3 stocks for a stock picker's market

3 stocks for a stock picker's market
The recent rally is impressive but historically not surprising. The Fed's money printing continues, and investor risk-taking has resumed. This all calls for caution.

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By Bill Fleckenstein
MSN Money
Given the recent market gyrations and the sloppy and weak trading, I thought I'd home in on the action and examine what clues, if any, that action might afford.


How long can the market rally last?
Heading into earnings season, I expressed my belief that most companies were set up to win at "beat the number," which they did. What I was curious to see was how the market would respond, and, in essence, the good news was sold.

Thus I think there's a decent probability that we'll go into some sort of trading range for a while. Whether that turns out to be for a long while or becomes the start of a top, I don't know.

If we do slip into a trading range, I would be somewhat shocked if that resolved itself with a big move to the upside, though given the money printing that continues, I wouldn't rule out that possibility. Consequently, although I am open to the idea of looking for stocks to short, I intend to be extra-cautious.

Right now, I have no reasons to take short positions other than the macroconomic ones, including debt and unemployment, that I've written about before. That backdrop aside, the monetary backdrop is not conducive to shorting stocks because of all the money printing going on.

Even if the market turns out to be rangy or exhibits somewhat of a downward bias, it's possible, in light of the money printing, that some stocks will do OK to well while others will do OK to poorly.

Buying in single packages, not bulk
Thus my long positions in a few non-money-printing-beneficiary companies -- e.g., Microsoft (MSFT, news, msgs), Novatel Wireless (NVTL, news, msgs) and Eli Lilly (LLY, news, msgs) -- as I think we could experience, for the time being, a market of stocks rather than a stock market. (Read "The trouble with techs right now" for more on Lilly and tech stocks in general. I also discussed this outlook in a recent appearance on CNBC; watch the video here.)

In other words, we might witness the evolution of a true stock picker's market for the first time in years, rather than the market's being essentially "all one trade," which has been my view.

We'll see how this plays out, but I thought it was worth introducing some of those ideas as food for thought.


Referring to the market rally of 1930, he points out that if that market could bounce as much as it did, with as little help as it got from the Federal Reserve and the government in terms of large stimulus, then it's no surprise we've seen the rally that we've seen.

His outlook for the market: It's just a guess, but he thinks it might face some tougher going early next year.

"It is hard for me to see what will stop the charge to risk-taking this year," Grantham wrote. "With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen.


"Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. . . . My guess, though, is that the U.S. market will drop below fair value, which is a 22% decline (from the S&P 500 ($INX) level of 1,098 on Oct. 19)."

In summary, Grantham believes there is unfinished business on the downside, though he does not think we need to make a new low. His road map seems to be not terribly different from what my current thoughts are. Perhaps that means some variation of that theme will play out -- unless it doesn't.

Windows' 7th heaven
In Microsoft's earnings report last week, the company did far better than most people expected. Even though I was thinking Microsoft might possibly do a bit better than expected, I was surprised at how much better it did. What it will accomplish over the next year or so is pretty much ordained, though.

When you think about the fact that 40% of revenue is derived from a product that for close to a decade has basically been a dry hole (that being the operating system) and that now the company has a really fine product release (Windows 7), you can see how the future looks bright. (Microsoft is the publisher of MSN Money.)

Video: Bull market or bust? Fleckenstein's view

But when you add in that all of Microsoft's major products will see new versions released in the next year and that the company has some interesting new products as well, coupled with the fact that it has cut expenses, I believe Microsoft can do well regardless of the world economy.

Obviously, if the economy is strong, that will benefit the company, but if it's not particularly strong, the company will still do just fine. So, barring some stupid upside move in Microsoft, my ownership of that stock will probably be on autopilot for the next year, though I might have to change my mind down the road.

It has been amazing to me to watch the "dead fish" trip over themselves to avoid MSFT over the past year. I just wish I'd been even bolder when I first started talking about Microsoft a year ago, when it was half the price it is today. Of course, that's the way investing usually is. You never own enough of the winners, even if they look like reasonably safe layups.

At the time of publication, Bill Fleckenstein owned long positions in Microsoft, Eli Lilly and Novatel Wireless.