This market has been very good for my subscribers and me. The Hulbert Financial Digest recently reported that my Model Portfolios were up an average of 17.1% for the first half of 2003, well ahead of the S&P 500's 11.8%. Over the last 18-1/2 years, we're up an amazing 2,964%. I believe our profits will continue because on Wall Street, the cream is finally rising to the top.

The stocks that have demonstrated steady earnings growth and are forecasting continued growth are leading the overall market. Since long-term Treasury yields have now soared over 1.4% in the past several weeks, interest-rate-sensitive value stocks have become increasingly volatile. As a result, growth stocks are significantly outperforming value stocks.

The second-quarter earnings results were outstanding. However, the earnings surprises (meaning, earnings results that are above and beyond analysts' expectations) were less impressive than in the two previous quarters. Apparently, the analyst community's earnings estimates were on the mark this quarter. In fact, many stocks have sold off in the wake of releasing their earnings--not because their earnings were poor, but because they didn't significantly top analysts' expectations.

Some pessimistic soothsayers have said that earnings growth has peaked in the near term. Nothing could be further from the truth. The earnings outlook remains very sturdy. I expect the stock market to climb steadily higher for the next several months.

In the interim, the recent profit-taking is just a pause in a sustainable rally that will last two years or more for growth stocks. But keep in mind, interest-rate-sensitive value stocks will remain volatile as long as long-term Treasury yields are volatile. What initially caused the dramatic rise in bond yields was evidence that the economy is in the early stages of a recovery. However, there's no doubt that panicked bond investors also sold their Treasuries as they watched their principal erode.

Some of the biggest investors in the Treasuries market are banks. The average bank is still awash with cash and is unable to lend out all of its deposits. This is why banks typically invest their excess cash in Treasury notes and bonds. Although a bank may be paying you a measly 0.8% for its money market fund, the bank is really investing its cash (your deposit) in Treasuries yielding 2%-3%--and pocketing the difference.

In other words, they're borrowing from their depositors short-term and investing longer-term. This strategy of borrowing short-term and investing longer-term works great when interest rates are falling. This is because the principal of Treasury bonds will appreciate as interest rates fall. However, when rates rise, as they have in the past several weeks, the principal of Treasury bonds will erode, and that will result in paper losses at many banks.

Investors are becoming very nervous over these paper losses. That's the primary reason that banks and other financial stocks have sold off as yields on intermediate- to long-term Treasuries have climbed. As a former banking analyst, I can tell you that virtually all banks borrow short-term and invest longer-term, so most banks and financial firms recently lost money on their investments in Treasury notes and bonds. When bond yields are rising, all these companies can do to stabilize their stocks is raise their dividend, as Citigroup recently did to help its stock.

The economy is finally creating new jobs. Initial claims for unemployment are now at a five-month low. The unemployment rate just fell to 6.2%. Also, Alan Greenspan is very optimistic for a sustainable economic recovery. Treasury Secretary John Snow has repeatedly said that the economy is poised for strong growth.

By lowering short-term interest rates, the Federal Reserve has caused the money supply to soar, which is boosting both consumer and business spending. The only missing ingredient for the economy had been investor confidence, but the dividend and capital gains tax cuts have already boosted the stock market and helped repair investor confidence. Overall, the economy appears to be poised for sustainable growth for the foreseeable future.

As the economy improves, growth stocks should outperform value stocks. In fact, growth stocks are now starting to outperform interest-rate-sensitive value stocks. This is the fifth quarter in a row that the stock market has posted improving earnings growth. During the past three quarters, earnings growth has been especially impressive.

The dividend tax relief is already changing corporate behavior. Many high-profile growth stocks have already boosted their dividends. For example, Qualcomm announced its first dividend payment ever in February. Now the company said it will boost its dividend by 40%. Slowly but surely, many growth companies will start declaring dividends, since dividend payouts are now taxed at the same rate as capital gains.

The stock market is now entering a more mature stage where steady, predictable earnings growth will be the most important characteristic that investors need to focus on. Fortunately, the stocks in my MPT Model Portfolios continue to post spectacular earnings results. In the past four quarters, the average stock in my Model Portfolios has delivered over 50% sales growth and over 180% earnings growth.

The primary reason that earnings are growing faster than sales is that operating margins continue to expand. Not only does the analyst community continue to raise their estimates for our stocks, but our earnings continue to beat estimates by over 10%. Some standout earnings for the second quarter include Avid Technology (NASDAQ: AVID) and Coventry Health Care (NYSE: CVH). Avid earned 25 cents a share, nearly 50% higher than estimates, and Coventry's profits jumped 75% as it beat estimates by 18 cents a share. Overall, I remain extremely confident that the average stock in my Model Portfolios will continue to attract institutional buying.

Over the last 18 1/2 years, MPT Review has helped subscribers earn 2,694% profits through our Model Portfolio strategy. By scouring the entire universe of stocks on Wall Street we pinpoint those stocks with the greatest profit potential.

Specifically, our strategy is built around four specific Model Portfolios suitable for the small nest-egg investor all the way to the large-portfolio investor. We know everyone has different investment goals and comfortable risk levels, this is why each Portfolio offers conservative, moderate and aggressive subcategories. We even give you the exact number of shares you should own so there's no guesswork involved. You'll receive our timely advice through monthly issues, weekly market updates, and faxed or emailed buy and sell updates sent directly to you each month. Click here now to try MPT Review RISK-FREE for 60 days now!

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