The InvestMentor

April 2, 2003

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Since everyone seems to have a war plan these days, or an opinion on one, I figured "Hey, I want one, too!" My war plan, however, is intended to help investors through this important period, and into the next phase of the economy and market, post-Iraqi-conflict. The Plan is comprised of four central ideas, described over the past several weeks in my columns, and summarized below.

(Disclaimer: My battalions are my words, my strategy devoid of "friendly fire," and the only one embedded with me is Mrs. Valentine. Eat your heart out, Donald Rumsfeld.)

We’re Out Of Recession

The National Bureau of Economic Research (NBER), the so-called arbiter of economic cycles, have to-date failed to declare the Recession of 2001 dead and over, despite overwhelming evidence that suggests the Recession went flat-line almost a year-and-a-half-ago. As I said on March 5th, we’re now in our sixth Quarter of economic expansion.

However, in the last two months we’ve seen a return to the weak conditions that were omnipresent two years ago. But I attribute all of the recent slowdown to the Iraq war, and the uncertainty it creates in people’s minds—consumers, managers, and executives. Absent this war, the pall will lift and the economy will continue to strengthen.

The Stage Is Set For A New Bull Market and Its Imperative to Be Fully Invested

Anecdotal evidence that the Bear Market is over is everywhere. When you see stocks announce horrible earnings, followed by their stock price rising, you now we’re reached a point where the bad news is priced in. I see a dozen such examples every day. Additionally, Bearish sentiment is everywhere—and that’s a great contrarian indicator of good things to come.

Technically, the Bear Market ended in October of last year. As long as the market stays above the lows set that month, we will date the start of the new Bull Market to last October. But if the market breaches those lows in the near future, then the Bear is still around. In either case it doesn’t matter unless you believe the Bear has longevity measured in years-to-come.

As I said February 19th, with impending Bull Markets, it’s better to be way too early than a little too late. That's because most of a Bull Market’s return comes in the early stages--the downside risk of being invested during the last of the Bear is quickly compensated for in a recovery...and then some.

"War Plays" Are Not What They Seem

Last week I said, "As far as 'war plays' are concerned—companies that will benefit directly—most are an aberration. There are very few investment themes or companies that will benefit directly from this conflict. All of the obvious ones have been either been overbid already, or won't benefit the way some predict they will." I went on to dissuade readers from seemingly "obvious" war plays, like the troubled Boots & Coots (WEL), and to caution against hoarding stocks that did well after the last Gulf War.

I continue to believe that broad segments of the market deserve a below-market-average weighting within a portfolio. They include defensive and low-beta stocks like consumer staples, health care, and utilities. As to gold, I advised readers way back in January to stay away from it as an investment. Even though we were months away from war, it was a foregone conclusion then and was already priced into the commodity. The rally in gold has since proved short-lived. In fact, gold is lower now than it was then, and continues to fall.

It Will Be Key To Be In The Right Places Going Forward

The real investment opportunity related to the Iraq war will be a function of what the economy holds in store when unshackled from the uncertainty associated with the war. In other words, the end to the war will provide a catalyst to a struggling, albeit recovering economy.

Stocks will sense the economic expansion before it makes its way to the income statements of companies. The market will continue to recover led by two major types of stocks: economically sensitive ones and high-beta stocks that always lead a rising market. That bodes very well for consumer cyclicals, service stocks, and high tech.

But as is always the case, there's no substitute for diversification, including marginal weights to good companies from other areas. Specifically, I pursue growth "macro-themes" and invest within the industries that stand to benefit from secular trends—regardless of what the stocks will do immediately following the end of the war.

I'll be writing more about this in the coming weeks and months. In the meantime, if you'll excuse me, I have an armchair and a war waiting for me to get back to.