Thursday, August 3, 2006
Where’s the best place to be invested once the Fed stops raising interest rates?
The easiest and most obvious answer is large cap pharmaceutical stocks. This makes sense because the Fed usually stops raising rates just as the economy starts to slow down. And the pharmaceutical sector performs well in a slowing economy.
But the easiest and most obvious answer is wrong.
In fact, the last time the Fed stopped raising rates - back in January 2001 - the pharmaceutical sector actually lost 1% over the next eight months.
That’s better than the 8% loss the S&P 500 suffered over the same time frame, but it’s hardly awe-inspiring. (Yes, the market actually falls when the Fed stops raising rates – but that’s a topic for another day.)
Another obvious answer is the biotech sector. Stocks in this sector have no earnings, and really no hope for earnings. But the potential for a dramatic breakthrough discovery is enough to convince investors to stick with this sector in difficult economic times.
And, just like with the pharmaceutical stocks, the biotech sector performed better than the broad market in 2001. But the sector’s 2% gain in eight months fell short of even money market returns.
If you really want to make big money when the Fed stops raising rates then you need to think small – really small.
You need to think nanotechnology...
Nanotechnology stocks exploded higher almost immediately after the Fed stopped raising rates back in 2001.
There wasn’t a nanotechnology index back then. But if you take a look at the performance of the individual stocks that make up the current Merrill Lynch Nanotechnology Index (NNZ) you’ll see some really stunning returns.
Shares of FEI Corp. (FEIC) gained almost 100% in eight months. MTS Systems (MTSC) was up 85%. Kopin Corp. (KOPN) rallied 60%.
Of course, not every nanotech stock blasted higher. Several of them languished along with the S&P 500.
But if you picked just one or two of the right ones, then this tiny sector generated huge profits.
And, it’s poised to do it again.
When the Fed stops raising rates this time around, the place to be is nanotech. My Big Trend Report portfolio currently holds three nanotechnology stocks and I’ll be adding another one next month.
I’m expecting terrific gains from all of them.
Best Regards & Good Trading,
Earnings today: Career Education, New Century Financial, Rio Tinto, Sprint Nextel, Suncor Energy, Transocean.
Tobacco, oil stocks continue to dominate New Highs list.
The bad times continue for eBay… back on the New Lows list and down 50% from highs. Now at 32 times trailing earnings.