IT'S TIME TO GET DEFENSIVE IN THIS MARKET OVERLY CONCERNED ABOUT THE "R" WORD

1/13/08 Sunday

By Dave Harris

The "R" stands for recession, and that's what concerns investors in this volatile market. The Fed chairman Ben Benranke affirmed a cut in rates will happen in the near term. The central bank will meet January 29^th-30^th.  The expected cut would come in response to downside risk to economic growth. To avoid dragging the economy into a recession, the central bank would act, so said Bernanke. Currently, the Fed funds rate is at 4.25 percent. I'm expecting a 50 basis point cut because they need to be more aggressive, even if inflation is the Fed's major concern. That's why the economic data in the week ahead is especially important. The PPI (producer price index) is Tuesday, and the CPI (consumer price index) is on tap for Wednesday. I suspect that if these readings suggest heavy inflation, the market will react to the downside. The Fed is in a tough spot.  When inflation pressures are high, it's hard for the central bank to justify cutting rates. Cutting rates makes money cheaper to get, and lowers the value of the dollar. But they need to cut enough to maintain economic growth and avoid a recession. Stocks have taken a big hit on recession fears. Let's not kid ourselves. It's a tough economic environment. So I'm recommending you take a more defensive direction in your portfolio.

My favorite sectors are healthcare, consumer staples and utilities. In healthcare I like Johnson and Johnson (JNJ). With a P/E of only 19, it's the cheapest of the bunch and best of breed. For consumer staples, I like Proctor and Gamble (PG) here at $70. They're everything from beauty products to cleaners to coffee and snacks. This stock will go up as the street worries about recession. For utilities, Exelon (EXC) is at a great price around $84. I would buy all these stocks here.

Holiday sales were generally weak. The Gap (GPS) had a horrible 6 percent decline in same-store sales. Limited Brands (LTD), operator of Bath and Body Works and Victoria’s Secret, reported a dismal 8 percent sales decline. I would sell those stocks and swap into Wal-Mart (WMT), which said sales rose 2.4 percent and above views. In times of higher energy prices, I believe Wal-Mart will benefit from the today's cautious consumer. Along with the broader market, the stock fell Friday by .68 to $47.72 per share. But be careful putting money into the stores now. Wal-Mart is an exception. I also like Costco (COST), which had a healthy 7 percent same-store sales increase. I'm particularly impressed with success in their exercise category and sporting goods items. The stock is looking pretty attractive here at $66.

This week it's earnings from the likes of chip maker Intel (INTC), bank Wells Fargo (WFC), International Business Machines (IBM), and General Electric (GE). Citigroup (C), the troubled financial institution, continues looking for big time foreign investors. I just heard the China Development Bank may add $2 billion. Citigroup’s fourth quarter results, expectedly hurt by big write-downs, will be announced Tuesday.