Recall the 2003 Market and Look Ahead

Now that 2003 is over, the stock markets arestill celebrating a great year. Major indexesshowed gains, with the Nasdaq up nearly50% and the Dow and S&P 500 reportingreturns around 25%. In fact, the major averages wereshowing the bulk of these returns by the end of thethird quarter, which brought a lot of smiles toinvestors before Labor Day. But as good as the gainswere, the volume fell for the first time in years.Traders felt that having gains over 20% were enough,and they were content to sit on the sidelines as theyshowed the bulk of the year's profits by the end ofAugust. This hesitation to fool with a good yearhelped the total volume to fall.

While the major averages reported decent gains,the smaller stocks reported even higher returns assmall cap stocks came back in vogue. The Internetgroup received some of that enthusiasm as Yahoo(YHOO), Amazon (AMZN), and eBay (EBAY)reported gains over 100% to 300%. These rewardslead investors to take chances in even smaller stocks.The Nasdaq and over-the-counter markets relivedpast glory as low-price and bulletin board stocksexploded. There's a lesson to learn here, but beforewe start to preach, let's take a few minutes to lookback at the year that was.

Energy Rebound

Some of the biggest gainers on the New York StockExchange were also the biggest losers of 2002. Lastyear, seven of the top 10 losing stocks belonged to theenergy sector. Williams Energy (WMB) was up nearly268%, rebounding strongly in 2003 from the beating ittook, along with many of its competitors, after scandalsinvolving the energy industry made headlines.

Note:

Energy issues suffered in 2002 from allegationsthat Enron executives cooked the books. Williams andothers also faced allegations of misconductduring the California energy crisisin April 2000. The Tulsa, Okla-basedWilliams lost nearly 90% of its value in2002, ranking as the second-biggestloser in the S&P 500 that year. In fact,the stock hit a low near $0.80 duringthe fall of 2002. However, the stockrecovered immensely and at one pointduring 2003 was near $11. Other 2003winners include the following stocks:Avaya (AV) up 379%, PMC-Sierra(PMCS) up 253%, Dynergy (DYN) up234%, and Corning (GLW) up 218%. Most of these winners were thebig losers of 2002.

Dynergy was also hurt from theEnron fallout, as investors ran awayfrom the stocks of energy traders, andconsequently, the bonds of the companiescollapsed. Then, as these energycompanies restructured and paid offdebt, their stocks rallied. Reflecting theincreased optimism, they were able tosell assets and restructure debt at higherprices than markets anticipated.

Another energy company havingsimilar problems is Calpine (CPN).Calpine is a North American powercompany engaged in the development,construction, ownership and operationof power generation facilities, and saleof electricity in the United States,Canada, and the United Kingdom.Calpine ran into trouble over the 2001to 2002 period due to its energy tradingbusiness. That business has since beenshed and Calpine has restructured, sellingsome businesses and expanding others.Calpine reported that over a periodof 9 months, ending Sept 30, 2003, revenuesrose 27% to $7.06 billion. Netincome from continuing operations alsorose 40% to $173.1 million.

Looking Ahead in 2004

Squawk Box

Gene Peroni, senior managing directorof research at Claymore Securities inPhiladelphia, Pa, believes that the stockmarket is in the midst of a long-termrecovery that will continue for most, ifnot all, of 2004. “A year from now, themajor stock indexes will be 11% to13% higher than they are now,” hereported on Dec 30, 2003, during atelecast of CNBC's .

“Money flows into the market willcontinue strong,” Peroni said. “I thinkwe'll see rebalancing of portfolios in thefirst half of next year, and that will putmore emphasis on equities and less onfixed-income areas.” Peroni doesn't seea big rotation out of certain stocks andsectors; he insists that what's workingnow will continue working throughoutthe coming year.

Money

Peroni's top stock picks for 2004 asreported in an article by magazineare Apache (APA), CR Bard (BCR),Johnson Controls (JCI), Nam TaiElectronics (NTE), Omnicom Group(OMC), The Progressive Corp (PGR),SPX Corp (SPW), Time Warner (TWX),and Wilson Greatbatch (GB).

Kiplinger's

Kiplinger's magazine reports that2004 should be a good year, but nothinglike the 1990s. They also state thatthe decade overall is unlikely to resemblethe second half of the 1990s, when20% to 30% yearly gains were thenorm. They believe that stocks of largecompanies should see an average 8%price gain, plus a 2% dividend yield, fora total return of 10%. They added thatclassic blue chips have lagged since thestock market bottomed, so those sharesmay be looked at. Five stocks that favors for 2004 areAmerican International Group (AIG),Coca-Cola (KO), General Electric (GE),Microsoft (MSFT), and Pfizer (PFE).

Some of the biggest losers of 2003in the S&P 500 included Winn-Dixie(WIN) down 38%, Eastman Kodak(EK) down 25%, Newell-Rubbermaid(NWL) down 24%, Qwest Communications(Q) down 24%, AT&T (T)down 22%, Kohl's (KSS) down 21%,Schering-Plough (SGP), King Pharmaceutical(KG) down 14.5%, and Merck(MRK) down 13.4%.

CNBC reports that many strategistsexpect the economy to be strong in2004, looking for technology, energy,and cyclical stocks to gain. However,the general consensus seems to be thatinterest rates will be turning up as theeconomy becomes stronger, with short-termrates suffering the most.

Ernest Caponegro is a New Jersey–based registeredrepresentative affiliated with First MontaukSecurities, member NASD/SIPC. He welcomesquestions or comments at 888-786-9507.Any opinions expressed are the author's and donot necessarily reflect the opinions of FirstMontauk Securities or those of its officers,directors, or affiliated registered representatives.

The information contained herein is the opinion ofthe author, an affiliate of Montauk FinancialGroupâ„¢ First Montauk Securities Corp (FMSC),member NASD/SIPC, and may not be those ofFMSC. Content provided is for informational purposesonly and should not be construed as an offerto sell or a solicitation to invest. FMSC's directors,officers, and/or partners may own options, rights, orwarrants to buy the securities mentioned. FMSCwas neither a manager nor comanager of any of thesecurities mentioned within the past 3 years.