is the latest in a string of companies to fall after being driven higher by momentum, Aaron Task told
"RealMoney" radio show listeners Thursday.
Task, the co-executive editor of
, is filling in for Jim Cramer this week.
He said that homebuilders, energy stocks, the "
have fallen prey to similar fates and that it's time to start taking a hard look at companies that have had tremendous runs higher.
Looking at the broader market picture, Task pointed out that a low jobless claims reading also may work against the market, because it could ramp up inflation worries and convince the
to raise interest rates.
Task explained that even though less unemployment is good for Main Street, the Fed is worried that Americans with additional money in their pockets will "rush out to spend it ... and that's inflationary."
He also said that now might not be the time to invest in small-cap stocks, even though the Russell 2000 approached all-time highs earlier in the session, and he added that it is an ongoing debate on Wall Street whether to stick with small and midsize companies or move into big-cap names.
One reason Task believes that smaller companies will falter is because he sees the Fed raising rates higher than expected and putting the brakes on the economy.
If this happens, investors tend to gravitate toward bigger names that they perceive to be safe, said Task.
He cited Tom McManus at
Bank of America
, who said in a recent report that he also believes small-cap names carry greater risks in this environment.
Historically speaking, when commodity prices rise faster than consumer inflation, that's good for smaller companies because it's tougher for big companies to pass on costs to consumers, said Task in citing the report.
But once consumer inflation ticks higher, it usually means we're headed toward recession or a bear market, which is better for larger-cap stocks, the report said.
Plus, smaller companies have gotten more expensive since the bubble burst in 2000, while large-cap companies have gotten cheaper, according to McManus' report.
Room at the Top?
Task welcomed Paul Desmond, president of Lowry's Reports, to the show. Desmond is known as a "technician's technician," and made a few interesting observations about market tops.
Desmond said that the current market advance is narrowing, and that we don't have broad-based participation in the rally that we once saw. He added that this erosion is typical when the market nears a top.
His firm looked at 14 bull market tops from 1920 to 2000 and found that the outstanding characteristic was a high level of selectivity, meaning that by the time the market hit its peak, all of the money had really headed into just a few stocks.
The average number of stocks making new highs at the top was six, Desmond said. If this is the case, then the idea that you want to be a seller on the day the market peaks is a fallacy, Task added.
Desmond agreed, saying that over the last 14 tops, 22% of stocks were already off 20% or more the day the
Cody Willard, president of CL Willard Capital and a tech and telecom contributor to
, joined Task to talk about the places in the markets he still finds attractive.
"I haven't done a lot of adjusting to the portfolio," Willard said, adding that several of his picks are off as much as 20%.
"What I try to focus on almost exclusively is to find some great companies ... and over time, they'll hopefully grow faster than inflation and make me a lot of money," he said.
Because he has faith in the intermediate-term fundamentals, Willard said that he's using these downturns to add to his position. For example, he owns Apple,
Willard added that there's too much attention on data points such as oil inventory numbers, arguing that only oil traders can extrapolate meaningful analysis from government oil inventory numbers.
A caller wanted to know how to play
ahead of its earnings report.
Task said he generally shies away from buying or selling ahead of earnings announcements because you never know how the market will react, even if the earnings report seems positive.
Willard told another caller that
is an interesting company, but that he is not comfortable with its potential for growth. He does not own and is not short the stock.
Agere was spun out of
, and Willard believes that it has a lot of Lucent's problems.
"Legacy is sometimes a problem," he added.
A caller wanted to know whether
is a good play on the aerospace sector.
Task said the he would rather buy
Life and Debt
Task ended the show with a look at the bond market, which had sunk because of inflation fears and the fact that foreign investors had steered clear of the afternoon's Treasury auction of five-year notes.
The flip side of wanting tax cuts while spending big and paying for two wars is that foreign nations have been lending the U.S. the cash it needs for all of this, he said.
At the end of 2004, foreigners held $1.9 trillion worth of U.S. stocks, $2.2 trillion in Treasuries, more than $2 trillion in corporate bonds and nearly $3 trillion of debt owed to banks and other lenders, he said.
Moreover, foreign investors own 52% of all U.S. government debt outstanding, up from less than 35% in 2001, he added.
It is a big worry for the bears that foreigners will stop lending the U.S. money, which could lead to higher interest rates and serious problems for the economy.
This is one reason why the Dubai Port controversy is so sensitive, he said. Even while politicians seek to keep foreigners from having ownership of our ports, they have very quietly become massive owners of our economy.
And even though legislators have been espousing anti-foreign-ownership sentiment, from an economic standpoint, the U.S. needs foreign buyers to own pieces of our economy.
Aaron L. Task is the co-executive editor of TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships.
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