Larry Kudlow
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When the fog of war lifts and Americans get ready to buy stocks again, the almost-forgotten old economy might make a great investment. Stock groups that are tied to metals and raw industrial materials have been ignored for years, and they're now showing amazing signs of life. Commodity indexes for metals and industrial materials are white hot, with each up about 20 percent from a little over a year ago. Precious metals, meanwhile, are up over 30 percent. In times of war uncertainty -- as is the case now with Iraq -- it's usual to see a premium in the gold market. But this doesn't explain all of the rise in gold, which is up more than $20 since the beginning of the year to over $370. Nor does it explain the rise in other commodities such as copper, lead, steel, tin, zinc, tallow and cotton. Since the stock market bottom of Oct. 9, 2002, the S&P 500 materials index is up 12 percent and industrials are up 7 percent. But that's not nearly as impressive as the commodity performance. Up-to-the-minute commodity prices reflect what companies actually pay for materials and price into their finished goods. Looking at it this way, these commodity spot prices are better business-price indicators than commodity futures. The latter can be used for speculative trading. The former reflects the real world. The old economy commodity-price rallies we're now seeing suggest that this nook of the economy differs from all others. Why? It has business pricing power. And rising prices generate higher profits. Here's how it's playing out. With commodity prices spiking, some big corporate names are reaping rewards. DuPont profits are up 183 percent, and International Paper is up 175 percent. Sealed Air Corp. is up 39 percent, and Worthington Industries is up 85 percent. Weyerhaeuser -- the forest-products company -- is up an interplanetary 1,950 percent. So good things are happening among some pretty big names. An educated guess is that these companies and their industries have become a lot more efficient in recent years through downsizing and the application of information technologies. Manufacturing productivity over the past year rose 4.5 percent, with unit labor costs up only 0.4 percent. These are the kinds of numbers that generate profits -- especially if prices are rising, as they are. Why are prices rising? One reason is an easier Federal Reserve monetary policy. Fed Chairman Alan Greenspan has been fighting deflation of late and has been pouring new cash into the economy at a 13 percent annual rate over the past two months. In addition, the federal funds interest rate cut of last November is starting to pay off. At least one supply-sider, Donald Luskin of the investment-research firm Trend Macrolytics, believes that Greenspan has learned a powerful deflationary lesson from his failed policy of targeting stock market wealth in the late 1990s. Spooked by an unintended bout of monetary deflation that is only now coming to an end, the estimable Fed chairman might be returning home to a gold and commodity targeting process. It can never be proven that the Fed is watching the gold price, but it's a good theory -- and a happy thought. Just where Greenspan is on monetary and fiscal policy is a guessing game often played by economists. Word was only a week ago that he was speaking out against the president's tax-cut plan in a private meeting with a bipartisan group of senators. But senior Federal Reserve officials say these reports are false. In fact, Greenspan has long supported the idea of eliminating the double tax on dividends, although his first choice would be to achieve this by treating dividend and interest expenses equally as tax deductions at the corporate level. Still, he believes the Bush plan will promote long-term economic growth. It's nice to have Greenspan on board. It's also nice to see John Snow, Bush's new Treasury man, getting into action so quickly. He is already effectively selling the president's entire tax-cut package on Capitol Hill and making the case that economic growth will stall budget deficits. When the fog of war clears, and the U.S.-led allied forces stomp Saddam and his gang of thugs deep into the ground, investors will find a very accommodative environment for investing and creating wealth. And when they come back to Wall Street, they will be well advised to play underrated old-economy stock sectors and companies. New economy telecoms may not recover in my lifetime. But that doesn't mean other parts of the market can't move forward.
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Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.