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2001 Financial Survival Guide

So what should we buy now?
How about the stocks that do well whether the economy improves or not? Can we just stick with Pepsi and Phillip Morris and Merck, to name three standouts from 2000? Can't we continue to ride the United Healthcares and the General Mills's? Listen carefully.

Now that Alan Greenspan has taken his foot off the brakes and begun to force interest rates down, you want exposure to the stock market. When the Federal Reserve eases, two things occur: The psychology toward investing goes from being absurdly negative to being ridiculously positive, and companies that use short-term borrowed money -- banks, auto, and retail -- soar. Some of this action had already been anticipated. We saw a surge in the bank stocks, and the lowly retailers roared back into action in the last few weeks of the year.

AUTOMAKERS
The auto stocks, crushed by the worst karma I have ever seen in my investing lifetime, will start working again as the Feds get the economy back into gear. I love Ford. And General Motors too, but not with quite the same undying passion.

FINANCIALS
It's the financials, though, that really rock when the Fed injects liquidity. As part of my work at TheStreet.com, the place I have retired to, I have decided to link my new portfolio's fortunes to the fortunes of those people who manage to make money in good times and bad. In financials, that means Charles Schwab and his eponymous Schwab, Hank Paulson at Goldman Sachs, and Sandy Weil at Citigroup. All three stocks seem like must-owns to me here, with only Goldman having sprinted too far to put on a full position. Any sell-off for the great Goldman Sachs, and you will see me buying stock for my personal account.

RETAILERS
Retailers come up second after a Fed ease, and this is where I like to go with a mixture of fallen angels and dominant players. Wal-Mart and Target are the dominant ones and make the most sense to me, but the one that keeps attracting my attention is Best Buy. Here's a former highflier that got decked by the one-two punch of a slowing economy and what seemed to be a stupid-as-wood acquisition of Musicland, which owns the chain of Sam Goody music stores. Everyone knows that we won't have to pay for CDs anymore because of the Net, right? Let me share something with you. It's a thought that struck me in the waning days of my hedge-fund tenure. Richard Schulze, the CEO of Best Buy, may be one of the smartest merchants of the past twenty years. I have puzzled and puzzled over his acquisition of all those brick-and-mortar Sam Goody stores and can only conclude that Schulze knows the days of free music on the Net are almost over and wants to position himself as the national CD retailer. I want to join him as a shareholder.

CYCLICALS
You want cyclicals when the Fed is easing up. These are the companies that need the economy to be strong so their earnings will exceed last year's benchmarks. Many of these companies, unfortunately, can be owned only for short, sharp bursts of performance, not my new style as a private investor. But if you are willing to be a tad nimble, try on MMM and United Technologies for size. The former just got a General Electric exec who will shake things up terrifically, and the latter has the best cyclical manager in the business, David George, at the helm. If these stalwarts don't suit you, why not bet with me that Jack Welch tabbed the best man for the job of replacing him and buy General Electric itself, the consummate financial and industrial leader that has done extremely well even when the Fed was fighting the economy? Who knows what kind of numbers Jack Welch can put in his last year on the job with the Fed juicing the economy?

BONDS
The ideas above could suffice for a portfolio in itself, but let's put some spice into the mix: high-yield bonds. Everyone from Warren Buffett to Floyd Norris, the sour but sage New York Times columnist, has written positively about those pieces of paper known as junk bonds. The more adventuresome of you can actually pick a diversified portfolio of corporate bonds of the lesser-rated variety -- I am drawn in particular to the high-yielding telco paper -- but in general I prefer the pastiche method, a high-yield-corporate-bond fund. I don't want fees weighing me down, so I'm buying the Vanguard High-yield Corporate fund. Better to diversify than to own the one piece of paper the Fed can't save. And as the Fed cuts short rates, these companies will have much more of a chance to improve their balance sheets and their operations, and their low-grade bonds could become high-grade ones. That's how you can make good capital gains and get good yields in the meantime. But remember, this only works when the Fed begins easing. You can usually keep it going only up to five months after the first ease. But I think that come fall, once the big gains have been made, you will have to sell these funds.

DRUGS
Finally, there's room for a little cash here to be deployed when the inevitable sell-off occurs in the drug and health-care stocks, long my favorite groups. Keep your eyes on Pfizer, Merck, and HMO giant United Healthcare for any economic-related declines (i.e., bargains). These stocks drop anytime it looks like the economy is set to roar again. I like them because they have solid businesses that have been handicapped by eight years of potential Democratic political peril. That's history. HMOs and drug companies plus George W. Bush in the White House equals 52-week highs for these stocks multiple times in 2001.

FOOD
If you don't think the Fed is going to cut rates aggressively enough, the best way to hedge your bets is with well-positioned companies like Pepsi, Philip Morris, and General Mills. But these are hedges only, and frankly, I don't think you're going to need them.

TECH
And how about tech? How about Intel and Microsoft? When do we wade back into Dell and Nortel and PMC Sierra and Nokia? The answer is obvious. When they're done going down. So does anybody mind if we wait a little longer? Nobody did last year, and it knocked more people out of the game than any sell-off since 1987. You'll get your chance. But if you feel like you're just going to jump out a window if you can't buy more tech now, especially when it rallies, then at least be sensible and stick with stalwarts like Cisco, EMC, and Brocade.

Can 2001 be a terrific year in the stock market?
When the Fed eases, the stock market works. But ever since the Fed made its dramatic move of cutting rates 50 basis points in the first week of the year, skeptics have insisted that it is too little too late and that the aftermath, another quick decline in stocks, proves that the Fed's moves don't matter.

That's nonsense. The Fed has cut rates fourteen other times in the past 50 years. Thirteen times, the market rallied a year later. (The only time it didn't rally was in 1968, when the Fed offered up only one rate cut, not a whole series, and then immediately started tightening again.) You usually made 20 percent on average twelve months after they began! That's fantastic.

Put simply: This is the lowest-risk, highest-reward environment possible. You have the Fed -- and history -- totally on your side. It doesn't get any better than that. That's why I insist on finding stocks to buy and own right now, because at the beginning of an easing cycle, the odds are with you. It's like you're playing blackjack and you know you've got nothing but face cards left in that shoe. That's when you have to put the maximum amount of money on the table. Stick with a diversified portfolio that includes historic winners, and you will find yourself loving the stock market once again.