Investors sticking with
the blue chips

Old Economy firms are attracting the
most attention while techs try to play catch-up

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By Amy Baldwin
Associated Press

NEW YORK >> Compared with high-tech, there's nothing glamorous about aluminum, chemical products and basic manufacturing. But investors don't care because they see there's money to be made in reliable Old Economy sectors.

"When the economy gets better, you buy the things you need, not the things you want," said Arthur Hogan, chief market analyst at Jefferies & Co. "That's what's going on right now."

Indeed, investors' recent strategy has been to buy stalwart blue-chip companies, including DuPont and Caterpillar, that are showing the first signs of earnings improvement.

While tech trading might be more exciting, it's also riskier, and so investors are more or less putting the sector on hold until its recovery is more certain.

With Wall Street's latest rallies focused on blue chips, the Dow Jones industrial average has risen 7.1 percent during the past month, and on Tuesday achieved its highest closing level of the year, 10,632.35. The tech-dominated Nasdaq composite index, meanwhile, is up about 3.5 percent compared with its standing of four weeks ago.

However, not all 30 Dow stocks are participating evenly in the advance. The greatest strength has come in basic material stocks and manufacturing companies including International Paper and DuPont. The two Dow industrials are trading near their 52-week high prices.

And, now investors are boosting manufacturers such as Caterpillar and consumer cyclical companies including General Motors. Caterpillar closed yesterday up $1.13 at $59.79, near its 52-week high on March 8 of $59.94. GM also is approaching its year-ago high.

When the economy first starts to improve, "You think of playing basic materials, diversified manufacturers, and eventually retailers," said John C. Forelli, portfolio manager for Independence Investment LLC in Boston.

Economic data also points to a recovery taking place in blue-chip sectors.

Yesterday, the Federal Reserve reported the strongest industrial production numbers since June 2000 as output at the nation's factories, mines and utilities rose 0.4 percent in February. The bigger-than-expected increase is the strongest evidence yet that manufacturing is improving.

Analysts say the last sectors to rally on Wall Street will be technology and telecommunications, where companies are still issuing revenue and profit warnings.

Tech and telecom depend more on other companies' capital spending, which continues to lag, rather than consumer spending, which remains relatively strong. In other words, companies such as software maker Oracle and cell-phone maker Nokia must wait for other businesses to start growing and spending money again before they increase their profits.

But capital spending isn't expected to pick up until the second half of the year.

"Companies are not going to increase their capital expenditures until they increase their profits," Forelli said. "And, companies are not going to increase their profits year over year until later this year."

Oracle said Thursday it doesn't anticipate spending to increase in the next two quarters. And Tuesday, Nokia and Lucent Technologies issued sales warnings.

These companies' weak outlooks are reflected in their stock prices, which are well below their 52-week highs. Oracle, for example, is nearly 40 percent below its high of $20.84.

In the near term, investors will be keeping a close eye on first-quarter earnings reports, which companies begin releasing in April. The results aren't expected to be robust, but should show some improvement, analysts said.

"It should be significantly less negative than the fourth quarter," said Ronald J. Hill, investment strategist at Brown Brothers Harriman & Co. "That would be key to saying we are on a trajectory to having some year-over-year growth in the second quarter, and that would bring investors in."

For the week, the Dow rose 34.74, or 0.3 percent, to 10,607.23, after gaining 90.09 yesterday. The Dow has advanced for five straight weeks.

But the Nasdaq had a weekly loss of 61.37, or 3.2 percent, despite advancing 14.16 yesterday. The Nasdaq closed yesterday at 1,868.30.

For the week, the Standard & Poor's 500 index eked out a gain of 1.85, or 0.2 percent, after rising 13.12 yesterday to 1,166.16.

The Russell 2000 index, the barometer of smaller company stocks, finished the week off 0.73, or 0.2 percent. Yesterday, the Russell rose 1.36 to 499.12.

The Wilshire Associates Equity Index, which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues, ended the week at $10.904 trillion, up $14.02 billion from last week. A year ago the index was $10.559 trillion.