New economy sees gold in old, boosts industrials

From the looks of the past couple of days, a lot of other people in the market trenches suddenly agree with Ognar. The result: a massive shift in market capital, powering the Dow Jones industrials up an astounding 819.36 points, 8.35%, in the past two days alone.

There were some technical reasons that accelerated the bounce. Some hedge funds and other investors suddenly found themselves on the wrong side of bets against the Standard & Poor’s 500-stock index, which until this week had been sagging, and Nasdaq stocks — which have soared, plunged in recent days, then Thursday roared upward again. And the so-called triple-witching expiration of options and futures on stocks and stock indexes Friday has exacerbated the market moves. Also, pension funds have been rejiggering their portfolios to buffer up their old-line holdings.

But some investors simply seized on market fundamentals (you remember them, no?). Old Economy stocks had been so beaten down that once they began chugging again, many investors jumped aboard. Why did investors finally take the plunge now, instead of three or six months ago? Veteran fund manager Ken Heebner says: "If I knew the answer to that question, I’d have a lot more money than I have now."

It seems that many investors have just been waiting for the old-line stocks to start moving up again. All of which shows the momentum mentality of this market: Indeed, some skeptics of the rally believe it is simply a knee-jerk reaction of momentum investors, who buy stocks just because they are going up. Instead of techs, now it is the Dow industrials’ turn, as some momentum investors have begun dumping tech and buying newly stirring smokestack and other Old Economy stocks.

For his part, Ognar says he has been trying to anticipate what kinds of stocks would start performing well six months from now, when he anticipates that the Federal Reserve will have ceased to ratchet interest rates upward. Ognar’s fund didn’t notch up gains of 75% last year by being shy about cutting-edge — and expensive, by traditional standards — technology stocks. So, when Ognar is shifting some of his money into less flashy names, it is a real change.

"Nobody was buying retailers and financials — everyone was underweight" in those sectors, he says. "I think the spread got too big" between technology stocks and older growth stocks such as Home Depot, which, he notes, is growing at 30% a year.

Not that Ognar expected anything like this week’s incredible surge in blue chips. And after several days of big gains, he wouldn’t be surprised if the stocks don’t spend a little while giving back some of the recent gains. He has broadened his buying from some "core" names such as Citigroup to secondary names like Costco and Lowe’s, No. 2 to Home Depot among do-it-yourself home-improvement outfits.

Given the big price rise, "we did some buying this morning; I don’t know if we’ll buy more tomorrow," he says. He is clearly not giving up on technology, either. "I like to see that tech is alive" Thursday, he says. The Nasdaq Composite, after declining in the morning, ended the day up almost 135 points.

But Ognar says it was clear the market would at some point broaden on expectations that the Fed would relent on its interest-rate increases. Those rate increases, to the surprise of some, until recently knocked the stuffing out of the older blue-chip stocks, but did little to dent the rise in New conomy stocks with high price-to-earnings multiples such as Cisco and JDS Uniphase.

Such companies were getting "big, big orders," Ognar says. "It didn’t matter what the Fed was doing for their business." But an end to the interest-rate increases would mean more stocks would benefit, Ognar says. "We’ve been anticipating that," he says. "We think you still want to stay with your best companies in each sector."

Why should the Fed stop tightening? It is as plain as the nose on your face, Ognar says: It is an election year, and the Fed doesn’t want to send the economy into a recession.

Interestingly, it may be the "go for the gusto" growth-fund managers such as Ognar who are shifting money into less dazzling stocks, rather than middle-of-the-road types or value-fund managers. Heebner of Capital Development Management, who is more of a contrarian investor than a value manager, says he has been adding to his positions in real-estate investment trusts and basic industry stocks.

William McCorkle, a large-capitalization portfolio manager at State of Wisconsin Investment Board, says he is "pretty well diversified, and just hanging on for the ride." And what a ride it is.