Merrill analyst Christine A. Callies
by: skeptically 03/27/01 09:20 am EST
Msg: 226137 of 226141
26 March 2001
Christine A. Callies
Chief U.S. Investment Strategist
Puru Sareen
US Investment Strategy
The Dust Begins to Settle—Recovery Prospects Still Encouraging
Investment Highlights:
• We doubt that the Fed has “blown it” with respect to equities. Last week’s
temper tantrum in the equity markets illustrates that almost nothing that
the FOMC did would have pleased investors.
• The majority of our macro and micro barometers indicate that the
prospects for equities continue to improve and the potential for broad
leadership is expanding not contracting.
• Although most groups have experienced some price erosion over the last
several weeks, the growth-cyclical, soft landing leadership still appears to
be intact. Further Fed rate cuts should reinforce this leadership shift.
• The dreaded inventory correction in U.S. manufacturing appears to be
proceeding swiftly, led by autos. This supports our view that margin
pressures from this source should be short-lived.
• Other negatives that might have interfered with the positive effects of Fed
easing also appear to be dissipating (energy costs, consumer debt).
• We, too, remain concerned about the level of household leverage, but detect
little evidence of a major consumer retrenchment in this area.
• The behavior of the long end of the Treasury curve over the last several
weeks has been decidedly sluggish given the magnitude and speed of the
equity market correction, and mortgage-related portfolio shifts. Risk-free
assets appear to be overvalued.
>Soft landing leadership survives
The maintenance of outperformance during an interim
correction can confirm new group leadership provided that
valuations and the business/monetary cycle also support a
sustainable move: consumer cyclicals (retailers—Best Buy
(BBY, $38.80, C-1-1-9), BJs Wholesale (BJ, $44.08, C-1-
1-9), Dollar General (DG, $18.98, B-1-1-7), Ethan Allen
(ETH, $32.20, B-1-1-7), Federated Dept. Stores (FD,
$43.13, C-2-1-9)), energy—Amerada Hess (AHC, $74.78,
B-1-1-7), BJ Services (BJS, $75.00, C-1-1-9), Weatherford
Intl. (WFT, $53.28, C-1-1-9), and utilities—Exelon (EXC,
$59.79, C-1-1-7) have managed to defend a significant
portion of their gains from late 2000. Unless the
fundamentals become uncompetitive (unlikely), these
areas should share a leadership role for much of 2001.
Resurrected leaders typically emerge on a piecemeal basis
(technology—semis, cap equip, PCs, especially Compaq
Computer (CPQ, $20.50, B-2-2-7) and Texas Instruments
(TXN, $38.81, C-2-1-7).
Old leaders that perform poorly (health care) are at risk of
becoming persistent laggards—especially if Fed easing is
aimed at reigniting profit growth. As profit growth begins
to turn, investors tend to pursue areas with greater
sensitivity to the business cycle, not the areas with the
least. Safe havens also can become shaky havens if the
relative multiples are extended, as appears to be the case
for the health care sector (especially diversified
pharmaceuticals, major pharmaceuticals). |
