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To: Softechie who wrote (4148)	12/18/2002 1:21:02 AM
From: Softechie	Read Replies (1) \| Respond to of 29597

Growth Won't Be the Byword of 2003 By James J. Cramer 12/17/2002 17:57 We keep waiting and hoping for something to happen that will break the up and down cycle we've had. We keep looking for business to turn up or for orders to get stronger or for companies like General Electric GE to signal that things have gotten better. And who can blame us? We are about to finish our third straight down year. A fourth will put us on par with the four years that preceded the Great Depression. My partner on CNBC's "Kudlow & Cramer," Larry Kudlow, likes to be upbeat. He sees aggregate economic data that point to an up year. I, on the other hand, am stuck with industry groups and the bottoms-up approach I was taught. When I look up from the bottoms, I can't see where the big turn will occur. In preparation for the next year, let's take a look at the major industry groups that make up the stock market so I can show you why I believe that any recovery will be anemic, causing us to default to individual issues on a case-by-case basis rather than the market as a whole. Mind you, that doesn't mean that we could be in a situation where you can't make money in the market, but it does mean that making money will be based on shrewd stock-picking and not powered by a backdrop of economic growth. If we divide the economy into key sectors, we get a list that looks like this: financials health care industrials and materials telecommunications energy consumer staples information technology retail and autos homebuilding utilities aerospace and defense You would think that any change for the better in the market would have to spring from those areas. But let's look at those areas and consider the prospects for each. That way you can understand why I can't get my arms around the big growth story of 2003. Financials: The financials -- the banks, the insurers and the savings and loans -- by all rights should have a decent year. Rates are low and that should encourage borrowing. But the big boom of financials came from refinancings, and I can't believe that after a year record refinancings we could have another year of record refinancings. You have to believe that interest rates would have to be 4% to get another. I have a hard time thinking we could get that kind of rate decline when the government is printing money like mad, gold is spiking and oil is staying stubbornly higher. Plus, the Federal Reserve is done. If anything, the Fed will raise rates next year if the economy comes back, and this is one group you won't want to touch if short-term rates start rising. Insurance has had a run and now can't seem to get out of its own way. Savings and loans are classic shorts in a rising rate environment. The brokers, with the exception of Merrill Lynch MER , haven't adjusted yet to the new world of low trading, low underwriting and low mergers and acquisitions. The stocks all are anticipating a big rebound after resoundingly bouncing off their lows this summer. I just don't see how this group, the largest in the S&P 500 , can be the leader, given that set of circumstances. We can have some price movement upward based on earnings and increased dividends and market share (that last reason is why I like Commerce Bancorp CBH and own it in my Action Alerts PLUS account), but the performance at best should be lackluster. Health care: With a weak dollar, plenty of consolidation, and not many drugs coming off patent in 2003, I think next year could be a better one for this sector. But the group's outlook always will be clouded by the threat of some health care bill that could stop the hefty increases in pricing for drugs. Any regulation of drug pricing is perceived as bad by the owners of these stocks. Not only that, but wherever the stocks are, they seem to go down when news of health care plans comes out. This is amazing given that the Republicans are in charge and the industry has spent a fortune to make sure that the GOP doesn't do anything rash. Those dollars will pay off on 2003 with a promise that nothing will be too invasive, but it won' t matter. Right now the drug companies have the run of the joint. For them, any change from an unregulated world will be a bad change. Medical device companies sport premium multiples to drug companies, but I don't know if that is warranted. I don't see any new devices that can spur extensive growth. And health care maintenance organizations and health care planning companies seem to be victims of their own success because they have raised prices so often that no one thinks they can maintain that pace. That's an outright negative that will be very hard to dispel. Hospitals are viewed as renegades since the Tenet Healthcare THC skirmishes and there's no getting around that. Medicaid and Medicare are considered out of control by the states and the feds respectively, and anyone banking on a friendly environment on federal payouts in 2003 is sorely mistaken. There's not enough there to lead us. Industrials and materials: This group holds some hope. These companies are exporters and the dollar's getting cheap. That helps comparisons. But anemic growth in this country and Europe won't mean much buying, even with the weak dollar. I don't see Asia coming back strong either, with Japan still mired in what now seems an endless recession. There will be case-by-case upswings, and we will have to watch Caterpillar CAT and 3M MMM to stay focused, because they are worldwide enterprises that are most sensitive to any global uptick. Editor's note: Please click here to read part 2 of Cramer's sector-by-sector outlook for 2003.