Wednesday, February 28, 2007

Color on sell-off from Morgan Stanley

- Morgan Stanley notes yesterday's 3%-4% drop in the popular stock averages is a wake-up call for a market that had become far too complacent, in ther view. The firm has been
defensively positioned for some time, and the sharp move now gives thm an opportunity to reassess their position and weightings.

Firm concludes that it is too early to increase equity weightings (unless an investor has a long time horizon, low exposure to equities and moderately high tolerance for risk), as valuations and earnings forecasts still appear vulnerable to a decelerating economy and the potential correction of a very high level of investor risk appetite that has prevailed for the past several months.

Recession or not? Alan Greenspan's comments Monday - that the US economy might slip into recession before the end of 2007 - garnered a lot of attention, but probably for the wrong reason. Most economists will admit the chance is real, but their published forecasts imply a certainty that Greenspan won't endorse. Rather, he suggests that forecasting that far into the future is 'very precarious.' Now, that is something to consider; is there an ample margin of safety for stocks given the economic uncertainty?

High quality, large capitalization stocks with diversified, defensive earnings streams, reasonable growth expectations and visible cash flow (buybacks and importantly, dividends) are the characteristics the firm seeks in stocks to add to portfolios now. They would avoid/reduce: companies that depend on commodity pricing power to drive earnings gains, cyclical earnings risk and small/midcap stocks that have seen substantial price/earnings multiple expansion over the past 5-7 years.

Notablecalls: Not actionable but good to know category. Gives some color on how the analyst community sees things.

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