Negativity Sends Chills Through Investors

Halloween's spooks are in theair, and fears of a stallingeconomy are scaring consumersand investors alike.Stocks are getting a cold shoulder frominvestors as stock prices follow thelower temperatures down. But as thethird quarter ends, the S&P 500 stillmanaged to record quarter-to-quartergains for the first time in several years.However, fear and profit taking arereplacing the optimism that higherprices brought over the past 9 months.

Pessimism Spewing

NBC News

Political talk is influencing investorand consumer confidence as the 10Democrats vying for President Bush'sjob continue to slam his record on theIraqi war. The press is adding to theconfusion with a constant, negativetone generated from the daily reportsout of Iraq. It's no wonder thatAmericans think things are bad.They're being pounded daily by somuch negativity that it's feeding onitself. Even Tom Brokaw of commented that the press had goneoverboard, and, while terrorism is stillpresent in Iraq, conditions are betterthan what's been stated.

Were our forces simply going towaltz into Iraq and everybody wasgoing to say thanks? It's a war. Themajority of the Iraqi Army ran off thebattlefield and melted into the population.These people are still out there,adding to the terrorism. The jails wereemptied, allowing convicts to roam thestreets. Why isn't the press focusing onthe good things, like new schools,replaced utilities, etc? The media saidthat Iraq was going to be anotherVietnam before the first shot was fired.How do they know? It took years to getEurope turned around long after theGerman occupation. Why should thingsbe any different this time?

Perception is everything. If we perceivethat things are bad, our perceptionsbecome reality. We can't afford to quitthis war. Next time, the loss of life and itseffect on our economy could be evengreater. We can't appease aggression andturn our backs on terrorism this time; thestakes are too high. As a nation, we musthave the will and the patience to wait thiswar out. If we give up, how long will ittake before the United States gets hitagain? The terrorist attacks in 2002 werelooking to do more than kill our people;they were looking to kill our way of lifeby destroying our financial system. Theymust not be allowed to try again.

Moving Steadily Up

While news from overseas may havebeen gloomy, the US economy plowedahead, and the number of millionaires hita 20-year high. Over 3.8 million householdsreported a net worth exclusive oftheir homes and 401(k)s of over $1 million,with an average income around$170,000. Looks like people are still ableto save a little. That's good news.

Meanwhile, with the third quarterover, several groups reported stellar gains.Gold futures climbed the last day ofSeptember to close out the third quarterwith a gain of nearly $40 as analysts kepttheir sights on $400-an-ounce gold orhigher by the year's end. Gold has been ina "down-to-sideways" trend for almost23 years, but the tide may be turning.Investors think commodity prices willmove higher as global economies start togrow. Gold jumped above $405, butclosed lower on profit taking.

Pharmaceuticals Stumbling

Drug stocks had a tough quarter asthe Amex Pharmaceutical Index (DRG)dipped 0.5% to 310.68. The index is off5.5% for the third quarter. Since thebeginning of 2003, the index is up 4%.Pharmaceutical stocks have been pressuredby a number of factors, includingfears about the growing effort to importcheaper drugs from Canada, which willaffect profits.

Major pharmaceutical companies arealso being squeezed by competition fromgeneric drug makers. On Sept 30, ImpaxLaboratories (IPXL) became the latestcompany to announce it won FDAapproval to market a generic version ofSchering-Plough's (SGP) former blockbuster,Claritin. Schering-Plough's profitshave been plunging since late last year,when the first generic competition to thecompany's flagship allergy medication hitthe US market. Another generic drugmaker, Ivax (IVX), has won tentativeFDA clearance to market a generic versionof Johnson & Johnson's (JNJ)epilepsy medication, Topamax. However,Ivax will need to hold off on marketingthe generic because Topamax stillhas patent protection.

Financial Sector Highs

The financial stocks had nice gainsover the past few quarters, with lowermortgage rates helping the bottom line.Several smaller institutions have beennamed as targets for takeovers. NewYork's Staten Island Bancorp (SIB) isamong the banks most likely to be sold inthe coming months, according to a recentreport released by Keefe Bruyette &Woods (KBW) on CBSMarketwatch.com.KBW said small banks will see interestmargins (ie, the difference between interestpaid on deposits and interest collectedon loans). That would stem the strongprofits that smaller banks have enjoyedthroughout the refinancing boom.

BusinessWeek

BusinessWeek

The 34-page report names 15 banksthat fit KBW analysts David Honoldand Eileen Rooney's profile of bankslikely to be sold. Also on the list areSovereign Bancorp (SOV), RepublicBancshares (REPB), Providian Financial(PVN), and Columbia Bancorp(CBMD). Looking through the weeklymagazines, reports thatDendreon (DNDN) was $3 last year,but has tripled the past few months asthe biotech industry has reported onseveral cancer remedies. See GeneMarsials' column in the October 6 issueof .

Ernest Caponegro is a New Jersey–based registered representativeaffiliated with First Montauk Securities,member NASD/SIPC. Hewelcomes questions or commentsat 888-786-9507. Any opinionsexpressed are the author's and do not necessarilyreflect the opinions of First Montauk Securities orthose of its officers, directors, or affiliated registeredrepresentatives.