The fog of war has enshrouded everyone and everything. But we
must soldier ahead. And that means investors, too.
The economy looks good, despite the gloomy forecasts of those
who can't see the positive indicators through the fog of pending military
action against Iraq. In fact, with the economy so promising and share prices
so inviting today, we might be looking at one of the best windows for
investing in a very long time.
The latest report on gross domestic product was twice as strong
as expected. When you take out the reverse algebra of trade-balance
accounting, domestic GDP is up nearly 3 percent. Capital-goods investments
by businesses have increased three straight quarters at an average 9 percent
gain. Inflation is less than 1.5 percent, a miniscule amount. And both the
money supply and commodities -- including aluminum, copper, steel, tin and
zinc -- are rising, meaning that some of our cash-strapped businesses are
getting back in the money.
Fourth-quarter profits were up 14 percent. Durable goods
retailers (automobiles, trucks and office/business equipment) were up 10
percent, the health-care sector was up 18 percent, telecoms were up 16
percent, and airlines were up 39 percent. There is no way we are heading
into a double-dip recession.
Is there a temporary oil shock? Yes. But the oil futures curve
is inverted, meaning prices are summiting the hill and will soon be headed
back down. Oil is now $36.50 a barrel. That price will be $33 in June, $30
in September, $28.60 in December, and all the way down to $23 and change in
Here's another point on oil: Yes, the recent rise in oil and
gasoline and home heating-fuel prices may pinch consumers temporarily. But
in constant dollars, today's $36 a barrel oil price would equate to $50 a
barrel on the eve of the Persian Gulf War and over $90 in 1980. The current
oil shock is actually less shocking when put in perspective.
We learned during the first Gulf War that Wall Street can
quickly shake off the fog of uncertainty and turn in an impressive rally.
Not only will that rally take place when Saddam and his henchmen are removed
from power, but it could be even more impressive than the market spike 12
Economic conditions are a lot better today than they were on the
eve of the first Gulf War. Real GDP was 1.8 percent then, now it is 2.4
percent. Inflation was 4.3 percent, now it is 1.7 percent. The 10-year
Treasury note was 8.5 percent, now it is below 4 percent. And the banking
system is much healthier today than it was in 1991.
On the economic-policy front, Washington is currently much more
stimulative than it was over a decade ago. Back then, the Federal Reserve
was tight with the cash. Now, it is loose. Back then, Papa Bush was suckered
into a tax hike. Now, Bush the Younger is cutting taxes everywhere he can.
As the booming '90s came to a screeching halt, we learned that
investors cannot always bank on the promise of capital gains -- or
shareholder returns based only on rising equity prices. But they can bank on
a dividend check from those companies that pay them. The same holds for a
corporate-bond coupon check. If stock prices rise and capital gains occur
for investors, then all the better. But if the investor dividend tax is
abolished in Washington, shareholders will be rewarded with a steady flow of
real money from corporate America.
This is why investors should focus on cash-yield plays. It's
almost a Dogs of the Dow strategy, centering on dividend yields and
corporate-bond coupon yields -- not, however, on Treasury yields. There's
been a mini bubble in Treasury prices, and they are way overvalued today.
Last year, the S&P 500 had an earnings per share of $45.80. This
year, with 3 percent economic growth and 12 percent corporate profits,
earnings per share could be $51.90, a 13 percent gain. With the humongous
stock market correction of the past three years, the S&P 500 is now back to
its long-run trendline growth of 7 percent per annum since 1969.
Cyclical stocks, big-cap techs, commodities, industrials and
consumer discretionary stocks are all ripe for the picking today. And so are
corporate bonds with juicy coupons, especially non-callable bonds and even
high-yield junk bonds. These are all good plays for investors.
And here's one more comparison with 1991 that should get
investors moving: Our high-tech, precision-bomb military capabilities are
gargantuanly better today than they were for the first Gulf War. Saddam is
history. America knows it, Bush knows it. Saddam may not know it, but he
will soon learn it. Investors must believe it, too.
There may be more than a two-week time horizon for investors to
get active again. Is it time to buy? Yes. Buy, buy, buy.