A House Divided
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Wednesday August 1
SmartMoney.com - Pundit News
By Stacey L. Bradford
IT WASN'T ALL that long ago that investors took solace from Wall Street's top prognosticators. Even while tech stocks were plunging, you could always count on the pundits to offer a rosier long-term outlook.
Well, those days are over. Here we are in August, right about the time many of our gurus had said the market's grand recovery was supposed to start. But instead of cheerleading, some once fiercely bullish strategists are throwing up their hands in defeat.
On Monday, our No.2-ranked pundit, UBS Warburg's Ed Kerschner, slashed his earnings estimates for the overall market. ``Earnings this year will be considerably worse than we thought because the U.S. economy shows few signs of rebounding from near-recessionary levels,'' he said. Kerschner blames weakening foreign demand and the strength of the dollar for the prolonged slump.
Deutsche Banc Alex. Brown's Ed Yardeni, who already had the lowest estimates on the Street, echoed this negative sentiment. On Monday, he cut his earnings estimates once again, from $47 a share to $45 a share.
And the talk at cocktail parties is downright depressing these days. Yet Morgan Stanley Dean Witter's Byron Wien says investors continue to be too optimistic. He believes the likelihood that the stock market and the economy will rebound quickly is unrealistic. Rather than seeing a V-shaped recovery, a U-shape is the best Wien can predict. Meanwhile, his Morgan Stanley colleague, Barton Biggs, says the collapse in tech spending is undermining economic activity and stock markets around the world.
There are a couple of ways you can look at all this negative sentiment. On the one hand, it may be true that the current downdraft is worse than anyone could have anticipated. After all, it certainly took technology companies like Cisco Systems (NASDAQ:CSCO - news) and JDS Uniphase (NASDAQ:JDSU - news) by surprise. And now that more information is available, the pundits, along with the rest of Wall Street, can adjust their predictions accordingly.
Or, you could view these experts as a contraindicator. Remember Oppenheimer's Michael Metz? He was wrong so often — managing to miss the entire 1990s bull market — that people found themselves scoring big by doing the exact opposite of whatever he was recommending. Similarly, those who listened to a few of our pundits, such as Gruntal's Joe Battipaglia, would have been led astray. This self-proclaimed technology expert once predicted the Nasdaq would reach a startling 5500. It now sits at just 2068.
So could it be that all this negative sentiment is a sign that things have, indeed, finally hit bottom? For some perspective on the real economy, we took a peek at a couple of traditional leading indicators that Fed Chairman Alan Greenspan is said to monitor. First, there's steel scrap, or the recycled metal that steel mills and mini-mills buy and melt down to form new products. Scrap prices are good indicators of the U.S. economy, since trends show up here before they appear in data from industrial production. And while scrap prices have been weak for some time, we were encouraged to learn that they increased slightly in late May through July.
Containerboard, better known as corrugated boxes, is another leading indicator. Containerboard demand is directly tied to industrial production, since lots of stuff is shipped in brown cardboard boxes. And here, while demand is still falling, it's doing so at a much slower rate than in May. That suggests we could be near a bottom in the economy, says Mark Wilde of Deutsche Banc Alex. Brown.
How much weight should we give to these small signs of optimism from the Old Economy? More than you might think. Goldman Sachs's Abby Joseph Cohen, our No. 1-ranked pundit, takes this information quite seriously. She's been keeping her eye on this segment of the economy all along, and noted in an interview with SmartMoney.com that molded plastic forms — another type of packaging that products are shipped in — are also seeing an increase in demand. All this contributes to her view that the economy is starting to see signs of improvement. She even says some sectors are already starting to stabilize.
``This is a very broad economy,'' Cohen says. ``While technology is important, it is only one small part.'' She encourages investors to look at other sectors, since they tend to pick up at different times in the economic cycle. The operating earnings for some industries peaked in the third and fourth quarters of 1999, she says, while others didn't peak until the second half of 2000. ``Considering [that] 12- to 15-month gap, it would be very unusual to expect all industries to bottom out at the same time,'' she argues.
Indeed, as far as Cohen can tell, most of the bad news on the profit and revenue front is already reflected in equity prices. By year-end 2001, she expects the S&P 500 to reach a lofty 1550 and the Dow Jones Industrial Average to hit 12500. (They now sit at 1215 and 10501, respectively.)
How to play this outlook? Cohen recommends investors pick up select retailers. (Sorry, Cohen doesn't recommend individual stocks.) She's still upbeat on technology stocks, despite their weak performance. ``It has been a mixed picture [for the technology sector], but many good quality names have risen,'' Cohen says.
If you buy into the doom-and-gloom prognosis, however, you may be a bit more comfortable taking your cues from Deutsche Banc Alex. Brown's Yardeni. Unlike Cohen, he continues to be bearish on tech stocks overall. ``The much-anticipated recovery in technology earnings is very unlikely to occur during the second half of this year,'' he says. ``I expect it won't start until the second quarter of next year.''
Yardeni also disagrees with Cohen on retail stocks. Although consumers are starting to get those tax rebates, Yardeni doesn't believe retailers will see the big sales pop other analysts are expecting. With more layoff announcements on the horizon and fewer jobs out there, some of that money may have to pay the bills. So what does he like? Yardeni continues to push energy and utility companies. Plus, more interest-rate cuts could lead to added strength in the already hot housing sector.
So if you're a fan of technology stocks, our gurus have done their job — albeit a little late in some cases — by warning you to brace for a rocky future. But if you see merit in looking to the Old Economy for clues, the message is clear: While we may not be out of the storm just yet, the clouds are certainly starting to part. |
