Friday, March 9, 2007


Now that the jobs report has joined the Bernanke testimony and FOMC January minutes release in yesterday’s news bin, 1Q07 earnings should slowly start to take center stage. The pre-announcement period (a/k/a the confession season) will kick in shortly and, based on my analysis (sector specific), I believe the risk is to the downside.

As the quarter has progressed, many research analysts have been ratcheting down their ever overly-optimistic earnings forecasts.

It is fairly well expected that 1Q07 will break the 14 consecutive quarters of double-digit earnings growth. And the full year should remain in the single digit range.

Many investors are, however, banking on a second half recovery as support for the bullish case. Hard to say. Given the dynamic nature of global economy and the markets, 2H07 seems a long time away.

Investment Strategy Implications

Caution remains the order of the day. Today’s jobs data was neither fish nor fowl. And its impact on equities was muted, at best.

The focus in the days ahead should be on the state of the economy and the Greenspan-inspired debate over a hard versus soft landing. 1Q07 earnings results will factor into this mix and help shed light on the strength of the economy. My bet is more toward a disappointing quarter, which in concert with other aforementioned items should act as a catalyst for the second down wave to the correction.

Have a good weekend.


andrew6 said...

Vinny, as you yourself have said, this is still a bull market. Therefore, it would seem that taking some money out of the market at this point--a simple definition of being cautious--would actually be a risky move.

Vinny Catalano, CFA said...

But if you believe that stocks were vulnerable to a decline, then my modified market timing approach requires that an investor reduce their equity exposure during such periods. In an aged bull market with high levels of complacency (such as we had for the last few months of 06 and continuing into this year, leaning against the wind is always the safest strategy.

Now, to respond to the phrase "taking some money out of the market at this point".

On Monday of this week, I reduced my equity exposure in the MGP because I came to the conclusion that the corrective phase we are in required a more defensive posture. As I wrote several times since the big drop two weeks ago, a double dip is the highest probability for the market. Therefore, a 4.5% reduction made sense.

I will grant you that making any move could be perceived as risky. But that is only if you are a buy and hold bull. I am not.

Hope this helps.