Contrary Buys: Stocks, Bonds, Japan

03/12/2004 12:00 am EST


Michael Norman

Publisher, Economic Contrarian Update

Michael Norman, editor of the Economic Contrarian Update,assesses commentary in the media and then takes positions opposite to the prevailing sentiment. Here’s the reasoning behind his bullish stance on pharmacy and food stocks, long-term Treasuries, and Japan.

"Our Contrarian Indices are based on market commentary in the media. High positive readings mean that there are lots of bullish news stories, headlines, and commentary. Contrarians go short when readings are positive. Negative readings mean that there is a preponderance of bearish headlines, news, and commentary. Usually, that is a good time to go long.

"The recent bond rally has been huge and it has caught a lot of investors by surprise. What is very instructive, I think, is that bonds are rallying and yields are falling despite the Fed's insistence that perhaps it should be the other way around. This move is very important, because it is not being ‘juiced’ by Fed statements, as was the case last May. On the contrary, the market is moving against the view of the Fed, probably because of an underlying slowdown in economic growth, which the data seems to be corroborating. Furthermore, it means that the bond rally could go parabolic when the Fed finally comes to realize that the true problem remains deflation, not inflation. What should investors do now? I remain fixed in my view that investors should buy Treasuries–particularly the longer dated bonds for now.

"The action in the overall stock market now–with leading tech and economically sensitive names falling significantly–is not a good sign for the economy. The data has been deteriorating. The problem, however, is that the perception is still bullish; there is still a widespread belief that the economy is not just growing but accelerating its growth. There is a widespread belief that the tax cuts are rippling through the economy and that corporate profits will continue expanding, as will business spending, when they won't. This erroneous view of the business environment, combined with the high price of stocks, makes the market ripe for correction.

"Within stocks, investors should buy the retail pharmacies and food stocks, particularly with the economy slowing. That's where you should be. With regard to the retail pharmacy sector, the Federal government will be spending upwards of $500 billion for prescription medications for seniors over the next ten years. That is going to happen regardless of the economic environment: Growth, recession, depression, it doesn't matter. That money's going in. That's half a trillion dollars, or about a five times increase in the industry as represented by the total sales of the leading companies right now. This is a slam dunk. I like Rite-Aid (RAD NYSE), Walgreen's (WAG NYSE), CVS (CVS NYSE), and Longs Drugs (LDG NYSE). You should own all of these. Keep accumulating them and just put them away. You will retire from them. Finally, I like the food stocks. I like Winn-Dixie (WIN NYSE), Kroger (KR NYSE), Safeway (SWY NYSE), and Kraft Foods (KFT NYSE). These companies will benefit if the economy slows. Less people will be eating out at restaurants. That means there will be cost cutting by households and more home cooking. That's why food stocks are a buy and tech stocks are not.

"One international market that I continue to like is Japan, where things are finally improving. The dollar's recent strength is likely due to the unwinding of a massive dollar short position, and a growing perception that in Japan, monetary growth rates will be rising faster than in the US. This shifting of stimulus to Japan and cutbacks in the US, is bullish for the dollar and bullish for Japanese stocks. It is quite likely that, over time, the problem will not be one of a too-weak dollar, but rather, that the yen will become too weak and the dollar too strong. Growth in Japan could rise substantially, which would finally give the Bank of Japan leeway to raise interest rates for the first time in years. The Japanese bond market would sell off sharply, pushing even more money into Japanese stocks. I remain staunchly bullish on Japan and think that the market at just over 11,000 looks like the best bet in the world right now. Japan's recovery might be bumpy. I would buy pullbacks in the Japanese market and continue building a position here for the long term. Investors should consider these Japanese ADRs:

Honda (HMC NYSE)
Toyota (TM NYSE)
Hitachi (HIT NYSE)
Sega (SEGNY Other OTC)
Mitsubishi Tokyo Financial (MTF NYSE)
Milliea Holdings (MLEA NASDAQ)
Bridgestone (BRDCY Other OTC)
Canon (CAJ NYSE)

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