We have been reading over this weekends Wall Street about the jump in rates with the 10 year moving to 5.10%, roughly.  Pundits are now looking toward the rebuild in inventory, firm cap-ex spending, exports and the slowing of foreign import consumption to boost growth for the 2nd quarter.  One of the articles sites average mortgage rate where 8% - 9% through the early 90’s.  This all may be true and positive.  However, most forecast predict the economy to run below trend line with the few brave soles calling for a recession.  In our asset allocation model we are favoring Large Cap stocks over all other asset classes with a concentration specifically on Large Cap Growth.  The two ETF’s we use are (IVE) and (IVW). 

Large Cap stocks in general are appealing for many reasons.  First we feel they can weather slow growth or recession better than other equity asset classes.  Typically, Large Cap stocks are dominated by diversified international companies, so decline in the dollar and/or a pick up in foreign markets should give them an extra kick.  Given the possible trends mentioned above, they are set to capitalize on strong domestic and international exposure.  Further more, compared to other equity asset classes and by historical standards, they are relatively cheap.  Additionally, Large Cap stocks can have better pricing power vs their smaller brethren. 

We think that Large Cap Growth is due after years of under performance against Large Value.  Additionally, we are very worried about the over weight position in financials for Large Value.  In the top 10 holdings for Large Value are C, BAC, JPM, Wells.  Although many people say rising rates help banks the yield curve looks relatively flat to us.  If mortgages and lending continue to cool from higher rates, it will have to effect the banks bottom line.  The largest sectors in (IVW) are technology and health care with the 4th being oil & gas.  These are areas we are excited about and see both short term and long term out performance in the sectors.  Should companies start to spend on cap-ex we feel technology will be the primary beneficiary.  Oil and Gas still have at least another year or two of above trend earning power driven by elevated commodity prices.  Shouldn’t everyone be excited about healthcare’s long term prospects? (pricing power-big pharma or not).  We have included the allocations below.              

 Large Value (IVE)

Sector			% of Total
		FINANCIALS	32.67%
		INDUSTRIALS	12.89%
		Consumer Services	9.43%
		TECHNOLOGY	9.30%
		TELECOMMUNICATIONS	7.03%
		HEALTH CARE	6.44%
		UTILITIES	6.27%
		OIL & GAS	5.83%
		CONSUMER GOODS	5.57%
		BASIC MATERIALS	4.26%

Large Growth (IVW)

Sector			% of Total
		TECHNOLOGY	17.94%
		HEALTH CARE	16.77%
		Consumer Services	14.13%
		OIL & GAS	13.19%
		CONSUMER GOODS	12.78%
		INDUSTRIALS	11.30%
		FINANCIALS	10.35%
		BASIC MATERIALS	1.76%
		UTILITIES	1.03%
		Non Classified Equity	0.51%

This entry was posted on Sunday, June 10th, 2007 at 2:22 pm and is filed under Exchange Traded Funds, Strategic & Tactical Maneuvers. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.