Future stocks

Health care shares held up well in downturn

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August 26, 2007|By Gail MarksJarvis | Gail MarksJarvis,TRIBUNE MEDIA SERVICES

In major stock market sell-offs, investors often can look at what held up during the storm and figure what sectors will be the leaders as the stock market recovers in the future.

Frequently, times of upheaval are turning points in the market. What worked leading up to a market peak turns out to be yesterday's news. And new stocks emerge from the downturn to be the market's winners going forward.

But this time may be different. Some areas that have held up relatively well may prove not to be the leaders when the market rebounds. And experts warn against simply buying beaten-down shares, saying they may not be bargains at all.

Some strategists say that reading the tea leaves this time around is more confusing than some other periods of stress because hedge funds, with more than $1 trillion in assets, have become major drivers of the markets.

In particular, funds that use computer-driven models to select investments have been hardest hit the last few weeks. They make up an estimated $241 billion of the global hedge fund business.

Rather than selling stocks in which they have lost confidence, many hedge fund managers have been forced to sell both strong and weak holdings because their lenders aren't supplying them with money, and investors are fleeing the funds and demanding money back.

"We are witnessing the world's greatest margin call ever," said Ed Yardeni, chief investment strategist of Yardeni Research.

Hedge funds often do most of their investing with borrowed money, known as leverage. Consequently, when investors are bailing out of hedge funds, the fund managers have little access to cash. They have had to sell what is expedient to raise cash, and that has meant selling some of their strongest stocks.

Analysts say that has blurred market analysis, with virtually every type of stock sinking after the July 19 peak. Not surprisingly, home construction, which is at the center of the housing recession, became the biggest loser, dropping 21 percent over the next four weeks, based on the Dow Jones home construction index, although it has recovered some ground since.

But a range of stocks, including precious metals, energy, technology, insurance, retailing and utilities, dropped more than 8 percent before rebounding a bit. Health care, which generally is seen as a defensive sector because people need medical care regardless of the economy or market conditions, behaved true to form in market shocks. It held up well, falling less than 5 percent.

Financial stocks and stocks that depend on consumers rather than business spending have been the weakest stocks of the year. Besides plunging during the shock of the last few weeks, they are the only two sectors that are in losing territory from the start of the year.

Now, analysts are trying to figure out what has been pummeled primarily because of hedge-fund selling and short-term fear, and what might remain in a slump in the future.

They are warning investors about jumping quickly into stocks based on the assumption that the Federal Reserve will save the day. And they want investors to be cautious about trying to identify bargains in knee-jerk fashion simply because a sector has been hard hit recently.

"Consumers love a sale, especially when they get two for the price of one," said Standard & Poor's chief investment strategist Sam Stovall. "Investors are the same way. Wall Street tends to get very excited whenever the Federal Reserve begins a new rate-cutting program."

Still, Stovall said, S&P's Investment Policy Committee recommends investors "take a cautious approach to the market in the coming weeks and advises against assuming that the Fed's rate cut signals an `all clear.' "

There is a growing realization that the problems that led to the market's swoon may not be short-lived or as easy to resolve as pundits urging investors to go bargain hunting.

During the last few years, lenders increasingly let down their guard, providing loans to homebuyers and businesses without the ability to repay them.

As homeowners and companies loaded down with debt struggle to keep up with payments, the economy is expected to feel the pressure. And with lenders tightening up lending standards, both consumers and businesses will likely have to hold back on some spending, a serious drag on the economy.

In such an environment, Merrill Lynch economist David Rosenberg said, even Federal Reserve interest rate cuts might not easily generate growth.

Private lenders are cautious. The result: The interest rates of fixed-rate mortgages have climbed to about 6.6 percent, and rates on so-called jumbo loans, or mortgages over $417,000, have risen significantly.

"That's not good news for anyone living in California, where the median price of a home is $595,000," Rosenberg said. "That is what we call a form of credit crunch; this is the end result of heightened risk aversion by both lenders and borrowers."

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