Following Wall Street's Smart Money
By Valence Williams
Successful investing requires patience and analytical skills. In order to catch the next stock market wave, we must pay attention to interest rates, oil prices, inflation, and geopolitical developments. Next would be to look for value and to think globally.
Interest rates have hit their lowest levels in decades; major corporations have reduced capital spending and significantly decreased their workforces. This, plus uncertainty over Iraq, has kept the market down. Corporate America paid close attention as the price of oil rose. A protracted period of rising oil prices not only would put pressure on corporate earnings, but also would reduce the amount of disposable income for corporations and individuals alike. Were oil prices to return to $22-$25 per barrel, say, it would mean savings of $80 billion-$90 billion for American businesses and consumers and a boon to the economy and the stock market.
War, cycles, bond market
The moment President Bush announced his intention to challenge Iraq, the price of oil began to drop. Since low oil and gasoline prices are a major stimulant to the economy and the stock market, the post-Iraq U.S. economy becomes very important in determining new investment strategies. It is equally important to note that interest rates and the prices of stocks, bonds, oil, gold, and real estate all move in cycles, sometimes with inverse relationships. Understanding these cycles and their relationships enhances our ability to acquire undervalued assets at the right time. As interest rates rise and fall, there are profound corresponding changes in the prices of stocks, bonds, and real estate. Now that interest rates are at their lowest levels, we can expect the next price cycle to be upward. Investment decisions should be made accordingly.
Over the last three years, smart investors moved out of stocks and into real estate, bonds, oil, and gold. As the stock market declined, money shifted to the bond market—municipals, treasuries, and, more recently, high-yield corporate bonds or junk bonds—in the quest for undervalued assets. As interest rates rise and the price of oil falls, it is very possible that the smart money will shift from these investments into the undervalued sectors of the stock market. Timing is very important, so we must be diligent in our macroeconomic analysis in order to guide our selection of individual stocks.
401(k)'s, IRAs, pension funds
The collapse of the stock market, combined with corporate misaccounting, decimated 401(k)s, IRAs, and pension funds. Understanding how to manage retirement funds clearly will be a challenge in the future. Besides diligently monitoring your monthly and quarterly statements, carefully select a qualified investment professional to help you make changes in line with the economic environment.
Economic and corporate sectors impacted by war
The following observations are not necessarily recommendations:
Defense: Maxim Group noted on February 27, 2003, that defense stocks have moved up more than 300 percent from their January 2000 lows. Raytheon (NYSE: RTN) and Lockheed Martin (NYSE: LMT) continue to look attractive in this sector.
Technology: Although the Nasdaq 100 (NDX) has dramatically outperformed other indexes, this leadership role may diminish as other sectors catch up to, and even surpass, the big tech concerns. "Growth" stocks remain viable, however. EMC, Microsoft (Nasdaq: MSFT), Flextronics (Nasdaq: FLEX), Citrix Systems (Nasdaq: CTXS), Nextel (Nasdaq: NTXL), and Micromuse (Nasdaq: MUSE) are attractive names in the group.
Utilities: The United States' success in war with Iraq ultimately will send crude oil prices down to the mid-$20's per barrel, possibly to as low as the high teens. That makes several utilities attractive, including Hawaiian Electric (NYSE: HE) and KeySpan Energy (NYSE: KSE).
Big Oil: The major oil companies have made solid recoveries from their lows. ExxonMobil (NYSE: XON) and ConocoPhillips (NYSE: COP) are very interesting stocks, as is oil-driller Halliburton (NYSE: HAL), which may reap a windfall from contracts to rebuild the Iraqi oil infrastructure.
Successful investing requires diligence, global thinking, and an understanding of geopolitical events and their impact on various industries. Iraq has a population of 25 million people, a devastated infrastructure and has suffered from general decay from 12 years of United Nations sanctions. Rebuilding this nation could be very lucrative for some companies. China has 1.3 billion people, and is the world's fastest growing economy. The prime interest rate in Brazil is 26.5 percent. Pay attention.
Valence Williams is a vice president at Maxim Group. He may be reached at 212-895-3578, or at Vwilliams@maximgrp.com