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Sunday Morning Coffee - Mar 30 2008 8:05PM

 March 30, 2008 08:05 PM


A reader asked for my opinion about what sectors and countries to buy when the market eventually starts a new bullish phase.

OK so this has two parts to it in terms of how I try to frame the answer.

Long time readers may recall my saying that I try to combine what I know about market history with an assessment of current events to try to make a forward looking analysis.

An assessment of current events with an eye toward reequitizing becomes difficult because it may not make sense to reequitize for a year and a lot can change between now and then.

Starting from the top down it makes sense in a new bull market to reduce the average cap size of the portfolio (I made the portfolio larger and larger cap-wise as the bull aged) because small cap usually leads off the bottom. In making the portfolio smaller you are increasing the volatility which again makes sense to do as obviously the prevailing direction of a bull market is up. All of this probably reduces the yield a little bit but in a year where the market goes up 25%, squeezing out an extra 50 beeps in yield should not be the priority.

In terms of sector the first thing that comes to mind to overweight is industrials. Globally speaking money must flow into infrastructure so I believe industrial stocks that benefit from this capital flow stand to do well.

Financials would be another area that usually does well emerging from a bear. Problems at Citi are not new. After a the famous near death blow in the early 1990s Citi went up about 2000% versus 300% (just eyeballing a chart) for the SPX into year end 2000. Citi was not my fav before this all started and probably will not be after but the point is that the financial sector (the ones that survive) will come back from this and probably outperform meaningfully for a while.

Tech should be one to overweight but if I were reequitizing right now I would be skeptical of that one but we'll see when the time comes.

Discretionary does well early cycle too. Energy is a tough call from a historical perspective as I think there are skews to each of the past episodes that make looking back especially unhelpful. Based on my perception of what is going on with supply and demand I would probably want to be overweight. Ditto materials.

Telecom equipment should do better than the ma bells of the world (and I do mean the world) but I am a little distrustful of making a big bet on that. Utilities, staples and healthcare would probably lag a little.

Most of this is based on how cycles work. I tried to add in a little current thinking in there but I think it will be a while before this matters and the manner in which the bear plays out will influence how I actually execute.

As far as countries I am not likely to make really big changes to the countries I favor. I have talked about adding China back in across the board at some point and I might add a little to a couple of the other countries I currently own. While that mind not sound like much keep in mind I have about 20% cash so at 2 or 3% per position it wouldn't take much to reequitize.

The picture is obviously from South Beach last week. That hotel is on Ocean Drive and looks out on to the beach (where I am standing) and the ocean beyond that. Unlike most of the pictures I took I don't hate this one.
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