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September 20, 2004
A Little Cautious
The market enters the second half of September near its recent highs after a strong rally off the early August lows. Northlake's recommended stocks and models have performed well in the rally but we are beginning to take a more cautious view. Quarterly earnings season is about to start and...
...we believe the possibility of a repeat of July's market weakness is possible. It is now clear that the economy has slowed from the rapid growth of late 2003 and early 2004. Slower growth first impacted corporate earnings at mid-year as 2Q earnings results and guidance were below expectations. We expect another bout of weak reports and poor outlooks in 3Q reports. The big question is whether this news is already baked into stock prices. In July, the bad corporate earnings news was largely unexpected and the slowdown in economic activity caught corporate managers and Wall Street by surprise. Stock prices responded by moving sharply lower. Most commentators are expecting a weak earnings season now so stock prices likely reflect some of the upcoming negative news.
Northlake believes that the rally in stocks leaves the market vulnerable to upcoming news flow and the possiblity of a 3-5% pullback is high. We expect stock prices to be above current levels by year end, however. Consequently, we will use any pullback to position portfolios in our favorite stocks and invest cash reserves.
Later in the week, we will provide updates on recent performance and news from our special situation portfolio. In the meantime, you can find a summary of our thoughts on our portfolio on the Research Samples link.
Posted by Steve Birenberg at September 20, 2004 07:26 AM
Steve,
Interesting insights into the market. I agree 3Q #'s should be weak - especially in technology related stocks. The question I keep hearing is whether or not the bad news is already priced in, I'm not so sure it is. It will be interesting to see some of the guidance and if oil/energy can maintain its momentum. Corporate bond investors continue to be very optimistic, as evidenced by tsy/corp bond spreads being within 2 bps of their best levels since Jan. This bodes well for your prediction of longer term (end of the year) market results
I would be interested to hear what effect you think Sarbanes Oxley will have on stocks (technology and energy etc.) and how you are positioning your portfolio given this. Also, I will be interested in reading about which individual stocks are you looking at to provide additional alpha to the portfolio.
Always a good read, thx for the update.
Spencer
Posted by: spencer at September 20, 2004 11:43 AM