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Get Four
|  | DECEMBER 14, 2004
The Dollar Is the "Wild Card" Barry Hyman of Ehrenkrantz King Nussbaum thinks the weakening greenback will be a key element for investment strategies in 2005 With the dollar already having dropped 20% against the euro, Barry Hyman, equity market strategist for New York investment boutique Ehrenkrantz King Nussbaum, thinks it holds the key to what'll happen in the new year. Hyman sees a rise in interest rates and inflation threatening the stock market in the second half. His prediction: "The dollar is going to be the important issue as a wild card for 2005." In this environment, he points to three sectors for potential investment: industrial cyclicals, consumer staples, and energy. He sees the weaker dollar helping exports in both of the first two areas. But he counsels diversification not just among sectors but also among small-, mid-, and large-cap stocks. As examples of stocks his analysts like, Hyman mentions two small-cap biotech names, Discovery Laboratories (DSCO ) and Indevus Pharmaceuticals (IDEV ). In industrial cyclicals he suggests an exchange-traded fund to minimize risk, and among the consumer staples he names Coca-Cola (KO ) as a turnaround play (see BW, 12/20/04, "Gone Flat"). These were some of the points Hyman made in an investing chat presented on Dec. 9 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk. Q: Barry, it's yearend forecast time -- what do you see ahead for stocks? A: My forecast for the rest of 2004 is moderately higher prices. We have not changed our 2004 forecast, since the market has fallen pretty much in line, and we still see the S&P 500 (which is how we measure the market) closing around 1,200. Our forecast for 2005 is somewhat complicated, because we expect a strong first half of the year, because of continued earnings growth and economic growth, but in the second half we expect inflation and worries about the weakening dollar to become an important story once again. So as a fair value for 2005, currently we believe an S&P 500 level of 1,300 would be appropriate. We foresee the year ending at around 1,270. We believe the dollar is going to be the important issue as a wild card for 2005. The dollar has dropped almost 20% against the euro over the past two years.... A weaker dollar, which we do expect, is inflationary and would cause interest rates to rise more dramatically than the measured tone that Mr. Greenspan has pointed to in the last few months. Q: Are you recommending certain stocks or sectors, given your outlook and the wild cards you just mentioned? A: Yes. We have a sector view for 2005 that is similar to 2004 in terms of overweighting or underweighting sectors. Our choices for 2005 are industrial cyclicals, as they represent a play on a weaker dollar and an export market with strong trends in Asia, as well as a continued economic recovery in the U.S. Secondly, consumer staples, which were not a favorite in 2004, will in our opinion benefit from a weaker dollar, since many of these companies are huge exporters. Even though we've seen oil prices drop down recently, we believe energy is a good sector as well. Energy remains a sector we believe can exhibit strong year-over-year earnings growth. A $40-a-barrel average price, or even somewhat lower, is still above a trailing four-year average price for that commodity. Therefore, we think there could be positive earnings surprises in this sector still, after the wonderful year it had in 2004. Q: Are Microsoft (MSFT ) and Cisco (CSCO ) dead money? A: As a sector choice, we are warming up to the technology sector...one has to be careful, in developing an investment model, to diversify well enough among large-cap, mid-cap, and small-cap opportunities. Only staying with the large-cap stocks -- with Microsoft and Cisco, which are great companies, but possibly deemed as past-markets' winners -- we believe would be a mistake that investors often make in limiting their investment choices to the most obvious large-cap stocks. These will likely be market followers that could offer somewhat greater-than-market returns, but one should be more diversified and possibly seek a portfolio of smaller stocks as well to take advantage of new technologies. In that light, there are many technology sector funds and mutual-fund managers whose specialties are in this category and offer great diversification and opportunity that would likely outperform a Microsoft or a Cisco. Q: Small stocks have been doing better than large caps, in general. Do you see that continuing? And can you name any that you like? A: This year has been a great year, once again, for the small-cap market, and 2005 will be once again a good year for that type of investment.... As long as interest rates remain in a slow grind upward, without any dislocation of equity markets to interest rates, the sector is viable and remains a strong investment theme. We like many biotechnology stocks covered by our analyst, where a diversified portfolio makes sense. Two names that we currently rate as "outperform" would be Discovery Laboratories and Indevus Pharmaceuticals. In the energy sector -- it's remaining a strong investment theme -- Key Energy Services (KEG ) is a good opportunity. In communications-component stocks, we have outlined Harmonic (HLIT ) as an opportunity in that sector. Q: Your thoughts on Citigroup (C ), Bank of America (BAC ), and J.P. Morgan Chase (JPM )? A: The large money-center banks, while still performing moderately well, could be expected to exhibit some concern as we get deeper into 2005. That is because of our forecast for higher interest rates.... Clearly, Bank of America has been the best-performing stock here, and we would continue to maintain positions in the sector until we get deeper into 2005. I would be more concerned as to the size of the next interest rate hikes in the next two meetings expected by the Fed, as to whether they remain moderate and measured in their policy. Anything away from that scenario would tend to hurt the financial sector.
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