Breakout, or Fake-out?

So congratulations, trivia buffs: The Dow ended last week at its highest level since June 12, 2001. It's a breakout, unless it's a fake-out. We should know shortly after the Federal Reserve meeting on March 22, which could reset interest-rate expectations for the rest of the year.

The Fed has nurtured financial markets for nine months with a promise to keep the pace of rate hikes "measured," along with an insistence that the gradually rising rates remain "accommodative" in absolute terms.

But that language seems increasingly at odds with brisk economic growth, inflationary pressures and a flattening yield curve. In recent weeks, Fed Chairman Alan Greenspan and some of his colleagues have hinted that they're looking for new words to live by.

No doubt they'll find a satisfactory straddle. But in the meantime, Wall Street will just have to hope that the Fed gets the interest-rate policy and interest-rate talk exactly right. Too many hikes could throttle growth and make stocks look expensive. Too few risk higher inflation and a renewed dollar dive.

The stakes get higher toward the end of a credit tightening cycle, where every incremental rate hike starts to pinch, and could mean the difference between a soft landing (February 1995) and a recession (May 2000). That first hike last June boosted the federal funds rate by 25%, but didn't raise anyone's borrowing costs, save for the lucky few who get to borrow from the Fed. The hike widely expected this June would be much smaller relative to the current rate, and much bigger in terms of its potential economic fallout.

Meanwhile, earnings-warnings season is here, and since the market isn't expecting any major blowups, there had better not be any. Add in the fact that stocks are closer to overbought than oversold at this point, and you can see why share buyers might want to take a break.

But every day the major averages hold these pre-Enron, pre-9/11 levels, their claim on them grows stronger. And all the while the meter will be running, measuring the still bountiful profit inflows into the corporate till.

One of the disorienting things about modern markets is that they can seem so ruthlessly efficient based on the speed with which information is digested and reflected in a security's price.

And yet the surest way to make money in this millennium has been to play the long-term trend, be it the decline of techs and the dollar, or the steady rise of oil, gold and foreign stocks. So while Internet-fueled markets might be perfectly efficient in processing rumors, they seem rather less good at reading long-term charts.

Tell me that the Amex Oil Index has more than doubled over the last year, I'll remind you that the S&P 500 Homebuilding Index doubled in the year since the market low in October 2002. But if you cashed out of home builders 17 months ago you missed out on another 90% upward move in this super-efficient real-time market of ours.

Integrated oil and gas producers now sell at an average price/earnings multiple of 14, which may be high in historic terms but seems reasonable next to the 20 P/E multiple of the major drug makers, who seem to have run out of miracle cures. Will the industry fundamentals turn and force investors to bid up the more expensive sector with bigger long-term headaches? I'd rather not be early on that trend.

I checked the P/E ratios of the overseas and small-cap funds I bought back in October and November, and they've gone up from 13-something to a still none-too-bullish 14.6 in the last few months. They're still yielding something approaching 3%. No comparable inflation hedge is on offer in the bond market, which is lending money to the Italian telecom monopoly at a 50-year fixed rate of 5.25%. No thanks.

You can also keep Motorola (MOT) and Microsoft (MSFT); I'll stick with Newmont Mining (NEM). Give me gold, give me a fat dividend yield, give me the possibility of a buyout. Give me protection against the fiscal follies in Washington and the happy humming emanating from the Federal Reserve. Give me a stake in the current profit boom, not an option on future growth. Happily, the lower-rent districts of the stock market are still offering all of the above.

We're living in a world where the idea of a terrorist nuke has passed from the realm of fiction to the focus of homeland security planning. In that world, the trailing P/E ratio still matters more than the projected growth rate.