Bear Stearns? Bearish Strategist
Liz Mackay, Bear Stearns? Investment Strategist, offered clients her somewhat bearish views on the market last Tuesday.
Mackay?s worries, which were numerous, included concerns about liquidity.
Mackay sees excessive liquidity due to a recent surge in central bank lending for security purposes. Such lending jumped 42% between October 13 and December 18, after declining since mid-year 1998.
Mackay also cited ?tech euphoria,? making note of widespread expectations of a ?Net melt up in January.? She said, ?We sense that everyone, (yes, everyone) fears selling any technology holdings since it has largely been a mistake to do so until now.?
Mackay finds evidence of further optimism in the slim proportion of cash holdings built up by mutual fund equity managers. According to Indata numbers, cash is now at 5.4%, half the level of two months ago. Clearly, Said Mackay, ?No big reserves are being built up.?
The Nasdaq, in Mackay?s eyes, is likely ?having its January rally early,? and the strategist warned, ?It will not be that long into January, before the Fed?s February meeting takes center stage.?
That leads to worry number three: a Fed rate hike. Mackay said, ?We could be looking at a 6% Funds rate.? (The current Funds rate is 5.5%.)
Referring to the tendency of markets to collapse after a sequence of rate hikes, Mackay expressed her belief that the market is ?facing three or even four steps and a stumble.?
Mackay softened the message by adding that, even though market years ending in zero are notorious for experiencing meaningful corrections, 2000, being a Presidential election year, will still likely produce an up-market, since there has never been a down market in a Presidential year since 1952. (That?s twelve times in all.)
MacKay added, ?It?s safe to say Greenspan does not want to tighten the third quarter,? which only increases the likelihood of a rate hike the first quarter.
Investors, please note: If that rate hike dovetails with the tech ?wring out? Mackay is predicting, there?s nothing left to hold the market up, and we?ll likely see a broadly-based correction first quarter.
Mackay expressed two added worries specific to tech: one, that chip companies will face inventory and earnings risks early next year, and two, the likelihood of a shakeout among e-tailers, many of which, Mackay thought, will soon be seen ?as retailers first and Internet companies second.?
?Frothiness?
Sensing a ?classic bubble? in terms of current ?frothiness,? Mackay offered a further knock on techs by noting that much of the tech spending expected during year 2000, for building verticals and business-to-business, will be of the one-time kind, thereby setting up difficult comparisons for year 2001.
Despite her bearishness, Mackay finds something to cheer in the ?current breath bear market.? The outperformance of the Nasdaq leaders leaves the broader market somewhat oversold, which makes it ?ripe for a lift, given a diversification way from tech.?
MacKay finds value in the midcaps. Though the earnings growth of the top 50 stocks in the S&P 500 has been well in excess of the remaining 450, the strategist sees the discrepancy between large caps and midcaps narrowing. According to Mackay, large cap earnings growth is expected at 15.7%, versus 15.3% for the midcaps, remarkable given the enormous valuation discrepancy between the large caps? 28.2 times and the midcaps? 12.2 times. Mackay?s point is, buy the midcaps and you?ll be paying far less for comparable earnings growth.
Okay, where to go?
Mackay suggests investors look to sectors like technology services, typified by Comdisco (NYSE: CDO - Quotes, News, Boards), a company benefiting from Internet growth, and to basic materials, where investors might re-acquaint themselves with such names as International Paper (NYSE: IP - Quotes, News, Boards), Schlumberger (NYSE: SLB - Quotes, News, Boards) and Kimberly Clark (NYSE: KMB - Quotes, News, Boards), all of which should benefit from the ongoing global recovery.
Mackay also sang the virtues of the New York Times (NYSE: NYT - Quotes, News, Boards), which benefits from Internet advertising, Federated Department Stores (NYSE: FD - Quotes, News, Boards), citing its recent purchase of Fingerhut, which provides fulfillment services for Wal-Mart, and hospital stock Columbia HCA (NYSE: COL - Quotes, News, Boards), a likely beneficiary of recent insider buying.
Bottom Line:
Summing up, Mackay said that 2000 should be a ?pretty good year? for stocks, though it may be ?off to a rocky start.? |
