companies 3000 Kodak/PFE, 12000 Chrysler (numbers are approximate) and these are over the next 6-36 months. These don;t add on much, but if teh trend continues we got to get our antennas So,

GUYS KEEP ON LOOK OUT FOR UNEMPLOYMENT OR CONSUMER CONFIDENCE NUMBERS.

Future Outlook:

short term: Bearish
medium term: Very Bullish
Long term: Bullish

Now to actionable advice:

I believe 2007 sectors to watch Financials, Oil, Tech/Internet, Housing and copper & Nickel. Of course Emerging markets are always good.

Over next 3-5 trading period, buy anything that is quality. As you will expect flight to quality when the selling momentun is done. So, in financial sector GS,LEH Oil firms XOM Oil services HAL, SLB tech CSCO, MSFT, AAPL(under 80) INTL (under 21) Currency EURO (FXE) & YEN Commodity Oil, Copper(may be) Gold India Play INFY,IBN,WIT Insurance MKL Berkshire, Internet Yahoo, Ebay IACI, Housing TOL, KBH, Pharma AZN Kroger MRK.

I wouldn't touch google above 420, but have been wrong on goog at 200,300 I was only right during the 380- 445 rally last year. I think there are many other better deals to put our money is stock with such high expectation that probability to fail is very high.

Otherwise look at ASPV MKL FCX DGX HD low valuations very little downside risk.

If you buy all the above stocks tomorrow and day after, you can get 10-15% return next 2 months and will be good through the end of the year.

Time period: I will go from 10% stock to 50% stock in the next 1-2 weeks and then 80% stocks by June if I don't sense recession.

Disclaimer: Most of my investing money (90+%) has been in cash for the last 2 months - having been a temporary bear. So, take it with that bias. If you have been reading my investing blog (http://rdar.blogspot.com) I have mention this. My only investment has been in my old firm KEA (acquisition story) and some funds in the emerging markets with low focus on china. I rcently acquired ASPV (cash cow story) SIRI (Long term value) and DGX (low valuation, non sexy stock - the day before the big Feb 2007 fall).