"Old-Economy Stocks More Attractive" than your momma??

Discussion in 'Trading' started by bungrider, May 8, 2004.

  1. think we'll get a move away from naz, now that it's showing the tiniest bit of weakness? i don't. it's an election year.

    i'm movin' into what i call energy services, because this summer is gonna be
    HOT and BROWN! and if i had the cash i'd be buying nat gas futures.

    warning/disclaimer: yes, i already own stocks in the sector. yes, i have been known to be wrong most of the time; when i keep my losses small i make money. don't listen to anything i say.


    Old-Economy Stocks More Attractive
    Saturday May 8, 9:27 pm ET
    By Svea Herbst-Bayliss

    BOSTON (Reuters) - Money managers got some good news on Friday, but with stronger job growth now hinting that interest rates will rise sooner instead of later, they also are reshuffling holdings, ready to own more old-economy stocks.

    "We are going to have to focus on more traditional, growth-oriented companies that will perform well when less speculative stimulus is being provided," said Arnim Holzer, chief investment strategist at Deutsche Asset Management, which manages roughly $250 billion in New York.

    For months, Wall Street had hoped for stronger employment numbers. And on Friday, a report showing that 288,000 new jobs were created in April -- 115,000 more than economists had forecast -- showed that job growth was finally taking root.

    But what sounded like good news in the morning gave Wall Street a headache by afternoon. The major U.S. stock indexes fell as portfolio managers prepared for U.S. interest rates, now hovering at 46-year lows, to climb -- perhaps as soon as in June.

    To keep the economy from growing too quickly, economists expect the Federal Reserve will have to start bumping up its 1 percent federal funds rate by small increments until it reaches 3.5 percent or 4 percent in a few years.

    Interest-rate-sensitive stocks like car maker General Motors Corp.(NYSE:GM - News), home builder Hovnanian Enterprises Inc.(NYSE:HOV - News) and financial services company Wells Fargo & Co. (NYSE:WFC - News), the fifth-largest U.S. bank and a prominent mortgage lender, fell.


    To prepare for rising rates, portfolio managers said they are now eyeing less glamorous industrial sector stocks, as well as chemical and paper stocks.

    Later when interest rates start to rise faster, "people will go into more super-defensive stocks like pharmaceuticals, food and tobacco," said Anthony Chan, chief economist at Banc One Investment Advisors in Columbus, Ohio, which manages about $190 billion in assets.

    That means, mutual funds specializing in small and mid-cap value stocks -- now ranking among the market's best performers this year, with returns between 2.5 percent and 2.75 percent, according to Lipper Inc. -- may look less attractive, managers said. Instead they expect growth funds may do better.

    For managers, the expected rate changes will force them to concentrate more on picking good stocks by evaluating earnings data rather than just making sector bets.

    "It is an environment we'll have to work very hard in," Deutsche's Holzer said.


    Managers are expecting similar shifts in fixed-income securities, advising investors to steer clear of longer-dated maturities like 10-year and 30-year bonds.

    "People will want to blunt the impact of rising interest rates and while you won't want to move into cash immediately, you'll see people shortening durations and moving into 5-year notes if they are in 10-year bonds or 3-year notes if they are in 5-year notes," Banc One's Chan said.

    Indeed, some may want to move out of fixed income entirely, worried that although the market has long anticipated higher rates -- 10-year bond yields have already risen from about 3 percent to 4.7 percent -- higher bond yields (and lower bond prices) will follow.

    "If you were on the fence, this would tip you from bonds into stocks," said Kevin Bannon, chief investment officer at The Bank of New York, which manages $92 billion.


    But the sector rotation may not proceed as smoothly this year, managers said, noting that the presidential election will make stock picking more complicated in the months ahead.

    Several managers agreed that if Sen. John Kerry, the likely Democratic challenger to President Bush, wins the White House, health-care reforms and defense budget cuts might hurt certain stocks.

    But they also agreed that it is still too close to call.

    "Right now, managers can still be patient," Holzer said. "But by the time things are clearer, they'll want to have their picks in place." (Additional reporting by Mark McSherry in New York)