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Look Past the Global Gloom

Overseas woes might be in the forefront now, but don't overlook bullish opportunities like Weyerhaeuser


The Dow Jones Industrials were down 1% on Wednesday, while the Russell 2000 small-caps were only down by a fraction of that. Whenever you see a disparity like that, with the large-caps down a lot and the small-caps down just a fraction (or even up), it’s likely due to overseas concerns.

For instance, Alcoa (NYSE:AA), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) are very susceptible to fears of European recession or worse, whereas the small-caps on the Russell 2000 primarily play in the U.S. domestic market and are not as susceptible to overseas worries.

The most recent data suggest that business investment contracted slightly in the third quarter, probably on concerns over the fiscal cliff and the continuing euro crisis. I expect this is the start of a protracted decline, but with corporate profits at a relatively high level and most firms able to keep credit, business investment should really be leading the recovery, not lagging, so it’s a real concern.

Now, some analysts believe that lower capital goods orders are signaling a U.S. recession. It’s not that simple, because consumer confidence is up, building permits are up, stock prices (until this week) were up, and ISM new orders were also strongly up. All of those metrics are in conflict with the idea of a broader contraction.

So, let’s take a look at the Beige Book, a report issued eight times a year by the Federal Reserve. Reports from the 12 Federal Reserve districts indicated that economic activity generally expanded modestly since the last report. The New York district, for instance, noted a leveling off of economic activity and the Kansas City district indicated some slowing. But, in general, most districts reported that growth continued at a modest pace.

So, what’s the problem?

Again, it’s overseas. Concerns about slowing global growth have been the focus this week, particularly after warnings from the World Bank (on slower growth in China) and the International Monetary Fund (on the eurozone debt crisis).

The headlines bear out this trend. China said Wednesday that Fiat vehicle sales fell for the first time this year in September. Despite posting better-than-expected earnings, Alcoa fell 4.5% because it cut its global aluminum demand forecast from 7% to 6% due to slowing Chinese growth. Cummins (NYSE:CMI), a company that makes diesel engines, lowered its revenue and profit targets for the year, citing weaker demand in the North American and foreign commercial truck market.

As you can see, there are a lot of conflicting signals, so the small-caps’ relative outperformance while the large-caps were weakening is a symptom of overseas uncertainty. Once earnings season gets into full swing in the next week, I expect the bulls to come back to the fore and lead the market a little bit higher over the rest of the quarter.

I’m looking for the chance of a shallow dip this week and the beginning of next week, and then a rise into November with a potential peak at the election. But don’t let that dip keep you from getting positioned. One bullish name that I like right now is Weyerhaeuser (NYSE:WY).

[WY chart]

WY is a forestry products company that has enjoyed a strong run since June in tandem with the improved housing market. It supplies timber for lumber, among other products used in building and remodeling homes. It is also one of the few stocks in the complex that pays a dividend, though it is relatively small at 2.9%. I think WY is a good buy at $26.10 or less, and I’m looking for an initial target of $28.65.

Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage.

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