Dow euphoria tests dizzy limits
afr.com.au
Wall Street,
By Alan Deans
Whether it is a burst of rational exuberance or just
millennium madness, the sharp rally last Friday in US
share prices is focusing renewed attention on Wall Street
as the year 2000 clock ticks down.
Labour statistics, which showed strong jobs growth but
benign wages, sparked a 247.12-point surge in the Dow
Jones Industrial Average, which ended the week at
11,286.18 and within grasp of a record. The S&P 500
also hit a new high, at 1433.3, as did the Nasdaq
Composite, at 3520.63.
It now seems possible that the S&P 500, the measure by
which most fund managers gauge their performance, will
climb by more than 20 per cent for the fifth year running -
a record.
It was all too much for one noted Wall Street bear.
"The technology, internet and telecommunications craze
has gone parabolic in what is one of the great, if not the
greatest, manias of all time," said Morgan Stanley's Mr
Barton Biggs.
"There is no question that the internet and the
communications revolution are transforming events; the
issue is profitability and what stock prices have already
discounted. We live and invest in a momentum-following
world, but in my view rational investors should begin
gradually to reduce their holdings in these three areas."
But it's all going to plan, according to one of the Street's
great bulls.
"We hold to our millennium melt-up case," said
Donaldson, Lufkin & Jenrette's Mr Tom Galvin. "A
liquidity surge in early 2000 will push the Dow to 12,000
and the S&P 500 to 1580 by March, or 10-15 per cent
gains over the next four months."
The buying remains centred on technology stocks, in
particular internet players and communications providers.
This is partly because individual investors remain focused
on companies such as Microsoft and Cisco Systems,
which have given them strong returns in the past.
But there is also a rotation into a new wave of internet
and wireless telephony groups that promise higher
growth.
Nokia and Motorola are strongly in favour because of
forecasts of consumer demand for new generation
wireless broadband services.
But so, too, are smaller information providers such as
Freeserve and Tellular.
The re-emergence of such investing mania is of concern
to some people, not simply because prices are running
ahead of fundamentals. Merrill Lynch's global strategist,
Mr Trevor Grantham, is concerned that it is resulting in a
renewed burst in consumer confidence.
"Investor sentiment has become optimistic in a very short
space of time," he said.
"The US equity market was over sold last month, but the
call/put ratio has risen rapidly and is already close to
over-bought territory. Given the strong global backdrop,
the Federal Reserve Board is likely to resume hiking
rates as soon as Y2K concerns allow."
The Fed has pumped up liquidity in recent times to help
allay any millennium bug problems but fears are that it will
act quickly in the new year to suck the cash back out of
the system. The investment surge predicted by Mr Galvin
could well eventuate but a tighter money supply and
higher interest rates threaten to nip it in the bud quickly.
This week will provide several new tests for the
investment euphoria.
Tuesday sees the release of the third quarter productivity
numbers, which are expected to show growth of 5 per
cent compared with 6 per cent previously.
Thursday will bring October's wholesale inventories,
which should be up by 0.3 per cent, compared with 0.5
per cent previously.
The end of the week looks like being the greatest test,
however, when the US producer price index is slated for
a gain of 0.2 per cent. |
