Monday, December 20, 2004


Historical data reveal that within 12 months of the first rate hike in a cycle, consumer discretionary stocks and technology stocks are down.

It has been 5 months since the first rate hike. The following is the performance of John Murphy's industry list since the first rate hike.

Internet +27%
Oil Service +26%
Gold and Silver +21%
Brokers +20%
Retailing +20%
Banks +9%
Biotech +5%
Pharma -7%
Semis -7%

The performance for the last three weeks follows:

Oil Services +7
Internet +4
Pharma +1
Biotec + 1
Banks -1
Semis -1
Retail -2
Gold -10

Three weeks can easily be a trading move and not a trend but it at least appears that Greenspan has been able to take the fear of inflation out of gold. As should be expected, Banks, Semis and Retail are struggling against the higher rates.

The big question remains in oil and oil services. There is still a hint of the late 70's in the oil markets. If energy is behind the curve, it could take a lot more pressure from prices to rationalize supply and demand. In case you were not around in the 70's, oil drilling stocks were the 50 baggers of the decade.

Pharma has gone from one of the worst performers to one of the best. When a sector is performing well in the midst of extra bad news, the "big boys" are buying! If you don't like the risk of any one company, consider PPH for purchase. PPH is one of the exchange traded funds.

I am treating the three week list as an indication of what is heating up and what is cooling down. Gold may still bounce higher. The dollar was down again today against the Euro. I am avoiding gold and studying oil drillers but am treating the rest of the list as trend setting. Add to positions in the groups with positive performance and trim back where they are negative.

Keep in mind that you have to think twice about how to categorize certain stocks. AMZN is the same price as last year so you could say it is suffering. It is simply starting to trade more on its fundamentals as a fast growing retailer. It no longer trades with the emotion of an internet high flyer. This is not such a bad thing. WMT is 13 times the size of AMZN and still growing its sales by 7 to 11% per year! This is an amazing feat but AMZN is growing sales at 20 to 30% per year, equally amazing. One challenge for AMZN is the growth of WMTs online sales. WMT does not break out its on-line numbers but is growing fast. One must figure that the profile of AMZN customers is more up-scale than WMT customers and that they will both continue to steal market share. The rate of growth for WMT is now fastest in the international markets.

Tech stocks are down but ETrade is doing very well. Etrade is a consumer of technology. As Etrade is able to lower costs by purchasing fast low price computers, it is able to increase its operating margins. Etrade offers many banking products and brokerage products. It is a low cost producer and has seamlessly integrated banking functions in addition to brokerage services. I trade with BrownCo as I am most interested in low costs, quick executions and low margin rates. Etrade is one of my favorite investments. Etrade is a high beta stock but one that I plan to hold through the good and the bad. It will trade with excitement when the market is strong but may be less volatile than AMTD. AMTD is more of a pure trade on brokerage commissions. I hold both stocks and view them as internet services company.

I keep looking at oil services companies because the price of oil usually hits its low before cold weather and then is up until prime driving season. It appears that we may have seen the bottom.