Advantage View:Where the Opportunity Is

Earnings have been very healthy on the back of cost-cutting,according to Steve Barry,co-chief investment officer at Goldman Sachs Asset Management.We see a market with stocks reacting individually.There's only so much you can do on the cost side.You've got to get some revenue growth.
I think you have to look beyond our borders.The U.S. is maybe half to a little more of our company's global results.The middle class of the emerging markets can help drive growth globally.
We see an improvement on the credit side of financials.We're in a world where investors want confirmation,rather than what may happen.Financials look to us to be very opportunistic here.That anticipatory dynamic is core to what we do.Financials are enterprises that behave and adapt,Mr.Barry believes.
Bob Albertson,a principal and chief strategist at Sandler O'Neill Partners,L.P., also likes the financials.He would go into banking.You're seeing accelerating signs of loan growth to businesses.It's a magnetic attraction to see that.The financial sector hasn't participated in the rally.
At the end of the day,credit demand is picking up.The excess capital is overflowing,and the banks don't know what to do with it,Mr.Albertson points out.
Goldman Sachs(GS),iShares Dow Jones U.S. Financial Sector Index Fund(IYF),iShares S&P Global Financials Sector Index Fund(IXG)

Conference Board Charts Downdraft

The Conference Board's Consumer Confidence Survey registered 87.3 last week-a drop from 105.3 a year ago,and down 8.3 from last month.A combination of high gas and food prices,coupled with a decline in home values and a nervous stock market,are giving consumers their most cautious frame of mind in two years.Billionaire Wilbur Ross of W L Ross and Company says the consumer is quite a bit overstretched.Spending has exceeded income growth for the past six years.Donald Ratajczak of Morgan Keegan feels that the pressures should create a recession,but the economy's internal dynamics have allowed for absorption to this point.Still,there is a 50-50 chance of a consumer-led recession.Goldman Sachs(GS) issued an analysis upping the chance of a recession to 40-45%.Gross Domestic Product growth will be below trend for an extended period-through 2008.Unemployment will rise to 5.5% from 4.7%.The housing downturn will worsen,and credit availability will decline.To Joe Battipaglia of Stifel Nicolaus,the U.S. is going through financial difficulty that will affect the general economy.We may be in a recession right now.That bonds are outperforming stocks is an indication of this.The equity risk premium is only 2.25%,yet the slowing economy suggests there is actually more risk than that.The correction of stock prices could have as much as 15% more to go.You'll see more rate cuts.Financial institutions will write more losses off.The economy won't pick up till the end of next year and into '09.A growth portfolio should contain 50% U.S. equities,25% international equities and 25% short term,risk averse instruments and gold.David Rosenberg of Merrill Lynch(MER) puts the odds of recession at 60%.Financial and brokerage stocks are already pricing it in.The Federal Reserve is pushing on a string,as we are in a rare environment of national real estate deflation and a credit crunch.Robert Albertson of Sandler O'Neill thinks the market will fall another 15%.The Federal Reserve can't do much about the mortgage problem.You should stockpile cash,as there is no pressing need to buy stocks right now.If you must buy them,then defensive areas such as tech and health care would be best.The iShares Lehman Brothers SHY and TIP bond funds have been good refuges for cash this year.