Where's a safe harbor now?

By Jon Markman

In the past three months, we've seen tech stocks come unplugged, bank shares lose interest, energy get zapped, home builders collapse and retailers sell at wholesale. All make sense to any follower of the classic investment-cycle playbook, as we're supposed to see companies dependent on financing and discretionary purchases suffer in the unwinding of a credit bubble. No big deal.

But in the past three weeks, a totally different dynamic has emerged that has stunned many in the big-money crowd, and it is this: Companies whose fortunes are tied to the most basic human needs -- and I don't mean cable television and casino gambling -- have suddenly hit the skids.

With no need to impress their mortgage brokers anymore, people have apparently stopped brushing their teeth, drinking coffee, eating cookies, lighting their homes and taking their meds. The likes of Procter & Gamble (PG, news, msgs), Kraft Foods (KFT, news, msgs), Consolidated Edison (ED, news, msgs), PepsiCo (PEP, news, msgs) and Eli Lilly (LLY, news, msgs) were savaged in January by investors who apparently didn't get the memo that companies making consumer staples and producing power were supposed to prosper in good times and bad.

So what put the uh-oh in Oreos? And where are the safe harbors for your money if you can't depend on steady demand for shampoo, corn chips and antidepressants?

Recession: Are we there yet?

The answer to the first question is that there are two major sources of anxiety right now -- as if one weren't enough. The first is the credit contraction, which might have hit close to its low last week (so long as there are no major blowups in the credit-default-swap market that I described last week). The second, equally damaging, has been the fear of a decline in manufacturing production and jobs, otherwise known as a recession. Add a rise in inflation, which slashes price-earnings multiples by cutting profit margins, and you have a very toxic mix even for consumer-staples makers.

• Talk back: Where are you putting your money now?

The way out of this mess for investors is treacherous. In a bear market, after all, 90% of stocks go down. Common sense dictates that while traders can make a lot of money by flexibly playing the short-term volatility -- as I describe in my new book -- long-term investors should stick with the 10% of companies that are in favor or hang out in cash.

To decide if you're with me on this, you need to determine whether a recession is already here, en route or not coming at all. For if you decide it's not, you might as well plow into banks, builders and tech companies right now because the massive decline since November will have proved to be a clever fake-out.

Let's look at the evidence. Through the start of this week, companies in the S&P 500 Index ($INX) that had reported fourth-quarter earnings were down a stunning 20.5%. Just to show you how much this caught most investors by surprise, consider that on Oct. 1, analysts collectively expected large companies to clock in with a growth rate of 11.5% in the fourth quarter. Even on Jan. 1, after it was already clear that holiday revenue in malls had been poor, analysts expected a 9.4% decline in big-company growth.

This economy will self-destruct in . . .

This shock at how poor earnings results have been has taken investors' breaths away -- and led them to shoot first, shoot later and kick companies' nearly dead bodies on the ground before getting around to asking questions.

Home builder Lennar (LEN, news, msgs), for example, reported it lost $7.92 per share in the fourth quarter, making a mockery of analysts' expectations of a loss of $1.65 per share. Overall, companies in the banking and brokerage sector have confessed losses of $50 billion in the fourth quarter, and there are still a few left to report. In a normal quarter, all companies, on average, report earnings 3.3% above estimates. This year, earnings are coming in 26% below estimates.

Grim, right? Well, not so fast. The view from Pollyanna's side of the table is that if Congress can ram through a broad-based tax-rebate package and mail those checks in the next two months -- rather than dragging out the negotiating and check-cutting process until summer -- then there's a slim possibility that it can save the nation from the sort of calamity that tosses hundreds of thousands of people out of work and throws the switch on a market meltdown.

Continued: Why pessimism may be good

 1 | 2 | next >