Stocks Clear Without Summer-End Blues

Physician's Money Digest, September30 2003, Volume 10, Issue 18

The summer is over, the kids are back in school, the economy is getting better, and maybe, just maybe, the price of gas will drop. Just a few days before Labor Day, prices at the pumps jumped 20 cents a gallon overnight. Reasons for the price increase vary, from too many regional different grades of gas to produce, to reduced supplies, to shortages due to the east coast power outage that occurred August 14.

Some conspiracy theorists even stated that this was a right-winged ploy by President Bush to reward his "energy friends." No matter what the excuse, it's going to cost drivers more to fill up. At the Jersey Shore, you can hear the pain from SUV drivers who are now paying close to $50 to fill their tanks. For Hummer owners, $80 is now the going rate to "filler-up." Ah, my kingdom for a motorcycle.

Speaking of motorcycles, Harley-Davidson (HDI) celebrated its 100th birthday the week of August 29. Harley-Davidson, Inc, operates in the motorcycles and related products segment and the financial services segment. HDI operates 2 companies: Harley- Davidson Motor Co, which is a subsidiary of H-D Michigan, Inc, and Buell Motorcycle Company LLC (BMC). HDI had a high of around $55 this year.

Up, Up, and Away

The Dow and S&P have posted gains for a sixth consecutive month, a feat that hasn't been achieved in 8 years. And the Nasdaq has advanced for a seventh straight month. Showing the strength of the move, the Dow extended its weekly winning streak to 4 consecutive weeks, while the Nasdaq and S&P have risen for 3 straight weeks.

The Dow was up 0.7% the last 5 trading sessions of August, and the Nasdaq added 2.5% as the S&P advanced 1.5%. The Dow reached a new 14-month high on the last day of August, while the Nasdaq hit a fresh 16-month high and the Russell 2000 jumped to a 15-month peak. The S&P 500 didn't join the party and was the only major index to lag behind, unable to top its July 14 high of 1015.

August had the Nasdaq up over 4.3%, and since March, the Nasdaq has added over 700 points. While the month's move was impressive, volume was anemic, considerably less than the average of 1.35 billion shares daily. This slowdown had some bears telegraphing a bad fourth quarter, while the bulls maintain that the weather was better in August and most investors decided to get some sun. Once again, the jury's out on that; nevertheless, 7 months of gains have to make you think about taking a little off the table.

Economy Proves Helpful

We've had great news from the economy, helping stock prices jump. The August Chicago Purchasing Managers Index surged to a 15-month high of 58.9 from July's 55.9 and the news on the job front has remained stable. Even though interest rates have backed up from their all-time lows in June, they're still near historically low levels. The real question is whether this economic growth can be sustainable.

Some economists are now forecasting a gross domestic product near 5% for the fourth quarter, but the impact of higher interest rates has already cooled the pace of mortgage refinancing. Housing is likely to slow from its insane pace by year-end. I'm still looking for home prices to drop 20% to 30% over the next 2 years. I think the leading culprit to affect that will be property taxes, which never seem to go down.

Welcome Stocks Back

The president's tax cut package, which was front-end loaded, is being credited by the administration and economists as the chief reason for recent economic growth. Some of the checks going to families may have been a catalyst behind the recent surge in retail stocks. Retailers are reporting strong back-to-school sales. Wal-Mart (WMT) recently upped its expectations and is now only a few pennies short of their yearly $59.48 high.

Other retailers have enjoyed higher prices as well. JC Penney's (JCP) responded with nearly a $6 gain within a few weeks, from its low of $15.47 back on July 1. That's a 36% jump, on top of the dividend. Target Corp (TGT) has also moved nicely up from a low of $37 back on July 1. Smaller companies in the sector did even better. Circuit City (CC) has moved up from a low of $3.91 back in March of this year.

And then there's K-Mart (KMRT). KMRT shares shot up as much as 9.6% on the last day of August. The discount retailer reported a much smaller quarterly loss as Wall Street took its first look at how KMRT was doing after emerging from bankruptcy protection. KMRT closed the month at $31.91, after touching a postbankruptcy high of $32.27.

KMRT shares were as low as $12 back in May 2003, after the company reissued new stock and the company recapitalized. I recall hearing several analysts and hedge fund managers saying KMRT was done and would be bankrupt again. That may be true, but a 250% move in 5 months is really something else. We should all be so smart to have owned it—nothing like Monday morning quarterbacking.

Looking forward, the 1 group that really hasn't been rewarded is the energy group. Several analysts and market pros, however, are taking a new look at them. Some winners have been the gas companies. In particular, 1 company we mentioned here a few months back, William Energy (WMB), has made a new high again on recommendations by several Wall Street firms and an improvement in their outlook.

Ernest Caponegro is a New Jersey–based registered representative affiliated with First Montauk Securities, member NASD/SIPC. He welcomes questions or comments at 888-786-9507. Any opinions expressed are the author's and do not necessarily reflect the opinions of First Montauk Securities or those of its officers, directors, or affiliated registered representatives.