Look Back at 2002, Breathe, and Move On

Thank God it's over! Thatsums up the feelings of WallStreet gurus and physician-investorsalike as the third year of thestock market decline ends. Last yearmay go down as one of the worstyears of any 3-year bear marketdecline. The Dow fell 17% and theNasdaq dropped over 31% after sufferingthrough one of the worstDecembers in history, losing 11% forthe month alone. The paper lossestotaled $2.7 trillion according to theWilshire 5000 index. The broad S&P500 was off by over 22%.

But big declines one year cansometimes lead to large bounces onthe upside once the new year startsand tax selling ends. After the yearstarts, selling is typically out of theway, and as the demand for stocksreturns, market growth is met withless resistance. Prices have a betterchance to increase. Most professionalsbelieve 2003 will be an up year.

A 4-year decline in the market isalmost unheard of and hasn't happenedsince 1929 to 1932, the middleof the United States'worstdepression ever. As bad as things arenow, this is not a 1929 repeat.

REAL ESTATE SHIMMERING

Wall Street Journal

While the stock market's indexessuffered, hard assets had some oftheir best returns since the inflationyears of the late 1970s. Preciousmetals had a banner year as gold andplatinum both rose 24.5%. Silverrose 51/2%. Gold stocks were up over51%.Through the third quarter, residentialreal estate (repeat sale index)was up 6.16%, capping increases of7.85% in 2000 and 8.69% in 2001,as reported by the .Real estate soared as the marketsfell, providing one of the few brightspots in a suffering economy.

Nationally, prices have jumped anaverage of more than 16% over thepast 2 years, but locally, some priceshave exploded. New York suburbshave seen increases from 50% to 80%and San Diego prices rose over 78%.Experts are now saying there may bea real estate bubble and prices mustcome down as interest rates rise andthe mortgage boom loses steam.

TREASURY AND JUNK

Most economists were expectingthe US economy to have a slowrecovery last year, which didn't happen.So against a backdrop of arecession-like economy, US treasurysecurities (ie, 10-plus-year bonds)had a violent but very profitableyear. The treasuries had returns ofover 16.7%. The 10-year note wasup over 14%. And municipal tax-freebonds returned over 10%. Somecould argue that the return was evenhigher, as there are no federal taxeson the income earned, and in somecases the bonds are also free fromstate and local taxes, providing aneven higher return. The 10-yearbond started the year with a rate of5.06%, but as the Federal Reserveresponded to slower economicgrowth, rates came down and the10-year bond finished the year with alow coupon rate of around 3.8%.

Corporate bonds turned insomewhat respectable returns—ifthey were able to escape the disastersthat occurred in companiessuch as WorldCom (WCOM), TycoInternational (TYC), and QwestCommunications (Q). These 3 hadtheir ratings slashed from investmentgrade to junk. Junk bonds had a badyear, according to the Merrill Lynchhigh-yield index, losing over 2%.

Spider-Man

Looking at individual issues, someof the biggest gainers of 2002 included:Boston Scientific (BSX), up 75%on better sales of medical stents;Newmont Gold (NEM), up 50% onthe increase in gold prices; andMarvel Enterprises (MVL), up 136%on the movie's success.Some of the biggest losers included:Dynegy (DYN), down 95% onaccounting and debt concerns;Gemstar TV Guide International(GMSTE), down over 88% due to apower struggle, declining ad sales,and legal problems; and Nvidia(NVDA), down over 80% on slowersales of graphic chips and restatedresults for 2000 and 2001.

LOOKING AHEAD TO 2003

Street Smarts

HCM

Market Letter

Paul Schatz from BeneficialCapital, who writes for ,notes that any year-end, Santa Clausrally should be taken with a grain ofsalt. One of his favorite sayings heardon the street is: "If Santa Claus failsto call, bears will come to Broad andWall."Michael E. Lewitt of the reports on a recent surveyof 150 corporate executives bythe Business Roundtable, which suggeststhat any recovery will be difficult. The survey concludes that amajority expects weak growth ingross domestic product, decliningemployment, and flat capital spendingfor this year.

Forbes'Newsletter

Forbes

The December 31 reported a soupy 2003 marketfor stocks and funds. interviewedseveral money managers, whoclaimed, "Investing in the 1990s wasa matter of ‘buy and hold,'but nowthe mantra is diversification."Accordingto Gerald Appel of Systemsand Forecasts, "In this kind of market,you really need a diversifiedportfolio with current income andtrue value stocks."He went on to saythat if you would like a small portionof your portfolio to be speculative,look at the energy sector—particularlyexploration and services—aswell as alternative energy, like hydrogenfuel cells. As far as bonds, Appeladvises staying short with maturitiesof less than 5 years, like ScudderPreservation Plus (BTPSX). He alsolikes real estate investment trusts(REITs), like Cohen Steers iShares.

The Prudent

Speculator

Walter Grouleau of Growth FundGuide looks for "undervalued opportunities,wherever they are."Thatmeans avoiding the US markets andlooking overseas in Asia and gold.He likes the Matthews China Fund(MCHFX) and the MatthewsPacific Tiger Fund (MAPTX). JohnBuckingham, editor of , tends to be a value investorwho likes technology with"extremely inexpensive valuations."In no particular order, his picks areAether Systems Inc (AETH), AtmelCorp (ATML), American Software,Inc (AMSWA), Captaris Inc (CAPA),Comverse Technology (CMVT), Fair-Market, Inc (FAIM), and ESS TechnologyInc (ESST). He also likes retailstocks such as Sears (S) andbeaten-up autos such as Ford (F)and General Motors (GM).

This year should prove to be interesting.Physician-investors will haveto pay attention to the economy, thepotential war with Iraq, oil, gold, andother geopolitical factors that maydictate prices more than earnings.

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.