And Now a Word From Our Analyst

Once again, we're fortunate to have the insight and expertise of our favorite analyst, Doug Rogers of ManageSource Research, who has been busier than a Saddam Hussein double.  Even still, we pried him away from his usual analytical duties for a moment of devoted service to you, our dear reader.

Today's offering provides an interesting comparison between this time in 2002 and the present.... the similarities and differences that may help you predict and profit.  It's an interesting read from a keen investing mind and we think at the very least, you'll be intrigued by his perspective.

Additionally, the crew at StockUpTicks wishes to offer Mr. Rogers our strongest congratulations for a phenomenal professional accomplishment that puts him in truly elite company among analysts. We'll be devoting an issue just to this in the day's ahead.
 

Navigating a market looking to recover, the Iraq effect and more

Pent-Up Demand or News-Addled Confusion? 2002 vs. 2003

I had a very positive outlook at the beginning of 2003 in much the same fashion as we all had cautiously optimistic hopes for the economy in 2002. So far, we have seen the marginal recovery that we had all hoped for. As a matter of fact, I was beginning to get very concerned that 2003 was beginning, and would ultimately turn out, just like 2002. That is, optimism followed by poor performance, warnings, inconsistencies and negative results. To ascertain the veracity in this comparison, I’d like to turn your attention to the following charts for identical time periods (Jan 1 – April 1) in both 2002 and 2003.
 

Initially, we can see some clear similarities in the way that both years began – some careful optimism and appreciation, followed by a protracted apathy across the four major indices presented. There is, however, a very clear difference as evidenced by the 10-yr. Treasury yield. If you’ll recall, yield works inversely to price, so as the yield curve rises, investors are selling and driving bond prices down. In the beginning of 2002, the 10-yr yield takes a sharp hit despite impressive initial gains in the NASDAQ that indicates that the continuing fallout from Enron and burgeoning debacles from WorldCom, Tyco, et. al. still had investors buying fixed income in anticipation if a continued bankruptcy, geopolitical strain and poor economic and corporate earnings reports. Despite an apparent move towards recovery on March-April of ’02 as shown by upward trend of the major indices combined with rapidly rising 10-yr yields (selling driving prices down), the recovery never takes hold, and indeed, major market indices ended 2002 on a very poor note. On December 31st, the Dow Industrials were -16.8%, Nasdaq was - 31.5%, the S&P 500 was -23.4% and the 10-yr. Yield was a whopping -21.6% from January 2nd 2002 (fixed income prices way up).

At the beginning of 2003, many of us felt very positive about a recovery during 2003. The impact of the various corporate scandals appeared to have been internalized and comprehended, and generally stable if not improving or completely consistent, earnings surprises and government economic data seemed to suggest that the worst was behind and investors could start focusing on future results as opposed to immediate damage control. Unfortunately, the market didn’t respond as expected and many feared a repeat of 2002. Indeed, a quick glance at the above chart might suggest just that!

There is a critical difference, however. The yield of the 10-yr note was rising; indicating fixed income selling. Investors were pulling out of everything! Not good. But wait, there was one giant plume of uncertainty looming overhead – military conflict with Iraq. This is a wonderful example of how the financial markets react to uncertainty. From approximately January 15th until the beginning of Iraqi Freedom, the U.S. markets were marked by consistent erosion of share prices and valuation. Investors weren’t committing capital to fixed income or equity until they could gain some knowledge of what direction geopolitical and economic forces might take them. As you all know and the charts support, the market responded soundly to the initiation of the military campaign. Analysts and investors could get back to evaluating investments and committing capital with a clear understanding of the forces that will be affecting those investments and their ultimate returns over the next 12-18 months. It is also indicative of a substantial amount of pent-up demand, which I suggest, hints to continued strong buying and higher valuation as we move through 2003. However, news-addled confusion has also generated tremendous volatility (see figure below). Thus, I proffer this advice: if you are a day or swing trader, be very conscious of war news. Each American POW we rescue and town we secure could send your portfolio sky-rocketing until three hours late when a SCUD hits a border town in Kuwait when it will feel like 2001 again! For everyone else, the markets have clearly demonstrated a strong interest in equities that should continue. Mid and long-term strategies should filter out Iraqi Freedom news while searching for under-valued and fair-valued equities that you think have the best chance of taking advantage of an economic recovery. Look for relatively low valuation and pent-up demand. Assuming your methodology for investing is sound, the short-term volatility will do nothing to hinder your ultimate goals.

Doug Rogers and ManageSource Research

Visit ManageSource Research www.managesource.com

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