Duck:
Here's the entire article.
El
SmartMoney.com - Ahead of the Curve
Looking at the Record
By Donald Luskin
COULD I HAVE picked a better time to begin a weekly column on investing?
It's been four months now since I started writing ``Ahead of the Curve'' for SmartMoney.com — and what a four months it's been. We're at war, following the worst attack ever on American soil. We've entered the first official recession in a decade. And in the midst of it all, the Dow Jones Industrial Average has come back from the depths of despair, earning an official bull-market appellation with a spectacular 20%-plus move packed into just eight amazing weeks since the Sept. 21 bottom — yet for all that, the Dow is still more than 6% lower than when I filed my first column on Aug. 1.
ADVERTISEMENT
In the 15 installments I've written over these four months, five major themes have emerged. In this relatively quiet moment between crises, let's stop and see how these themes have fared. I'll look at two themes this week, and the other three next week.
The Market at War
The day after the terrorist attacks on the World Trade Center and the Pentagon I wrote that ``from this crisis could emerge significant opportunities that could propel the economy and the markets into an important new growth phase.... History shows that cataclysmic events like this have always been reflected in powerful stock-market moves.''
And that's exactly how it worked out. But why, in the midst of a now-official recession with no tangible signs of recovery in sight, should the markets have rallied above their preattack levels? I suggested that part of the reason was the opportunity for the global economy to reassess what is truly valuable. The rapidly recovering markets are telling us that we've been wrong to focus on surplus management and debt reduction — instead, ``defense and security costs are the highest and best uses of the economy's resources.''
And if that's so, I argued that companies involved in defense and security should be the most promising investment theme for the next market cycle — defense contractors, makers of aviation-security equipment, vaccine manufacturers and so on. Since its inception on Sept. 28, my ``Jihad portfolio'' of defense and security stocks has stomped the Standard & Poor's 500, gaining 27.3% vs. the index's 10.4% pop.
But, as always, timing is everything! Since my column on defense investing appeared on Oct. 17, the portfolio has gained 5.0% vs. the index's 6.7%. Clearly, as the stench of fear in the broad markets has dissipated, stocks of all industry groups have played a bit of catch-up with defense and security stocks, which moved first and fastest as the recovery commenced. But now that the fear premium has been leached out of the mass of stocks, my forecast is that the defense and security sector will gradually pull out ahead as these companies harvest the superior opportunities before them. And if — God forbid — there were to be more terrorist attacks at home, or if the war on terrorism abroad should massively escalate, defense and security stocks will be both the best performers and the best hedge.
Fiscal policy has been the area in which I've been most disappointed by America's collective response to the Sept. 11 attacks. In the immediate aftermath, Republicans and Democrats alike seemed united behind the need to craft a meaningful economic-stimulus package, designed to help America grow its way out of both the military crisis and the then-unofficial recession. I joined with the voices calling for a cut in capital-gains taxes as the most powerful form of stimulus — jumper cables attached directly to the drained battery of the economy.
But after all this time, Congress and the president have yet to agree on any stimulus at all — other than a hodgepodge of bailouts and spending bills. The stimulus proposals still pending are little more than short-term welfare programs — for people and corporations. The idea of a capital-gains cut fell out of the debate early on.
Looking Out for No. 1
Another theme that has pervaded my columns these past four months has been the special opportunities available to market-leading companies during times of crisis — the chance to survive adversity and then emerge on the other side with a lot less competition. I suggested in a column on Oct. 24 that investors consider a ruthless ``Neutron Jack'' approach, focusing only on the No. 1 players in each business category.
Since then, market leaders have slightly outperformed the mass of stocks — as evidenced by the leader-centric Nasdaq 100's 13.0% gain vs. the broader-based Nasdaq Composite's 11.8% rise. Of the three No.1 technology companies I focused on in my column, two have outperformed the Nasdaq Composite: Intel (NASDAQ:INTC - news), with a gain of 28.6%, and Cisco Systems (NASDAQ:CSCO - news), with a gain of 14.3%. The third, Dell Computer (NASDAQ:DELL - news), has underperformed, with a rise of only 6.4%.
But at the same time, some marginal companies have turned in spectacular short-term — and I'm sure short-lived, too — performances. Even if they are destined to mediocrity, over the past month the mere fact that the market decided that they would even survive long enough to be mediocre has led to some amazing back-from-death's-door gains.
For example, congenital No. 2 microprocessor maker Advanced Micro Devices (NYSE:AMD - news) has outperformed No. 1 Intel since my column, gaining 38.7%. But that's only half of a two-part story. Since the market bottom on Sept. 21 Intel has gained 67.4%, handily beating AMD's gain of 48.4%. Intel outperformed right off the market bottom, when things looked worst; AMD outperformed in the second half of the period after Intel's gains made things look a lot better — and never did catch up. And now, going forward, my bet is that AMD won't catch up. After the market has gotten over its surprise and delight that AMD will survive at all, it will continue to show its long-term preference for a company that doesn't walk with a limp.
In the networking-gear category, Cisco Systems has been a reluctant No. 1 company vs. Juniper Networks (NASDAQ:JNPR - news) and Extreme Networks (NASDAQ:EXTR - news). In an earlier column, I chastised Cisco's chief executive, John Chambers, for not taking advantage of the opportunity to play the tech gorilla. And Chambers has continued his wishy-washy ways, sending mixed signals to the market about his intention to use pricing power to crush his competition.
At the time I wrote my column, Cisco had gained 42.5% off the market bottom on Sept. 21. The evidence of Chambers's inferior skills as the guy in the gorilla suit was that, even then when things still looked pretty scary and Cisco should have enjoyed the biggest advantage, Extreme had gained a competitive 38.5% and Juniper had gained an astonishing 143.1%. Since my column Cisco has gained 14.3%, while Extreme has gained 38.6% and Juniper has lost 2.63%. Viewed from the Sept. 21 bottom, that puts No. 1 Cisco in the No. 3 performance position with a gain of 62.9%, vs. Extreme with 91.9% and Juniper with 136.7%.
In the personal-computer category, No. 1 Dell Computer has had to contend with the slow-motion collision of two garbage trucks known as the Compaq Computer (NYSE:CPQ - news)/Hewlett-Packard (NYSE:HWP - news) merger. Right after the deal was announced I characterized it in a column as ``assisted suicide for corporations'' — and since then major H-P stockholders representing the Hewlett family's interests have come to have similar concerns. The prospect of the deal's coming apart has lifted H-P's stock by 12.7% since my column about No. 1 companies — compared to a 6.35% gain for Dell, and a 2.26% loss for Compaq.
Since the Sept. 21 market bottom, Dell is strongly in the winner's circle with a gain of 59.2% — compared to H-P's gain of 35.7% and Compaq's gain of 19.1%.
Looking ahead, there's no question in my mind that the easy money — easy in hindsight, that is — has already been made in the smaller, less dominant players in each business category. It's just going to get harder and harder from here on in to pick the few winning needles out of the losing haystack. As investors realize that the back-from-death's-door premiums have already been earned, and that these smaller, risky companies don't really have any long-term comparative advantages to justify their still-stratospheric valuations, these stocks will, one by one, join the realm of the corporate undead until finally someone puts stakes through their hearts once and for all.
Up Next
In next week's column I'll review the growing consciousness in the marketplace of the risk of monetary deflation, which I first wrote about for SmartMoney.com on Aug. 15, long before it burst into the mainstream headlines. And we'll look at the helplessness of Alan Greenspan, as we have watched him these four months pulling on the levers of interest rate policy only to find that...nothing happens! And finally, we'll look at progress toward the privatization of the Social Security system, and review what 401(k) investors should be doing now.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors. You may contact him at don@trendmacro.com.
SmartMoney Map of the Market - See the Market Like Never Before
Order SmartMoney magazine and receive a 65% discount
To see all of our stories, go to SmartMoney.com, the most comprehensive resource for investing; providing award-wining tools and daily updates on investment opportunities. Register for free real-time quotes,watchlist, portfolio tracking and more. Get SmartMoney Magazine at the Publisher's LOW direct-to-public rate! |
