TheStreet.com 21: A New Index for the Economic Recovery

Stephen Schurr

Is it here yet? Economic recovery, the missing link in this year's stock market rally, may be buried under thousands of quarterly earnings reports due out this month.

For investors who can't dig through every one, we've created TheStreet.com 21. This index of 21 companies is designed to be a leading indicator of the economy's direction for the rest of the year and beyond.

Earnings season is always important, and this summer is unusually critical. In the slew of second-quarter earnings reports, companies will reveal their outlooks for the rest of the year, confirming or denying whether an economic recovery -- the basis for this year's remarkable rally -- will in fact materialize.

But the data dump from corporate America will be confusing and contradictory at times. Some reports will be irrelevant, while others will be vitally important. Knowing the difference is critical for investors.

We've selected 21 companies that are extraordinarily suited to serve as a reality check for the rally. The 21 companies represent a diverse range of industries, but unlike indices designed to represent the broader market, such as the Dow Jones Industrial Average or the S&P 500, TheStreet.com 21 doesn't represent every sector of the economy. Our goal in choosing TheStreet.com 21 was to select stocks that were hypersensitive to the times. If the economic landscape truly has improved, TheStreet.com 21 should reflect it first, and rise accordingly. If the economy is stalling, the index will decline -- a harbinger of bad news to come.

Click here to see the entire chart of TheStreet.com 21 components, including the reasons for their inclusion.

We will be tracking our new index on a daily basis, while reporting the major news of each component and explaining how it alters the outlook for a recovery. TheStreet.com 21 has been assigned an opening value of 1000, based on the closing prices of the 21 components' share prices on July 3. At the end of each trading session, we will calculate the new value of TheStreet.com 21 and post it on the site the next day. TheStreet.com 21, by design, is heavily leveraged to U.S. economic activity and may prove more volatile than broader market indices such as the S&P 500. Indeed, its first two trading sessions bear this out: TheStreet.com 21 rose 2.7% to 1027.35 on Monday, compared with the S&P 500's 1.9% gain. In Tuesday's more sedate session, the TSC 21 edged up 0.3% to 1030.06, mirroring the S&P 500's 0.3% gain.

Choosing the Components

In constructing TheStreet.com 21, we cast a wide net for insights, gathering suggestions from columnists on our subscription sites RealMoney and Street Insight, as well as other academics, analysts and money managers. Ultimately, the companies chosen for TheStreet.com 21 fall into three general camps, with some components filling more than one bill. First, the index includes bellwether companies such as Cisco(CSCO) and General Electric(GE) that so dominate a particular sphere of corporate America that they serve as proxies for the entire sector. GE -- the largest company in America by market capitalization and with operations that range from financial services and media to jet engines and power plants -- serves as a proxy for the U.S. economy.

Second, several components best represent a particular industry whose fortunes are tethered to economic improvement, such as advertising-dependent media company A.H. Belo(BLC) and Continental Airlines(CAL) as a representative carrier. Advertising, for example, is a vital indicator of economic activity: If corporate America spends more money buying spots on TV and newspapers, that bodes well for the recovery. We chose Belo rather than an advertising agency such as Omnicom Group, whose business usually lags behind the broadcasters and newspapers that run the ads.

Third, we included several companies that serve as a barometer for economic activity in a vital area. Container-board maker Smurfit-Stone Container(SSCC), freight forwarder Expeditor International(EXPD) and staffing firm Manpower(MAN) are some such companies. If Smurfit makes more of its goods -- from boxes to cement bags to convenience-store coffee cups -- that signals that spending is picking up.

TheStreet.com 21 may diverge from the daily gyrations of the broader market. But the news and second-half guidance that emanates from these companies -- such as the number of new orders added by tech-outsourcer Solectron(SLR) or the amount of new business at commercial real estate investment trust Equity Office Properties(EOP) -- should provide a glimpse of the economic outlook that extends far beyond company or even sector-specific news.

How We Will Use the Index

First and foremost, the index's stock prices will serve to inform readers about the progress of the economic recovery. While far from 100% accurate, the stock market remains the best predictor of how the economy and corporate profits are expected to perform. The index's value, therefore, should provide a decent predictive gauge.

Our analysis of TheStreet.com 21 will extend beyond the daily tally. TheStreet.com will compile the most germane news events that affect the 21 companies, including earnings reports, major industry news, major contracts and the latest sales data. Within the regularly updated TheStreet.com 21 chart, we will include a column that indicates whether the latest news on a particular component was bullish or bearish.

Lastly, over the course of the next six months, we will write breaking news and feature articles on TheStreet.com 21 components. The breaking news stories will include insights from the analysts, industry watchers and money managers who are the experts on these companies. The features will offer profiles of a few of the components, with a particular eye on detailing how the company's latest updates spill over to the outlook for recovery.

If the current recovery stalls and the major indices fall back to their March levels, it will be the fourth-straight summer of disappointment in the stock market -- a string whose only precedent is the Depression years following the crash of 1929.

Knowing beforehand whether it is happening or not could spell the difference between success and ruin, at least for investors contemplating significant positions in stocks. TheStreet.com 21 aims to provide that insight.

The following companies constitute TheStreet.com 21, an index designed to be a leading indicator of the economy in the second half of 2003 and beyond
Company	Sector	Reason for Inclusion
A.H. Belo (BLC)	Media	Dallas-based owner of large and small newspapers, TV stations and Internet sites. A good barometer for advertising outlook and media business.
Bank of New York (BK)	Financial services	Diversified bank serves as sector gauge. Also, its big securities-servicing business offers insight on market activity.
BestBuy (BBY)	Discretionary consumer	The proxy for big-ticket consumer electronics spending. A consumer-PC upgrade cycle would be felt here.
Caterpillar (CAT)	Industrials	Giant worldwide equipment supplier for agribusiness, construction, mining and more. Broad industrials and farming barometer.
Cisco (CSCO)	Information technology	The bellwether of technology.
Comerica (CMA)	Financial services	Midwestern bank with a big commercial-lending business. A leading indicator of regional activity.
Continental Air (CAL)	Airlines	The new beacon for a battered group. Also, a gauge for consumer and business travel.
Devon Energy (DVN)	Energy	Acquisitive independent oil and gas producer is yardstick for energy. A read on natural gas -- prices and supply levels.
Equity Office Properties (EOP)	Real estate	Sam Zell's REIT offers glimpse of commercial real estate activity in major metropolitan areas.
E*Trade (ET)	Financial services	Online broker provides indication of individual investors' market activity.
Expeditors Int'l of Washington (EXPD)	Transportation	'Freight forwarding' company gives reading of shipping activity, especially in the vital Pacific Rim.
General Electric (GE)	Conglomerate	A proxy for corporate America and the No. 1 S&P 500 component. As America goes, so goes GE -- and vice versa.
Ingersoll-Rand (IR)	Materials	Machinery and tool giant offers good way to judge the strength of a cyclical recovery.
Kohl's (KSS)	Retailer	The proxy for the consumer. Can high-growth retailer keep growing?
Level 3 (LVLT)	Telco	A barometer for the depressed, heavily leveraged telecom sector.
Manpower (MAN)	Services	Employment gauge. Outlook for staffing firms hinges on economy's recovery.
Maytag (MYG)	Appliances	No. 3 home-appliance maker offers gauge on big-ticket-item consumer spending and corporate efforts to turn around messy, debt-laden balance sheet.
Smurfit Stone Container (SSCC)	Materials	Container-board and box maker signals economic activity. If businesses and consumers are buying stuff, Smurfit will have to box it.
Solectron (SLR)	Information technology	A tech-outsourcing company that gets business from IBM, Cisco and other tech titans. Solectron is leveraged to tech recovery and will provide early indicator on capex spending.
Tiffany (TIF)	Luxury-goods retailer	The proxy for the rich consumer and the trickle-down effect of the big dividend-tax cut.
Yahoo! (YHOO)	Information technology	A representative of the Internet's frothy Big Three. Also, a gauge on e-commerce and Net advertising.

What do you think about TheStreet.com 21 index? Email us at twocents@thestreet.com

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