What are the Odds of a Recession?

Monday, August 07, 2006 | 10:30 AM

“We have an inverted yield curve, a negative savings rate, six-year-high industry operating rate, multiyear-high commodity prices, cycle-high profit margins, uncomfortably high unsold inventories of both homes and autos, and a peaking-out in housing starts — all classic late-cycle developments...Be wary of the pundits telling you how great soft landings are. They hardly ever happen. The odds of a soft landing after a Fed tightening cycle inverted the entire yield curve are slim.”
-Merrill Lynch's David Rosenberg

That quote is in a NYT column by reporter Conrad de Aenlle, who seems to be making up for his puff piece on employment last week. Aenlle continues:

“There’s more than a small chance of going into recession,” said James C. Cusser, a senior bond manager at Waddell & Reed. “It’s smaller than 50 percent, but a year ago that would have been off the table.”

"The catalyst could come from the Fed if it continues to raise rates, with or without a pause this week. Persistent tightening could push rates on adjustable-rate mortgages past some unidentified tipping point, he said.

James B. Stack, editor of the InvesTech Market Analyst newsletter and an investment adviser with a conservative approach, offered no odds, but he still worries that a recession may be on the way.

One concern is the National Association of Home Builders Confidence survey. The last time the mood of builders sank as low as it is now, Mr. Stack wrote, “the economy was just three months away from entering the 1990 recession.”

Incidentally, Stack is the first newsletter I recommend to laypeople who want to do very little tweaking on their holdings; He is straight forward, and invests quite conservatively.

I would add utilities to the defensive sectors recommended by Rosenberg: 

"Health care and consumer staples, industries known for producing stable earnings streams in challenging economic conditions and areas of the stock market that have produced high returns in past recessions. Since 1973, the two groups have risen at annualized rates of more than 28 percent when the economy is in recession, he pointed out.

Stack recommends a 47 percent investment in stocks and 23 percent in cash, and the stocks he favors are concentrated in the same sectors Mr. Rosenberg mentioned. His choices include Dentsply International, a maker of dental products; Biomet, a manufacturer of surgical implants; and the beverage companies PepsiCo and Diageo."

Market Values
Talk Turns to Chances of Recession
NYTimes, August 5, 2006

Monday, August 07, 2006 | 10:30 AM | Permalink | Comments (44) | TrackBack (0)
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Can't argue with the DEO chart, but it looks a little overbought on the daily for an entry. A pullback to 68-69 would be nice.

Booze is always a crowd pleaser.

Posted by: Craig H | Aug 7, 2006 11:33:25 AM

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