Goodbye Bears

This week stocks investors started the year with conviction as the NASDAQ reached a 2 ½ year high yesterday and a few companies saw their stocks rise more this week than all of last year.  Early selling this morning gave way to buying as investors were cheered by the announcement by TomRidge that the country’s terror alert status had been lowered from orange to yellow.

The headline U.S. unemployment rate continued to drop, though slowly, in December, falling to 5.7% from 5.9% last month.  While non-manufacturing rose by 1,000 jobs, manufacturing payrolls continued their declines, but at a slower pace than the first of the year.  International investors greeted the news by selling the dollar hard.  Sellers see little sign the Fed will raise rates any time soon, leaving them with low yields and little incentive to hold dollars.

On other fronts though, the recovery remains healthy.  U.S. Construction Spending rose for a sixth straight month in November to an all-time high.  Residential construction, which accounts for more than half of the total rose 1.9%, helped by continued low interest rates.

Auto sales showed a nice rally in December as the annual trend rose from 16.8 million to 18 million cars.  The service sector as measured by the ISM Non-Manufacturing index expanded for the ninth straight month in December, but at a slower pace than November.  However, taken in whole, the report shows a very healthy economy and recovery.

The long-beleaguered telecom industry may be re-connecting with investors as new signs of life surfaced this week.  The S&P Telecom index rose 5.4% after returning the worst performance last year.  Managers of telecom companies are more upbeat as well as significant contracts for upgrades and capital expansion are beginning to be announced.

Nortel,North America’s largest phone equipment maker, announced that they signed a five-year contract with Verizon, the nation’s largest phone company, to provide equipment for internet phone calls.  The stock rose 23% on the news without knowledge of the value of the contract.

Verizon plans to start selling Voice over the Internet services, “VoIP,” to consumers and businesses by the middle of next year.  Why is that so important?  VoIP is by far more efficient and less expensive than conventional circuit-switched phones networks.  It allows multiple phones calls or Internet connections on the same line, not just the one you get over the copper wires going into your home.

The “P” in VoIP stands for packets.  In packet switching, messages are divided into digital pieces, which can take different paths across the network at the speed of light, and are reassembled when they reach the receiver.  Conventional calls tie up a pair of wires from the sender to the receiver.  Nortel executives claim that packet switching can reduce telecom costs by 30% or more.  According to Bloomberg, Nortel has the second largest share of VoIP services at 22.1% (according to sales) behind Cisco with 26.3%.

Yesterday, Nokia pre-announced better-than-expected results for the fourth quarter yesterday and numerous analysts are upgrading the sector as a result.  The surprise came in the network infrastructure segment, providing further proof that telecoms are beginning to invest in their networks to reduce costs and gain competitive advantage.

As we look forward to 2004 and beyond trends are generally positive. We expect the most robust growth to include healthcare (particularly biotechnology), telecommunications, services and manufacturing related to the trend toward outsourcing, data storage, productivity enhancing software and hardware, homeland defense apparatus, high end specialty retail, and micro and nano-technology.  Some of these industries are mature with higher earnings and price predictability, while the newer industries represent greater potential rewards, but increased challenges as well.  In the latter cases, we will invest appropriately according to our strict model-discipline, using diversification and the experience gained during the three-year bear market following the bubble tech-wreck to more adeptly navigate those waters.