Con-tango

Sectoring

The whole point of looking at the economy is to get an idea of where to put our chips… and it hurts when we’re wrong.

After making the rounds, I still hold to my view that 2007 is going to be a rough year for the US economy: 1.5 % GDP growth. If it does get rough, the Fed will have to open the liquidity valves full blast —they’re already pushing liquidity… And if this is the case, interest rates falling, bonds will be a good place to be… And if liquidity will be pushed from all currency angles, assets is the next place to be.

Having said that, let’s hone in to select the best sectors to safeguard our money this coming year.

Howard Simons

Howard Simons agrees
with next year’s low rate, Fed-pushing-liquidity scenario. Or, should I say,
he views the markets themselves increasing liquidity, instead of the Fed —based on
the hedge funds huge credit leverage potential (view that I don’t necessarily share,
nor do I admittedly… know well enough to size the influence of the
derivatives involved).

But taking advantage of Howard’s recent posts, here and here, we’ll get to see —under a different light— three splendid charts to get a first idea of the sectors which are looking better and their risk levels.

But, let’s first heed Howard’s advice to heart in our selection process:

The smaller the company, the higher the risks,
and securities are not necessarily linked to their underlying commodities (i.e. Phelps Dodge prices were poorly correlated to copper prices; mainly due to the collars PD took to lock-in seemingly good copper prices… which cost them $300 million in one quarter alone!).

Source: Bloomberg

OK, by looking at the charts, one has to agree with Howard… size does matter, larger S&P500 companies are better rated than their smaller sized brethren. And, let’s not forget, if 2007 turns out as expected… a very difficult year, one should look for safe harbors, or AAA rated stocks: blacks and blues in the Bloomberg charts.

To be continued…