Nasdaq rebounds: but keep your runners on
The snake-oil men are selling a market bottom. Buy this at your peril, cautions Brian Hale.
The Fox network's sex, sun and sand Temptation Island version of Survivor is being played out with real money on Wall Street this week.
Bullish strategy sirens are trying to woo investors' money with tales of Nasdaq bottoms while amorous analysts are pitching their advances on the inherent promise of this quarter's scantily-clad quarterly corporate results.
But while the TV show is being criticised for encouraging voyeuristic pleasure in the possible destruction of relationships, no-one is criticising the Street for encouraging the possible further destruction of investors' life savings. Not that everyone there is playing the game. Many analysts took a stick to their forecasts and recommendations as the first week of the fourth-quarter profit season unfolded.
By Friday, trading had become a little lacklustre with some significant selling on the New York Stock Exchange, although selective buying in technology shares continued despite analysts being unimpressed with the week's mediocre tech results, IBM apart.
Intel and Microsoft pleased only the diehards while Sun Microsystems seemed to please hardly anyone.
While Sun matched its earnings estimates, analysts cut forecasts and downgraded ratings because of doubts about its performance in a recession.
That weighed heavily on Nasdaq where the Composite index ended barely changed, advancing 1.89 points for a 5.5 per cent rise over the week. That lifted its gains this year to 12.1 per cent.
Over on the NYSE, the Dow Jones slumped 90.69 points or 0.8 per cent, to be up 0.6 per cent on the week but down 1.9 per cent for the year. Its heaviest losses stemmed from Home Depot, which issued its second successive quarterly earnings warning following slowing consumer demand and declines in prices for materials prices such as lumber.
It prompted a bit of profit-taking outside technology, after a run supported mostly by the belief that the Federal Reserve will aggressively cut interest rates to re-fire economic activity so it is best to buy now ahead of the recovery.
But that belief is nowhere near unanimous. Salomon Smith Barney became the latest firm to throw in the towel on the short-term growth outlook last week, taking a sharp knife to its economic forecasts even though it still believes outright recession can be avoided by aggressive Fed action.
Salomon slashed its S&P 500 earnings forecasts to a minuscule rise for the year, with most of that back-loaded to the autumn quarter at the earliest, and fretted about the prospect of a further decline in confidence by both businesses and consumers risking a more serious downturn.
That risk grew on Friday with the release of the University of Michigan's closely-watched consumer sentiment index which fell to 93.4, its lowest since 1996 and much worse than the downwardly revised 98.4 reading for December, which marked a two-year low. Wall Street expected a reading of 99.
It also had expected better from most of the weak economic numbers that appeared during the week. Notable was the Philadelphia Fed's business index, which tumbled massively to minus 36.8 in January - its lowest reading since December 1990, when the nation was in recession.
Salomon also debunked the widely heard argument that equities always do well when the Fed is easing. Its research shows that average returns when the Fed eased and the US fell into recession have always been lower than when the Fed eased during a financial crisis or without a slowdown. For Australia, the average monthly returns in US dollars in recessionary circumstances since 1988 had been zero, the company said.
Not surprisingly, the week's lack of rocket-shot earnings numbers from the tech companies left most observers convinced that the apparent revival in techs (and Nasdaq) had more to do with optimistic spin-doctoring rather than a widespread belief in a quick economic rebound.
Mutual fund-tracker Trim Tabs estimated that equity funds had inflows of $US4.3 billion ($7.7 billion) over the four days ending Wednesday, on top of inflows of $US15.3 billion in the week before. The lion's share for both weeks went to US stock funds which already were heavily in cash and desperate to get invested.
So, few are surprised by the past week's gains in the wake of a disastrous December but most experienced hands do not believe that the fundamentals suggest that Nasdaq has bottomed or even that this week will see a continuation of the recent run.
Many are leaning towards the view that it has just been another bear market rally after last year's 55 per cent tumble in the Nasdaq Composite. Merrill's global technology strategist Steve Milunovich thinks it could have further to run during the next month or two "despite poor fundamentals". But after the rally "stock prices could soften again as the fundamentals lagged valuations" and then "the dichotomy between stock prices and fundamentals will have to be resolved one way or the other".
Others argue that, as with any bear market rally, anyone enjoying the party should dance near the door.
smh.com.au |
