Be Aware of Influencing Market Factors

Physician's Money Digest, July15 2004, Volume 11, Issue 13

As Americans watch and analyze Iraq's news coverage, the United States stock market shows an upward drive in many industries. With this in mind, let's briefly discuss the industries that have performed well during wartime periods. Studies of both peace and wartime trends have helped investors determine which industries can be the most profitable.

Over the past 2 years, there have been debates about the ethics of portfolio growth due to current world conditions. Awareness of these facts has made physician-investors question economic morality. Meanwhile, the facts are the facts. There are some industries that have greatly benefited from Sept. 11 and the remaining fear of terrorism.

Direct beneficiaries of these events include the defense industry, military contractors, oil companies, construction and reconstruction companies, and associated construction supply companies. As you probably are aware, Halliburton is an American-based construction company currently working to help rebuild Iraq. In addition, Halliburton's subsidiary Kellogg, Brown & Root was awarded the main contract to fight oil well fires and reconstruct oil fields in Iraq by the United States Army Corps of Engineers.

War and the Market

After the Cold War, the aerospace and defense industry struggled to make a profit. However, Sept. 11 and fears of further terrorism propelled defense stocks. In the past 2 years, companies producing ammunition, missiles, rocket propellants, emerging transformation systems, global content and network information security systems, explosives detection systems, and aircrafts have made outrageous profits.

Fast forward:

For example, at the close of Sept. 17, 2001, Symantec Corp (SYMC) was at $9.47 per share. On Apr. 16, 2004, SYMC closed at $47.67 per share. This is a 400% increase in a period of only 2 years. The company provides global content and network information security systems. According to its Web site, the Norton brand of products is the worldwide leader in consumer security and problem-solving solutions.

Threats to United States information systems coming from within and outside the United States as well as the growing number and complexity of these threats reinforces the idea that America's computer systems can never be too safe. Although it's something we don't like to think about, a terrorist-produced virus could wreak havoc across the nation. A breach in our government's computer systems or the Internet could shut down United States commerce.

Note:

Another example is Invision Technologies (INVN), which provides Transportation Security Administration–certified explosive detection systems. These systems are used at airports for screening checked passenger baggage. The company also designs, develops, and manufactures products used for weapons detection and nonaviation applications, including landmine detection. INVN stock moved from $23.62 per share back in May 2003 to $49.59 per share in Apr. 2004. General Electric recently purchased INVN.

Financial Side Effects

Other than national security stocks, oil prices have also stimulated the economy. Since the attack on America on Sept. 11, Ultra Petroleum (UPL) has seen its stock increase 650%. Another oil company showing promise is Patina Oil and Gas Corp (POG), which has experienced a strong upward rotation since the start of the war on terrorism. In fact, POG stock is up 21% from their Sept. 17, 2001, close.

American life post-Sept. 11 has been unlike anything we've experienced. American flag flying has skyrocketed since the attack on the United States. The flag-making industry has made a huge profit from reestablished American pride. The sale of religious collectibles and memorabilia has become a multibillion-dollar industry in the past 2 1/2 years. There seems to be a direct correlation between these profits and America's fear of terrorism.

There are also many industries indirectly benefiting from that tragic event. These companies and industries have been assisted by federal policy. Without Sept. 11 and the high unemployment rate, the Federal Reserve would not have acted as aggressively as they did in terms of lowering interest rates. Falling interest rates have stimulated the real estate industry, home improvement industry, banking industry, and all of their associate sectors. Many have benefitted from the robust economy due to low interest rate levels.

John Valentine specializes in portfolio management and in developing high-net-worth strategies. He is the principal investment advisor at Valentine Capital Asset Management of San Ramon, Calif. He welcomes questions or comments at 925-275- 0200, or visit www.vcrpg.com. Valentine Asset Management, Equity Research & Portfolio Evaluation, and Securities America are independent entities. Securities offered through Securities America Inc, member NASD/SIPC, a registered broker/dealer. Securities America Inc as a firm does not make a market in, conduct research on, or recommend the purchase or sale of any of the above issues. Compliance mandates disclosure of all purchase and sell prices for means of performance.