Though I have not seen it for myself, I completely believe reports that a bar in Santiago, Chile is serving drinks specifically named to beat the recession blues. The Catedral bar (appropriately in Santiago’s financial corridor) has created what they’re calling a “Crisis Menu”, which offers (again, appropriately) discounted drinks to help ease the pain of an economic implosion. Some of the cocktail monikers include “The Subprime”, “In Recession”, “Madoff Nectar”, “Down Jones”, and “Bailout”.

There’s an old saying, ‘When life gives you lemons, make lemonade.’ I’m not sure what life would have to be giving us that’s so potent that we can make a mixed drink out of it, but this recession is obviously more than just one of life’s little lemons.

Anyway, the rumor is that alcohol sales have not been hit at all despite the recession. In fact, taking a cue from Chile’s Catedral, I’m wondering if the economic crunch is actually the reason for a strong liquor and alcohol market. It wouldn’t be unusual if it was though - alcohol sales usually do improve in a recession (liquor more so than beer). Consumers are more apt to drink at home during a recession though, as opposed to buying a drink at a bar or restaurant.

All joking aside, there may be an investment opportunity built into this quirk. The brewer and vintner stocks haven’t really been acting like things have been fine (i.e. they sank in the latter part of last year), but that may have been more market-related than performance related. Now with the selling frenzy over and cooler heads starting to prevail, I’m wondering if there are some big bargains in this group.

Molson Coors Brewing Company (NYSE:TAP) boasts a twelve-month P/E of 16.40, and a profit margin of 18.8% for their last quarter. Foreign brewers seem to have created a great deal of success too. Take Fomento Economico Mexicano (NYSE:FMX) and Companhia de Bebidas Das Ameri (NYSE:ABV) for instance - both of them have numbers comparable to Molson’s.

Brown-Forman Corp. (NYSE:BF.B) sells stuff that’s a little harder than beer, but has also managed to do well lately. And, they may continue to do well according to an industry research group. The Vinexpo/IWSR (which tracks wine and spirits sales trends) recently forecasted that consumption of hard liquor and wine in the U.S. will grow by more than 10% between now and 2012.

An overly optimistic outlook? Not necessarily. Spirit sales grew by more than that between 2003 and 2007, when we were coming out of the last recession. So, the pace doesn’t seem unreasonable now. If the economy really starts to recover in a big way, the pace could be even more impressive.

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Not that we should expect any industry to do particularly well as of the latter part of last year, but have you guys been keeping tabs on the microchip and computer memory makers like Intel (INTC) and Micron (MU)? It’s not so much that they’re reporting poor numbers - we all saw that coming. It’s that the forecasts seem to keep being adjusted lower as inventory piles up.

It was Micron that got the ball rolling a few days ago. They acknowledged they had to cut prices last quarter to compete in an oversaturated memory and chip market; a nervous consumer base didn’t help either. Yesterday Standard Microsystems (SMSC) reported a terrible third quarter - revenues were down 20%, and income (non-GAAP) was down more than 30%. The company cited weak demand (again) as the primary culprit… an they’re sitting on too much inventory too. Then Intel told us today their fourth quarter sales would be about 23% short of last years. Though Intel didn’t directly discuss any inventory problems, they did say their customers didn’t order as much as they had last year. Translation - their customers had enough of whatever they’d normally buy from Intel, which may well mean Intel is also sitting on more goods than they really care to.

I’ll say this much for the computer technology and part makers… they made damn sure they didn’t run short of the goods. Unfortunately, those kinds of things - technology ‘toys’ - are the first to suffer when a recession gets ugly. Now they’re all sitting on too much of their product, which may well become outdated by the time they get around to selling it.

Of the three companies I mentioned, only one of them gave a clear forecast of what to expect next quarter - and that was a grim forecast. Standard Microsystems is planning on quarterly revenue being down 40% to 70% the next tune they report. Can Micron, Intel, or any of the others be in a drastically different boat? Doubtful.

Don’t hear me wrong - it’s not that I think every company is going to get crushed. In fact, I remain optimistic about 2009. It’s just that some companies that overshot with their projected demand are going to really struggle to get through all their inventory on hand. Be a little concerned if you own - or are thinking about owning - a tech company that stocks inventory months in advance…. the demand just isn’t there.

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Though the new year technically started on Friday, squeezing a trading day in after a holiday and before a weekend doesn’t quite help us out if we were looking for early clues about sector leadership. As fas as I’m concerned, today’s the first real day of trading in 2009. So, the clues from today’s activity mean a whole lot more to me.

In any case, if there are any clues we should take at face value from today’s small cap leaders, then here’s the list you’ve been waiting for…. the best-of-the best industries from the world of small cap stocks.

Some of these arenas I’m not surprised to see get a good start right out of the gate. Others I’m not so sure about. Take a look for yourself, but keep reading for my follow-up thoughts.

        Name                                  %Chg: 1 day      %Chg: 4 wk      3-Mon Pct Chg

1. Oil & Gas Drilling                           8.19%             27.19%              -28.12%
2. Automobiles Industry                    6.31%             17.75%              -10.97%
3. Marine Industry                            5.99%             26.38%              -12.33%
4. Oil & Gas Explore & Prod               5.61%             26.39%              -24.20%
5. Homebuilding                               5.36%             -1.64%              -23.23%
6. Diversified Financial Srvcs Ind        4.30%             5.23%                -1.14%
7. Energy Equip & Service Industry    4.61%             24.41%              -16.50%
8. Energy Sector                              4.45%             24.59%              -16.37%
9. Oil, Gas & Consumable Fuels Ind    4.20%             24.84%              -16.99%
10. Oil & Gas Equip & Svcs                  4.00%             23.92%              -13.93%
11. Computer Hardware                      3.57%             12.15%              -15.42%
12. Cstr&Frm Mchnry & Hvy Tks          3.52%             17.43%               0.26%

Energy doesn’t shock me one bit. I predicted a modest recovery in oil prices with my predictions for the new year, which would pull the energy sector’s stocks along for the ride. I trust that strength, even if I still expect a lot of back-and-forth.

Automobiles doesn’t entirely shock me either. The ‘worst is over’ mentality prevails thanks to a government bailout. Fundamentally speaking though, the worst is not yet over. However, America’s love of turn-around stories may be enough to prop those stocks up for a while. A trade? Maybe. An investment? Not yet.

Homebuilding? Same as automobiles…..America loves a turn-around story more than they love results. I do think housing is at or near a bottom. It may take much longer for investors to see that we just don’t need as many houses or homebuilders as we currently have.

Financial stocks really are poised for a better 2009, though it’s still apt to be hit and miss from one stock to the next. I trust the early strength though.
As for computer hardware, I don’t see much longevity to today’s strength at all. Homebuilders and auto-makers can ride the euphoria train for a while. Hardware makers, on the other hand, have too much inventory, and not enough customers. Even if the economy turns considerably better, slightly-more-advanced technology is low on the list of priorities right now.

Farm machinery and trucks? Yeah, I can see that trend lasting a while. I predicted agricultural stocks would remain hot in 2009, which means ag equipment could as well.

Anyway, it’s just one day - not to be etched in stone. I just thought it was kind of interesting to see which small cap industries jumped on the first day of real trading. As I said on Friday though, January is an erratic month, full of ups and downs. The list above could change dramatically when I do my “monthly small cap leaders” list at the end of January.

If you’ve got any special insight about individual small cap companies that are driving the results above, please chime in below.

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Though the market was in the red yesterday - again - not every industry was giving up ground…. particularly among small caps. The S&P Small Cap Distributor Index was up nicely (4.7%) on Monday, as it has been for the last four weeks. Were it just Monday we were seeing this strength, I might dismiss it as a mere curiosity. But to see this oddball group perform that consistently in this environment? I think it’s worth a closer look, just to see of there’s something worth adding to our portfolio.

First of all, a ‘distributor’ in this sense is a technology and electronics distributor… mostly. The actual definition is a little blurry, but the group includes the likes of Tech Data (TECD), Ingram-Micro (IM), ScanSource (SCSC), and GTSI Corp. (GTSI). (Be sure not to confuse these stocks with food and beverage distributors.)

However, it’s specifically the small caps in this group that have been on a month-long tear.

As for Monday’s pop from the small cap distributors, it’s attributable to two - and only two - names….Peerless Systems (PRLS), and Pomeroy IT Solutions (PMRY). They were up 3.7% and 2.4%, respectively. Impressive numbers, though the fact that they’re both priced under $5.00 means a small gain goes a long way in percentage terms. Still…

Both are ‘of interest’. I’d lump these two smaller names into a more speculative category, while based on the intermediate-term strength, I’d be willing to take a look at a couple of the larger names mentioned above as a less-speculative possibility.

It’s not just the chart I’m digging though. The underlying results for these companies are compelling too. I don’t have time to get all the way into the rationale, so I’ll summarize it with a “now and later” look at their price multiples (a.k.a. P/E ratios). You’ll find that data in the nearby table.

My first thought was that the ‘N/A’ was a nice way of saying nobody expected profitability from that respective company. As it turns out though, ‘NA’ actually meant ‘not available’ in this particular instance. These companies are small enough - and boring enough - to avoid analyst coverage. However, I know for a fact that GTSI and Pomeroy were both profitable last quarter, though they had not been profitable at some point earlier in the year (i.e. they’re not imploding).
Now, do I believe even the adjusted projected-P/Es? I don’t distrust the genuineness of the guess, though I don’t take it to heart either. I think there’s still an overly-optimistic bias from these companies as well as from the few analysts following these companies.

At the same time though, I do firmly feel that at least a couple of these names will be surprising leaders in 2009. I believe the worst of any recession has already been priced in, and I suspect we’re at the beginning of an economic upswing. As the global economy starts to improve, I think many of the individual company results will be no worse than meeting expectations, and possibly exceeding them.

What I like best, however, is that nobody else is even interested in these names….analysts, or investors. It’s still hit-and-miss within the group, but I like the overall group quite a bit because the bulk of the outside world hasn’t meddled with them yet.

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This certainly isn’t the kind of thing the media is going to cover - particularly when the Blagojevich debacle is just getting juicy - so I’ll bring it to your attention …. coal stocks are starting to smolder again. Could it be an omen of a fully-stoked fire? Methinks it could be, which is why I want to put the industry back on your radar. (I put it on your radar back in September, but never got a chance until now to follow up.)

Just so you know, coal stocks are well up this week-to-date. That’s not a big deal, as a lot of groups are up this week. However, there are two key points of interest about the Dow Jones Coal Index (DJUSCL) to make. First, it is THE leading group for the week so far, and second, these stocks may be waaaayyyyy undervalued. They took more than their fair share of drubbing since June, so I have to wonder if a recovery is going to be particularly strong. I think it will be - it has been so far anyway.

Take a look at the chart of the Dow Jones Coal Index… for the first time in months we’re seeing higher highs and higher lows. It looks a little like the gain over the last few days may be pushing the chart’s limits, so I expect a small pullback from here. As long as we don’t make a lower low though, I think this is something that’s more than a little interesting. In fact, as long as the 20-day line (blue) holds up as support, I’ll likely buy on a dip. Why there? That line has been a big factor - bearish and bullish - for months now.

I also wanted to throw in a chart of Arch Coal (ACI). This is an idea we were kicking around a few days ago as a possible ‘official’ site trade. We opted for the ProShare Ultra 500 ETF (SSO) instead, as we felt better about a market call than a sector call. However, we may add ACI to our official pick list soon - if this chart does what I think it’s going to do. Keep this one on your back pocket, along with the Market Vectors Coal ETF (KOL) [not shown]. Either have a lot of potential.

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Want to know what’s been the hottest industry group so far in November? It’s the mid-cap internet and catalog retailers. The average stock in this cluster is up 17.4% month-to-date, according to my Reuters information. That’s only fourth among about 300 industry and market cap groups, most of which are still in the hole for the month. The reason? I think the obvious one is the right one … online and out-of-store shopping - as an investment - tends to get a little more attention when more consumers start doing it themselves as a consumer choice. It’s a ridiculous reason, as online and catalog shopping is still at the mercy of a recession, but that hasn’t prevented these names from blasting off.

And what should we expect this year in terms of online sales trends? Nielsen says their polled consumers are planning to spend about 41% of their holiday shopping budget online, compared to 39% for last year. As for the number of people who said they’d spend the majority of this year’s shopping budget online, that number increased from 32% to 36%.

All well and good, but what about the raw numbers? Are consumers going to spend less or more - total - online? Well, it depends. Nielsen also said these improving web-shopping trends point to a slightly higher online sales total than we saw in 2007, even though in-store retail sales are expected to be lower.

Unfortunately, there are two sets of data that are not available that I’d still like to see.

The first set is, how much of this year’s online shopping is going to be done with traditional retailers who have stores anyway? Of the three sites that are expected to see the biggest increase in web-shopping (Amazon, Wal-Mart and Barnes & Noble), two of them are also prolific storefront retailers; only Amazon is purely virtual.

The second set of data I’m curious about is how much paper catalog retail shopping is going to be transacted this year? I know most paper catalogs are relics, and all of them are eventually going to follow in the footsteps of the now-defunct J. Peterman. However, they’re still a factor… at least when it comes to that 17.4% month-to-date gain I mentioned above.

Anyway, some of the stocks in the group include the big players like Amazon (AMZN), eBay (EBAY), and IAC/Interactive (IACI). The ‘mid caps’ are the likes of Overstock.com (OSTK), Systemax (SYX), and GSI Commerce (GSIC).

I still don’t think owning these companies based any recent online-shopping trend, data, or season is a sound reason to own any of them. In my experience, if it’s “too obvious” then there’s no real value to the premise. However, if enough other people think it is a good reason to own ‘em, it may well make for a good short-term trade.

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Back on October 27th we made a handful of industry picks that we expected to do well even if the overall stock market stayed weak. Since then - with one exception - those picks have indeed done better than the market (the S&P 500). On the other hand, it’s a dubious honor … they all still lost ground - they just lost a lot less ground than the market.

Still, to see that kind of relative performance still suggests the strategy has merit. It’s just that the market was hit so hard, so quickly, that not much of anything could come up for air.

Here’s the overall performance of our picks for November-to-data, along with the S&P 500. Airlines were the only stocks in our list that underperformed.

All those picks are still valid too. Why? The recession isn’t over, and perhaps the bear market isn’t over either. These are all groups that fare better in the kind of environment. Even the airlines can do well in a recession, as long as oil stays cheap.

That said, here are the best of the best for the last month. Frankly, I don’t trust them all. The market got a bullish Obama nudge, but it’ll take more than that to keep stocks headed north. However, momentum is momentum. Maybe some of these groups are making gains now knowing that the economic storm isn’t over yet. I know water’s on there twice … I’m sure there’s overlap, but those two indices aren’t quite the same.

As I mentioned with our last look at this data, spotting sector rotation is a journey - not a destination. This is an ongoing exercise, as there’s always a group falling in and out of favor. I’ll keep you in tune as much as I can.

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Yesterday I opened this can of worms, vowing to open it a little further today when we got more data. Well, we did indeed get more data about last month’s and last quarter’s retail sales. October’s retail sales fell by 2.8%… the biggest plunge ever. What had been the biggest drop-off ever was the 2.65% dip in November of 2001. Nordstrom (JWN), JC Penney (JCP), Abercrombie (ANF), and Kohl’s (KSS) all reported numbers that were well under last year’s comparable results, though they at least met or exceeded the lowered expectation. Here’s the basic breakdown…

                               Actual EPS      Estimated EPS   Same Quarter Year Ago EPS
Nordstrom                  $0.33              $0.31                        $0.68
JC Penney                  $0.55              $0.54                        $1.17
Abercrombie                $0.72              $0.71                        $1.29
Kohl’s                         $0.52              $0.51                        $0.61

Clearly nobody’s doing great, though two names stick out - Kohl’s, and Wal-Mart (which was specifically mentioned in yesterday’s look).

Based on these results, I think we can take the hint that the consumer is feeling real pain right now, which translates into pain for these companies. That’s tough part about being in a discretionary business … even when things get challenging, the “I want it” mentality can drive sales. Now though, these stores are dealing with “I just don’t have the money” problem - a different beast altogether.

The reason Kohl’s and Wal-Mart have been able to survive - and dare I say thrive - is simply that they’re more able to meet basic needs at a reasonable cost. TJX Companies (TJX) deserves an honorable mention as well on that front. For the retailers that sell goods on the upper end of the price scale though, it’s ugly. The numbers don’t lie.

There are a few more retailers to report next week; I’ll keep examining the data as long is it’s relevant.

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Not that three retailers’ results mean everything, but in looking at who did well and who didn’t, I have to wonder if the consumer is just playing dead, or is actually dead. Most spenders say they’re cutting back, but never actually do so. This time around they may be putting they’re money where their mouth…. or I guess not putting their money where their mouth is, as the case may be.

There are a handful of retailers who report later today and tomorrow (like Kohl’s, Nordstrom, Abercrombie and Penneys), so I’ll update this list later on. I want to go ahead and plant the seeds now though - check out how retailers have fared, which is almost entirely a function of top line sales…

                         Actual Quart. EPS        Estimated Quart. EPS       Comp. Quart. 1 Year Ago
Macy’s (M)                 $(0.08)                        $(0.19)                                $0.08
Wal-Mart (WMT)         $0.80                          $0.76                                  $0.70
TJX Cos. (TJX)            $0.54                           $0.55                                  $0.54

Not that Macy’s (M) is uber-high-end, but let’s face it - it’s not a discounter like Wal-Mart (WMT) or TJ Maxx (TJX). I just find it interesting that the brand-name department stores and specialty stores were specifically doing well through the early part of this year, while discount chains were turning in mediocre performance. Then a few weeks ago, all those roles got reversed.

An obvious consequence of a recession? I wouldn’t say so. It seems logical, but in reality consumer spending on high-end goods (the ‘wants’ instead of the ‘needs’) rarely actually tapers off… even if money is tight. So, the ‘value over luxury’ theme is largely a myth - or was a myth. Now it seems to be a reality.

Like I said, a few more stores will be reporting over the next day or so, and might re-paint this picture slightly. It’ll be interesting though… and probably not in a good way.

If the data above is a trend and not just a snapshot, then Wal-Mart is really jerking us around. They actually lowered their Q4 outlook even though Q3 profits were up 10%, and sales were up 7.5%. For most retailers and apparel makers, sales were down significantly last quarter. Liz Claiborne’s (LIZ) sales were lower by 16% last quarter, and Best Buy’s (BBY) revenue fell by 7.6% in October.

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We’re now entering the thick of earnings season again, and obviously things are going to be a little nastier than they were a year ago, or even three months ago. However, the question is whether or not earnings will be better or worse than expected. (Meeting a low expectation can still be a good thing for a stock.) And, the same applies to the overall market….if companies aggregately beat the average expectation, it could be good for the whole market.

With that in mind, here’s some key earnings data for the S&P 500, which is currently priced at 930.99. (By the way, I’ve got forecasted sector P/E’s below…which is actually the whole point of this entry.)

The consensus estimate for forward-looking 52-week operating earnings for the S&P 500 is now $90.65 (P/E = 10.27), which is down from $102 (P/E = 12.1, at the time) a couple of months ago. And, trailing operating earnings are reported to be $61.27 (P/E = 15.2), which is down from $91 this time a year ago (P/E = 16.7, at the time).

I had to read the numbers a couple of times to figure out what I was missing, ’cause they just don’t jive. Then I came to this conclusion - the estimates jive….they’re just still too optimistic.

Basically what Standard and Poor’s is saying is that stocks are undervalued compared to where they were two months ago, AND they’re going to be about 33% more profitable over the next twelve months than they were over the last twelve months. In short, they’re predicting a full recovery back to 2006’s earnings levels (when times were pretty good).

My question is this - what’s going to happen over the next year that will cause earnings to improve from $61.27 to $91.00? I’m not saying it can’t happen…I’m just saying “show me why and how”. After all, they were wrong two months ago about where we’d be now. Why should we trust ‘em about where we’ll be 12 months from now? (That’s a rhetorical question, of course.)

That said, I want to clarify my stance….I’m optimistic too, but only because I know stocks don’t always trade at that they’re worth. I think 2009’s valuations won’t be as attractive as guessed by our friends at S&P because stocks will be priced at what the market thinks they’ll be worth in 2010. That’s why I’m planning on ‘paying up’ a little in 2009 for decent equities…they’ll be moving higher in advance of earnings results. I won’t be worried about doing so either, at least not until I start to see P/E’s (trialing) reach above 17/18-ish.

That’s not exactly what I came here to talk about though. I actually came here to talk about sector valuations, and making meaningful valuation comparisons within a sector. You know - apples to apples.

See, I’ve got a feeling in 2009 we’re going to start seeing some serious sector divergence, which we didn’t see much of in 2008 - all sectors stunk. I’ve got some opinions on which sectors will be hot and cold, but I want to lay this groundwork first because it will be a large part of my selection strategy.

The nearby table lays out Standard & Poor’s forecasted P/E’s for all the major sectors (as of November 4th). My strategy is a simple peer comparison. Basically, if I’m looking for undervalued stocks, the forecasted P/E (or even the trailing P/E) has to be as cheap or cheaper than the respective sector.

Now, do I trust the Standard & Poor’s forecast? The whole point of the rant above was to illustrate how even S&P can be too optimistic for the overall market, so I have no reason to think they’d suddenly be realistic when it comes to sector earnings forecasts. However, as long as they’re consistently overly-optimistic, we can still make useful comparisons.

In short, on a forward-looking (2009) basis it looks like Standard & Poor’s thinks stocks are trading at about 2/3 their historical values. That’s pretty exciting, though perhaps a little too enthusiastic. Still, even if companies fall short of the expectation - and I think they will - I still see some significant value in technology, energy, telecom, and general industries. I have to like financial stocks too, but that’s not really based on valuations….that’s just based on them being so beaten up.

This is just the beginning of creating a sector outlook. Stay tuned as I rationalize my way though a complete sector forecast for 2009, though sector rotation is a journey and not a destination.