A New Old Theme Emerging

• February 25, 2002
• Peter Navarro

There
is an important theme developing in the market. 
As the economic data continues to hint at a recovery, “Old Economy”
cyclicals continue to gain strength — from Caterpillar

(
CAT |
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Chart |
News |
PowerRating) and ExxonMobil 
(
XOM |
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PowerRating)
to 3M
(
MMM |
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PowerRating) and Procter and
Gamble
(
PG |
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PowerRating).  At this
juncture, tech stocks would normally begin to participate in the upswing, but
for a variety of reasons just the opposite is happening.

It
is now generally agreed that all sectors of telecom are in trouble. The fiber
optic crowd is over-leveraged from over-expansion.
The long-distance carriers are engaged in a wave of destructive
competition as are the cell-phone carriers — free minutes, free minutes, free
minutes. Only the old Baby Bells are hanging on to their local
monopoly-like cash machines — but the whole sector is a dog’s lunch.

Meanwhile,
the new “whine” in a very old bottle is the emphasis on what never mattered to the
tech investors — PE ratios. Here’s
the problem — and it has a double edge:

1. The
   first and most obvious is the ongoing revisions of future earnings by CEOs
   across the tech board. Remember
   that stock prices are nothing but an expectation about a future stream of
   earnings and when that stream looks smaller, stock prices must go lower. So as earnings are revised,
   so too, are prices lowered.

2. The
   second problem is Enronitis — it draws a larger band of uncertainty around
   future earnings. That means higher risk, and more risk is discounted by lower
   stock prices.

The
bottom line for tech is this buzz: As future earnings streams are viewed as both
lower and more risky, the PE ratio crowd crows that the ratios are still “too
rich.”  The refrain, of course, is
that we ain’t hit bottom yet. This
is why we will likely see the Dow side of the market begin a recovery even as
the Nasdaq side continues to squirm.

The Macro Data — Last
Week

The
most important numbers to catch my eye last week were the trade numbers. They showed that the deficit had shrunk and that’s usually good news —
but not in this case.

Our
imports were way down — auguring global recessionary problems for both Asia
and Europe. And our exports were
way off — so our export industries are looking at more unemployment. Watch the European markets, in particular, for the next several weeks. Any further systematic declines, and the evidence will build for a global
recession dragging the U.S. economy — and stock market — back down.

The Macro Data — The
Coming Week

We
get a double dose of consumer confidence this week — once on Tuesday from the
Conference Board and again on Friday from the University of Michigan Consumer
Sentiment gang. Two weeks ago, the
U-Mich report showed a drop and sent the market into a tizzy.
Look for a very cold chill if these reports show any further significant
decline — and a sector rotation in health care, medical, pharmaceuticals, food
and tobacco.

The
other big report will be on Friday — the old Purchasing Manager’s Index now
renamed the Institute of Supply Management of ISM report. 
This is one of my favorite indicators to chart the recovery.
If it goes up, look for a big boost for the cyclicals.
If it dips back below 50, it may be “double dip” recession time and will

be a very nasty close.

And
by the way…Greenspan speaketh on Wednesday before Congress. Watch for any signs the Fed is going to a neutral bias — signaling that
a recovery is nigh (the good news) and that the interest rate cycle is over (no
so good news).

Barron’s Watch

Come every Monday after the
weekend publication of Barron’s, stocks go up or down on the coverage. Watch for Roxio
(
ROXI |
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Chart |
News |
PowerRating) — a very pure DVD play — and cover girl
Caterpillar
(
CAT |
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News |
PowerRating), the dean of the Old Economy, to get a nice Barron’s bump
this week.

Macroplay of the Week:

Tech investors are
rotating out of computers, software, hardware, and telecom and looking for
higher tech medical stocks — a nice defensive sector as the Nasdaq bleeds.
Integra Lifesciences fits the bill nicely, marketing high-tech orthopedic
products in 80 countries.

The
technicals look just OK — it’s under accumulation and three of the four
moving averages are stacked up one over the other.
However, both RSI and momentum are down in negative territory. Still, fundamentals are solid, with an IBD rating of B+.

TIP:

As you track IART, watch both ICU Medical
(
ICUI |
Quote |
Chart |
News |
PowerRating) 
and Interpore International
(
BONZ |
Quote |
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News |
PowerRating). They are in the same sector with excellent technicals and fundamentals
and the three stocks might make a good basket trade.
ICUI is at a new 52-week high. BONZ:
Sell all if the sector tanks, but be ready to ride only one or two as the sector
heads up.
 

Summary

margin-left:6.0pt;margin-bottom:.0001pt;text-indent:-1.5pt;mso-layout-grid-align:
none;text-autospace:none” align=”left”>If
you have a favorite macroplay that you would like me to feature in this column, send
me an e-mail at pnavarro@uci.edu or go
directly to my web site https://www.peternavarro.com. 
I’d love to hear from you.