>>>perceived as the greatest credit risk? >>>
"That will narrow even further the already tight
spread between short term and long term U.S. interest rates as
short rates rise and long rates slip further."
By Cal Mankowski
NEW YORK, Dec 19 (Reuters) - Wall Street stocks are likely
to start the new year under a cloud with one of the main props
for the market, corporate profits, suddenly looking a lot less
robust as Asian economies contract.
Noting that there have already been profit warnings from
the likes of footwear-maker Nike Inc (NYSE:NKE) and computer
network company 3Com Corp (NASDAQ:COMS), Hugh Johnson, chief
investment officer at First Albany Corp, predicted "more and
more companies will need to announce in the next two to four
months the impact of the Asian crisis on their sales and
earnings."
Johnson continued, "in both instances they (Nike and 3Com)
are attributing weaker profits to slowing demand from Asia."
Just a few weeks after the Standard & Poor's 500 stock
index seemed to shrug off the worries that first rocked the
markets in October, Wall Street stocks were heading lower in a
premature reveral to the always-hoped-for year end rally.
Jack Conlon, director of international trading at
NationsBanc Montgomery Securities Inc, said he sees increased
volatility early in the new year "with a slight downward bias."
But afterward he believes a "flight to safety" will draw money
invested overseas to both the U.S. bond and stock markets. "The
safe haven is still the states," he said.
Wall Street wrapped up the week in another bruising
session, with a triple expiration of stock index futures and
options and individual stock options giving some extra fuel to
a broad retreat. The Dow industrials were down 90 points to
7756 just before Friday's close.
Eric Miller, market strategist at Donaldson Lufkin &
Jenrette, said without expirations, "it would have been a bad
day anyway considering the Asian markets and the ongoing
earnings worries."
The Japanese stock market registered a decline of 5.24
percent on the Nikkei index Friday, setting the tone for a
sharply lower opening on Wall Street. Japanese investors were
rattled by the bankruptcy filing of grain trader Toshoku Ltd
(TOKYO:8034). South Korean stocks also posted a decline of more
than five percent.
Miller said the concerns about "negative guidance" on
earnings from U.S. companies and "especially from technology
companies" have grown. He said corporate profits next year
generally speaking may be anywhere from flat to up five
percent. That follows a long run of double-digit growth in
profits.
But with a higher bond market and corresponding decline in
yields providing some cushion for stocks, Miller expects the
performance of the stock market next year to be similar to
1994's flattish year. Speaking of 1998, Miller said, "it's
certainly not going to be a big up year and probably not a big
down year. I think it's a year that isn't going to show much
change."
"Hegative earnings previews are going to continue into
January," said Carl Bhathena, strategist at EVEREN Securities.
He anticipates only four percent profit growth in 1998. But he
said if international rescue packages are effective, the stage
could be set for a nice rebound in 1999.
First Albany's Johnson said the markets will begin 1998 in
a "cross your fingers" and "touch and go" frame of mind. He
said one acute danger is that financial institutions overseas
will be strapped for cash and begin selling short term U.S.
Treasuries. That will narrow even further the already tight
spread between short term and long term U.S. interest rates as
short rates rise and long rates slip further. He said a
flattening yield curve squeezes margins for financial companies
which could cause real profit problems for them next year even
if there are no credit quality problems on top of that.
Long treasury rates slipped to 5.92 percent Friday while
two-year rates were 5.66 percent.
Copyright 1997, Reuters News Service
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