One plausible answer is that the big and liquid stalwart stocks (old economy stocks) continue to be regarded as 'safe havens': Dow components Dupont, International Paper, and Alcoa are up on the year while other companies such as IBM, and MSFT are down sharply. Another factor to consider is that those companies that have the ability to consistently pay dividends have faired much better than those that do not. Granted, a 2% dividend yield is not attractive when compared to stock market gains in the 1990s. However, today 2% is more than the average yielding money market. With this in mind, many Dow components offering visible dividends have attracted capital while their dividendless counterparts have not.

For steadfast bulls the isolated strength in a handful of Dow stocks is hardly encouraging. Rather, now that the majority of economists and analysts firmly believe that the economy will rebound this year stagnation in the stock markets can be called somewhat surprising. Furthermore, no one, including Abby, Battipaglia, and Goldman would attempt to argue that companies such as Alcoa and International Paper are heralding in the new bull market – no one is this naive. Rather, as we all know financial, and tech stocks typically rally as the economy pulls out of recession. Ironically, as the commentary on the economic climate has steadily improved this year financial and tech stocks have been hit the hardest…

Financials Fumbling Recovery Hope?
Yes, f-stocks initially helped spark the 'recovery' rally in late September, but no, this trend has not continued. To be sure, the 3 financially related Dow components have each fallen sharply in recent weeks even as the economic statistics continue to promote the word 'rebound'.

Whether or not Enron related fears are solely responsible for the tech/financial fallout is debatable. However, regardless of Enronitis, a highly pertinent question remains: if the economic recession is really over then why are these three stocks trading below their pre-September levels today? Are financial stocks telling us that further troubles lurk for the American markets?

For JP Morgan an easy answer will suffice: the company is being investigated by the Fed for its Enron dealings, lawsuits against the company are mounting, and Fitch has downgraded JPM's outlook to negative. By contrast, apprehensions surrounding America Express and Citigroup are not nearly as poignant. Rather, the economy continues to show signals of a rebound, Moodys and others are boldly predicting that peaks in defaults and bankruptcies have already been reached, and Argentina and Enron specific problems are supposedly concerns of the past. As such, weakness in AXP, and C could be considered somewhat surprising.

The mixed signals from the 3 Dow financial stocks are not the only concern. Additionally, the broader readings in banking stocks have been negative for some time. For instance, the Philadelphia bank index, while perky, has been trending lower since early 2001 -- the signals of a new economic expansion are not yet visible.

Additionally, the S&P bank index is going on nearly four years without suggesting another sustainable bull market is upon us.

Conclusions
Financial stocks typically lead the economy out of recession. However, it should also be remembered that when a recession arrives financial stocks are typically one of the weakest groups. Now that we all know recessions exist, it is probably safe to say that we will not have to wait a decade for the next one to arrive in the United States. Perhaps this is the pervasive logic now infecting f-stocks?

In this regard, it would appear that investors are hedging their 'bets' in financial stocks -- not allowing a trivial thing such as an economic rebound to be their only guide when investing. As such, stagnation in financial stocks may be telling us that the upcoming expansion with either not be that strong, or not be sustainable. In either case, everyone is in agreement that bullishness in the likes of Alcoa and International Paper will not be enough to sustain a 'new' bull market. Rather, perhaps only delay the next bear market…

Dividends And Dire Straits
So long as no major crisis develops those stocks that have paltry dividend yields have greater support strings than those that do not. Moreover, those stocks that have hard assets, not financial assets (banks) appear to be in favor because of balance sheet visibility they offer the investor.

That said, in rare instances when investors completely give up on stocks dividend yields can escalate significantly higher than fixed income yields simply because an attitude is fashioned that 'all stocks carry great risk". The last time this happened was in the 1930s – when owning any grouping of stocks other than gold proved dangerous.

With these things in mind, is should be remembered that financial stocks can be a indicator of both 'good' and 'bad' times. With f-stocks dropping while the economy is supposedly improving one has to seriously wonder whether another Enron type incident lurks. An economic recovery without an f-stock rally would be highly irregular.

Brady Willett
BWillett@fallstreet.com
www.wallstreetwishlist.com

February 27, 2002