Here is an interesting write up from the "bears" point of view.
<<02 May 07:35
By Stacey L. Bradford
Of SMARTMONEY.COM
THE JOKE WAS ON INVESTORS in April. Higher energy prices, rising inflation, a
slowing economy and some disappointing earnings reports sent stocks into a
tailspin, touching lows not seen since before the presidential election.
And yet a handful of our pundits came out swinging last week, arguing that
with prices so low surely the market had hit bottom - or at least close to it.
As the S&P 500 continues to struggle - it's up a scant 1% since last Monday -
we think it's time to give the bears their chance to speak. After all, they're
the ones who've been right this year.
You won't find Merrill Lynch's Richard Bernstein predicting a rally in the
near future. Asked when the slowdown in growth and profit expectations might
improve, the gloomy strategist tells investors it won't be anytime soon.
Just look at the flattening yield curve, he writes in a note dated April 15.
When the yield curve flattens significantly, it implies slower-than-normal
growth for the economy in coming months. "Although some observers are already
suggesting that the economy will re-accelerate and the correction in cyclical
issues is near an end, the yield curve continues to suggest otherwise," he
writes. The upside? At least the yield curve isn't inverted. When that happens,
investors should prepare for a recession.
ISI Group's Ed Hyman agrees that the economy is slowing. He points out in a
note dated April 28 that real year-over-year GDP growth peaked one year ago at
5%. Over the past year, GDP increased by just 3.6%. And with the lagged effects
of oil and Fed interest rate hikes, GDP growth is likely to continue to slow
over the upcoming 12 months, he says. Hyman expects just 2% real GDP growth
during the second half of 2005 and the first quarter of 2006 - a level
insufficient to create jobs, say most economists.
Now for our biggest bear, Pimco's Bill Gross. It wasn't long ago that the
bond guru warned investors that the Dow Jones Industrial Average was more
likely to hit 5000 than to stay above 10000. He has admitted to blowing that
call. (We always like a pundit who shows humility.) But that hasn't changed his
bleak outlook. While he's no longer predicting doomsday, he warns that the days
of 10% annual returns from the stock market are over for now. He says, it's
more realistic to expect 5+% nominal returns from equities and just 2% real
returns (after inflation).
According to Gross, the slide in real interest rates has pumped up all asset
prices, since they're all being discounted by an extremely low real interest
rate. "The current level has produced double-digit annual rates of appreciation
for different asset classes at varying cycles - stocks and bonds first -
commodities, collectibles and housing with a lag," he writes. Real bond yields,
whether they be short term or further out the curve, bottomed in 2003, and have
been moving higher ever since. "Not only has the downward journey ended, but a
mini up-cycle appears to be underway, which ultimately reduces bond prices
[and] stock P/Es and casts a negative pall on other asset classes."
Is Gross just piling on here? (After all, have you ever seen a positive
pall?) Perhaps not. He does expect housing prices to appreciate in line with
inflation and perhaps a touch beyond that based on mild demographic pressure.
But while he says stock prices may rise, they'll rise only in line with real
earnings growth, which Gross pegs at around 1% to 2%.
Fortunately, none of our experts are arguing that investment capital is
better off under the mattress. If you're willing to place new money into the
market, a couple of our pundits have some fresh ideas for you.
Bank of America Securities' Thomas McManus suggests looking for winners among
the wounded. "It is past time for us to begin the process of sifting through
the carnage to look for bargains," he writes in a note dated April 29. McManus
likes IBM (IBM) because he thinks investors overreacted to the company's
disappointing earnings report two weeks ago. He's so hot on this company that
he is placing it in his model portfolio, swapping out Texas Instruments (TXN).
McManus also likes chemical companies Eastman Chemical (EMN) and Dow Chemical
(DOW), which he added to his model portfolio, replacing International Paper
(IP) and Packaging Corp. of America (PKG).
Smith Barney's Tobias Levkovich is looking to the past for clues. In a note
dated April 21, he writes that we are near the end of a retrenchment period and
close to another rally. "In the past it has always paid for investors to own
semiconductor stocks during such rallies, while the majority of upward moves
have benefited diversified financials and media names, as well," he writes. He
recommends Intel (INTC), Applied Materials (AMAT), Dell (DELL), Goldman Sachs
(GS), Merrill Lynch (MER), Morgan Stanley (MWD), Charles Schwab (SCH) and Dow
Jones (DJ) (which owns 50% of SmartMoney.com). He also says Comcast (CMCSA),
Marriott (MAR) and Cisco Systems (CSCO) appear attractive.>> |
