SmartMoney.com - Weekend Report
A Big Fat Zero
By Igor Greenwald
IT WAS A RIVETING SOAP OPERA. The past week featured easily identifiable villains
(those spoilsports at the Fed), a charming hero (John Chambers riding to the rescue with
news that Cisco Systems (NASDAQ:CSCO - news) still has sales) and, best of all, the obligatory happy ending.
Better change the channel, because coming next is a ``Twilight Zone''
episode screening in a dark and empty room to the ticking of a giant clock.
And smack in the middle of this nightmare looms the number that inspired
fear in ancient Greeks and human sacrifices among the Mayans.
The number is zero. That's what U.S. economic growth is expected to
slow to in the revision of second-quarter gross domestic product due for
release Wednesday, with potentially dire consequences for the stock
market and the nation's pride.
An investment community nearly unhinged by a widely anticipated
quarter-point interest rate cut is likely to be confronted with a milestone, or
millstone, of economic decline from growth of nearly 6% a year earlier, the
most damning evidence yet that the country is lurching toward a recession.
This threatens to be a confrontation the way a mugging is a confrontation. ``When you're at zero you're kind of on a cusp....It's a number that makes everyone look twice,'' says Charles Seife, author of ``Zero: The Biography of a Dangerous Idea.''
The timing is not encouraging. The GDP number is coming down the pike amid what's likely to be one of the lightest trading weeks of the year, one woefully short on sentiment-saving distractions. If the revision were to disappoint and the trading programs were to start dialing sell orders, a search party might need to be dispatched to find buyers.
It will know exactly where to go, since the beach-loving, work-skipping money manager has been fingered as a prime suspect in the disappearance of the summer rally. He's tanned, he's rested, he's absent. He's also mostly a hopeful urban myth.
Money managers are certainly taking days off, and no doubt more days than ever now that sticking all of one's assets into Treasurys has turned out to be the blockbuster summer strategy. But rest assured that, before the tech sector imploded, it left everyone with the wireless gizmos necessary to make stock trades even while buried up to the neck in scalding sand.
People would trade, if trading were profitable. The fact that they are not doing so betrays a disturbing lack of liquidity that has already led to several vacuum-driven sell-offs. How much more comforting to speak of summer vacations: Suddenly, the market slump turns out to be explainable in terms of a seasonal - and brief - rite.
It's nothing of the sort, argues Wayne Nordberg, vice chairman of KBW Asset Management, investment advisers specializing in the financial sector. ``You have the economy in the doldrums, and while that's happening the continued erosion in corporate profitability is still shocking people,'' he says. ``There is no valuation underpinning the market.''
Like many analysts, Nordberg expects stocks to go much lower, but not before staging a short-term rally. Friday may or may not mark the turning point. Either way, Nordberg has simple advice for individual investors trying to time the market: Don't.
``It's been a bad year for speculators, and that's not going to change,'' he says. Instead, you are urged to find a nice value stock you know and trust, preferably one paying dividends of the sort that, according to Nordberg, have accounted for 40% of the stock market's historical return.
Sadly, investors aren't listening, complains Raymond James chief investment strategist Jeffrey Saut, who late last year accurately predicted the crash in corporate profits and tech valuations. ``Eighty percent of my calls are worshipping the Ciscos and Oracles (NASDAQ:ORCL - news), and I've been telling them for 18 months it's the wrong place to be,'' he says.
At best, they're buying limited downside protection by selling call options. The indicators based on options trading testify to a frightening complacency among traders, says Bernie Schaeffer, chairman of Schaeffer's Investment Research. ``From a sentiment perspective, it's eerie - it's almost 1987-like,'' he says. Stocks did not have a good autumn that year.
Schaeffer notes that the Nasdaq's technical charts make for depressing reading. So do those of the computer makers, which have been on the defensive since Dell's (NASDAQ:DELL - news) disappointing profit warning. And then there's Microsoft (NASDAQ:MSFT - news), a true bellwether that has anticipated many of the broader market's moves over the last year. Its shares closed below $60 on Thursday for the first time since early April before rebounding the next day. ``It could be on the verge of a significant technical breakdown,'' says Schaeffer.
That raises the stakes for the midquarter update due Wednesday evening from Sun Microsystems (NASDAQ:SUNW - news), another one of the big tech names the market's not supposed to care about but still does. The omens aren't good, even though the company is shooting for pro-forma earnings of just two cents a share, down from 15 cents a share a year earlier. ``We see pressures at Sun and think that the company may guide expectations lower,'' cautioned Buckingham Research Group analyst Jay Stevens on Thursday.
With no earnings reports of broad significance on the menu, the non-GDP news flow will depend on second-tier economic statistics such as existing-home sales on Monday, consumer confidence on Tuesday and the Chicago Purchasing Managers' Index, a gauge of regional economic activity, on Friday.
On Wednesday morning, Computer Associates (NYSE:CA - news) Chairman Charles Wang finds out whether shareholders still want him anywhere near the till, as a dissident group's attempt to oust him goes to a vote. Spouse Nancy Li might plan a personal day just in case she needs it to comfort a newly unemployed hubby.
Early Thursday the European Central Bank may or may not do the world a solid by lowering interest rates. Shockingly, Alan Greenspan doesn't get a vote.
On Friday, everyone knocks off early and heads for the beach. If you run into a money manager dying to buy the Nasdaq-100 (AMEX:QQQ - news), by all means lend him a cell phone.
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