SAN FRANCISCO -- OK, so maybe "everybody" isn't smitten with bonds and certainly not the investing public. For the month ended Jan. 20, $10.5 billion flowed out of fixed-income funds while equity funds enjoyed inflows of $23.5 billion ($17.7 billion in U.S. equity funds), according to TrimTabs.com. Nevertheless, even some of the most bullish equity strategists on Wall Street are starting to embrace bonds, which rallied sharply again today. Meanwhile, equities appeared uncertain whether to rejoice that the Federal Reserve's rate hike was "only" 25 basis points or lament the Fed's statement , which indicated that market DJs will be playing this song of tightening again. Thomas McManus, equity portfolio strategist at Banc of America Securities, today announced he has lowered the equity portion of his recommended allocation to 75% from 80% and upped the fixed-income quotient to 25% from 20%. "Despite the pickup in stock prices over the past day or two, the recent downward slide for stocks is portending something more significant than just another 'buyable dip', in our view," McManus wrote in a report released Wednesday morning. "Over the next several weeks, the outlook for equities remains uncertain." Based on Friday's close (already a few percentage points lower than current levels), he assessed the near-term risk as 10% for the S&P 500 and up to 20% for the Nasdaq Composite. At the same time, the market strategist said bonds "have become increasingly attractive," showing particular affection for the 10-year bond vs. the 30-year. Separately, Edward Kerschner, chairman of investment policy at PaineWebber, also heaped praise on the prospects for bonds in a recent report, noting "bonds do exceptionally well in the 12 months following" an inversion of the yield curve. (And, yes, he acknowledged the inversion got a "technical jump-start" because of the Treasury Department's plans to reduce the supply of 30-year bonds.) McManus was traveling and Kerschner could not be reached for additional comment today.
Still Friendly After All These Years
Before you go fretting that these long-term bulls have been seduced by "the dark side," please note both market watchers took pains to express they maintain positive attitudes about stocks. McManus notes that -- at 75% -- even his lowered equity allocation is higher than most (true) and that a continued bond market rally will "help to broaden the stock market's leadership." In that light, he recommends investors "with sector flexibility" (a.k.a. those willing/able to invest in something other than tech) consider "attractive opportunities" in interest-rate-sensitive big-caps such as Chase ( CMB), Warner Lambert ( WLA) (which this evening announced plans to merge with Pfizer ( PFE)), Procter & Gamble ( PG), and Dominion Resources ( D). Banc of America has done no underwriting for the aforementioned. Kerschner, meanwhile, maintains a year-end target of 1600 for the S&P 500 and 12,500 for the Dow Jones Industrial Average (as well as a 25,000 Dow target for year-end 2010). Also, he notes the inversion of the yield curve is "not bad" for stocks, which rose an average of 3% for the three months following initial flattening/inversion in past instances, 7% six months thereafter and 16% during the ensuing year. "To the extent that the recent flattening of the curve suggests the 16-month correction in the bond market has ended and the tightening cycle is entering its terminal stage, this is positive for financial assets in general -- including stocks," he wrote.
Aesop Says. . .
Market players with bearish leanings will no doubt say McManus and Kerschner are trying to rationalize the Fed's tightening stance and the inversion of the yield curve into yet another positive for the stock market. Only history will show who is right. In the meantime, the moral of this story is to inform you -- in case you hadn't already noticed -- that even some of the most staunch bulls are thinking about diversification. It isn't a dirty word. (Really.)
If you bought PurchasePro.com ( PPRO) based solely on last night's column, you'd be a winner -- as the stock rose 3.3% today. But you'd also have done something foolish. The purpose of this column is to (hopefully) provide some guidance and insight but never to say "buy XYZ now" or "sell PDQ," or supplant traditional research (and common sense). Last night's story focused on the fact PurchasePro.com has added some high-profile bankers to its underwriting syndicate, which I (still) contend is a "positive." But that's not to say there aren't some "negatives" out there, too, notably, that in addition to its planned maximum 3.45 million secondary, a 6.2 million share lockup of PurchasePro.com shares expires on March 13. It is impossible to list every detail about any publicly traded story in a single article. Thus, it is folly to invest based on one article. Finally, before you email another tirade charging me with ulterior motives for writing about a given stock, please read the fine print below.