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Not Just the Cream Rises to Top as Old Economy Stocks Milk Momentum Rally

Observers are skeptical of the Old Economy rally's staying power, considering tech's hold on investors.

At some point this week, interest rates ceased to matter. As did slowing consumer demand and lagging earnings growth. For the most part, even bad news took a backseat.

Because for a brief, shining moment, bank stocks, consumer stocks and other Paleolithic-era favorites became mo-mo plays. Imagine it! In two days,

Home Depot

(HD) - Get Report

rose 18%!

Coca-Cola

(KO) - Get Report

and

General Mills

(GIS) - Get Report

jumped 15%! Even

Barnes & Noble

(BKS) - Get Report

rose 13%!

Plenty of analysts and investors argue that it's about time, considering the dark cloud that's hovered over nontech shares in recent months. Even so, many observers don't expect this strange new chapter in the story of

momentum

investing to keep up. For one thing, the conventional wisdom continues to favor tech stocks' growth prospects while largely ignoring associated risk. For another, the fundamentals that made so many investors bearish on these stocks remain firmly in place. And last but not least, the Old Economy revival featured sharp run-ups in a number of stocks that, well, deserve to be beaten up.

The Mundane and the Tech Stocks

It's hard not to ignore the notion that the selloff in the consumer and financial stocks, to name two, was overdone to begin with. "There are an awful lot of beaten-up companies," says Tim Ghriskey, senior portfolio manager at

Dreyfus Funds

. "There's a lot of value there."

He's right. Food and other consumer companies make money and pay dividends. Up until very recently, that didn't matter, because they weren't promising to grow 300% a year. So they traded at 10 times earnings instead of 200 times. This week, that discrepancy apparently flashed a green light somewhere. "Somebody bought deep cyclicals like crazy," says Ghriskey. "And it's a momentum-driven market."

It certainly is. "People were trying to treat the

Dow

like the

Nasdaq

," says one East Coast hedge fund manager. "They traded the mundane as if they were tech stocks."

Another hedge fund manager who follows retail closely thinks there will be more rotation into heretofore ignored Old Econ sectors like music retailing. This week's

CDNow

(CDNW)

and

Peapod

(PPOD)

debacles show that perhaps the Internet isn't going to steal huge hunks of market share from bricks-and-mortar players. If CDNow can't make it alone, the money manager figures,

Trans World Entertainment

(TWMC) - Get Report

may be looking pretty good.

Leakier Boats

But this week's rising tide was such that even leakier boats got a lift: Investors bought into sectors first, then looked at what they'd bought.

Goldman Sachs'

TheStreet Recommends

Nomi Ghez put out a note on Wednesday saying she was lowering her earnings estimate for

Campbell Soup

(CPB) - Get Report

because of declining soup consumption. No soup for you? No prob! Campbell shares rose 21% between Tuesday and Thursday's close.

The retail sector, beaten up all year because of interest rates and tough monthly sales comparisons, is full of heartfelt little tales like that.

Lands' End

(LE) - Get Report

has

disappointed more than once over the last six months, but the company's shares are up a stupefying 40% this week.

Williams-Sonoma

(WSM) - Get Report

recently

plummeted after it warned it would miss fourth-quarter earnings estimates due to wider-than-expected Internet losses. It rose 26% this week.

Even

Procter & Gamble

(PG) - Get Report

-- which you've got to think many investors would refuse to buy purely out of

spite following its recent unexpected profit warning -- rose 8%.

Reading Is Fundamentals

All this joy despite little change in the interest-rate outlook. The

Fed

meets next week, and everyone and his mother expects a 25-basis-point increase. And slower consumer spending isn't good for cyclicals. These issues haven't gone away.

Rising rates and slowing earnings growth "should remain issues at least for 2000, and possibly longer," wrote

Donaldson Lufkin & Jenrette

retail analyst Gary Balter in a research note Thursday. (Unless the Fed decides to hold off for the election, that is.) Balter suggests selective buying of retailers, focusing on faster-growing names such as

Circuit City

(CC) - Get Report

,

Lowe's

(LOW) - Get Report

and

Target

(TGT) - Get Report

. (His firm hasn't done recent banking for these companies.)

The East Coast hedge fund manager has a darker view. Retailers need capital to grow. With their stock prices up, "these companies will do secondaries or convertibles at the top, Greenspan will raise rates, and the whole thing will fall apart."

Though some investors may be diversifying their portfolios, the switch out of tech and into lower-growth, cheaper stocks is more likely temporary than not. "If I were a value manager, I'd sell," says one high-growth money manager who has no plans to take a look at the likes of General Mills, unless he's reading the logo on his

Wheaties

box. "This is their last #$($*#)-ing chance."

Ghriskey says the same, in more delicate terms. "The market will favor tech," he says. "At some point,

there will be an external catalyst that might change that." For now, however, consumer stocks should probably enjoy their moment in the wonderful world of mo. Just don't get too used to the ride.