MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING WEDNESDAY, DECEMBER 31, 1997 (2)
U.S. MARKET NEWS
Curtain Falls on Bulls' Amazing Three-Year Run
By Justin Carder
NEW YORK -- After a year like 1997, many a Wall Street investor probably feels like a Times Square reveler after a cheap-champagne binge. Besides "Where's my wallet?" an understandable question might be: "How did I get here?"
The stock market's major barometers ended the year with an unprecedented third straight year of gains greater than 20%.
The Dow Jones Industrial Average ($INDUA) finished nearly 23% higher than 1996 and capped its best 10-year stretch in history by gaining more than 300% since 1987 -- the year of the Black Monday crash. This was the first time in the 101-year history of the Dow that the index posted three straight years of greater-than-20% gains.
As an illustration of this phenomenal growth, $100 invested in the Dow at the beginning of 1995 would have grown to $205 and change as of Thursday's close. Not too shabby.
In 1997, the other indexes didn't do too badly either. The S&P 500 (SPX) posted a 31% rise in 1997, while the Nasdaq (COMP) gained 22%.
Despite suffering the worst one-day point drop ever on Oct. 27 and battling worries about the effects of Asia's economic troubles on U.S. companies, the market remained strong as investors expressed confidence that economic growth will continue in 1998.
Market players said they expected fresh flows of cash into the stock market from bonus payments, dividend distributions and retirement-account contributions to boost the market in the first weeks of January. "My best guess is that in January, the flow of funds starts again and the market starts to climb higher," said Arnie Owen, managing director of capital markets at Cruttenden Roth.
But before we rush into 1998, the old year needs to be put to bed.
GLOBAL INFLUENCES
In 1997, global markets did their best to scare the stuffing out of Wall Street. Asia, which became a bad word for most investors in 1997, looks like it will stay that way for at least part of next year.
Hong Kong was the first major global stock market to take a dive. The Hang Seng index fell in October to hit a year-low of 8,775.88 points, off a year high of 16,820.31 points in August.
Asian regional currencies had breezed into 1997 tied firmly to the U.S. dollar's apron strings, with their underlying economies slowing but still confident of future dramatic growth. But serious problems were simmering and by July it became impossible for governments to keep the lid on the economic pressure cooker any longer. Financial markets started to see through officials' sanguine rhetoric, and while traders began to take speculative positions in currencies that looked bound to fall, analysts started digging and quickly uncovered horrors
galore in Asian economies, especially in banking.
"For the most part, the crisis which has engulfed many of the region's economies is the direct result of years of financial excesses," said Larry Hatheway, chief economist at UBS Securities in Singapore. "In short, much of Asia over-borrowed and over-lent, with too many of the borrowed funds ending up in unproductive assets."
Most of Europe's major stock exchanges headed into the New Year bloodied but unbowed, as they shook off the effects of a turbulent year to end 1997 at record or near-record highs. The main driver behind growth in European bourses was the strength of the U.S. markets.
NO MORE TECH FISH IN A BARREL
When it comes to choosing technology stocks, 1997 might have marked the end of easy pickings.
"Making money in technology used to be like shooting fish in a barrel," said Art Russell, technology Analyst for Edward Jones. "Going forward, people are going to have to be much more careful with who they lay their money with."
Russell explains that, while technology has forced its way into the minds of money managers at every level, it isn't enough to simply buy "technology" issues.
"Underlying demand for these products continues to remain strong," he said. "But the various subgroups performed quite differently from each other. For example, hardware stocks made big gains, while networkers or semiconductors got beaten up. At the beginning of the year, it looked like semiconductor stocks would be big winners. How you ended up depended on where you had your money."
The Philadelphia Semiconductor Index (SOX) rose as high as 403 over the summer, only to drop to below 270 to finish the year. Volatility like that may leave some investors sitting on the sidelines.
But Russell says a smart player should get in the game. "We saw that technology as a percentage of GDP is growing and technology is becoming a greater part of our daily lives," he said. "There's a great opportunity for investment. After this year, you have to be in technology."
1997 WINS IPO SILVER MEDAL
This year was the second-best ever for IPOs, raking in $43.1 billion in U.S. proceeds, according to Securities Data Co. That is down 13% from $49.8 billion, set in 1996, the hottest year ever for IPOs.
But analysts say the 1997 market showed signs of hangover from the drunken revelry in 1996 -- it took months to get off the ground, and when it did, buyers demanded safer bets.
The year started slowly -- fears of a hike in interest rates kept the IPO market on its knees after Federal Reserve Chairman Alan Greenspan said financial markets might be showing signs of "irrational exuberance" in December of 1996. The first quarter of 1997 was weak and the market came to a standstill in April as the stock market floundered.
But as inflation failed to materialize and corporate earnings came in at par, small-cap stocks and IPOs found their legs. After months of dithering, the Russell 2000 index (RUT) sprang to life in mid-April. The index chugged higher and never looked back for the next five months -- climbing a sensational 38.5% by mid-October. The warm breeze smiled on IPOs and buyers hastily returned.
Technology stocks, which had become pariahs after the failure of many highly touted Internet IPOs in 1996, were suddenly allowed back into polite IPO society. In May, amid the surge in small-cap stocks, came the red-hot debuts of Rambus (RMBS) and Amazon.com (AMZN). Analysts said Rambus, which makes a technology that speeds up the processing capability of semiconductor chips, was proof that mutual-fund IPO buyers would risk buying into small companies, so long as they had strong blue-ribbon underwriting teams, such as Rambus. Its shares jumped to $30 from their IPO price of $12. The stock now trades at about $46, the top-performing IPO of the year.
Once those deals did well, underwriters were quick to make hay, which may have resulted in an overstuffed pipeline and hurt IPOs down the road, in the winter. And buyers still remained selective.
After the heady summer, the fourth quarter was looking rosy until the Asian fiscal crisis took Wall Street by surprise. The worries sent investors for the exits -- with the precipitous decline halting trading on the New York Stock Exchange on October 27. For the year, the Russell 2000 rose 18%, soundly whipped by the S&P's 500 gain of about 31%. IPOs also lagged other secondary stock and debt offerings -- which both had record years. Low interest rates made bond offerings attractive and fund managers showed their risk-averse stance by choosing "secondary" deals, or stock offerings by already-public firms with stock histories.
WEDNESDAY'S MARKETS
Stocks ended 1997 with mixed trading in a relatively quiet New Year's Eve session. The
Dow Jones Industrial Average ($INDUA) finished down 7.72 points, or 0.1%, at 7,908.25.
Wednesday's subdued pre-holiday session saw the Dow up as many as 44 points at its peak as investors stretched a year-end rally into a fourth session.
"We didn't have any problems overnight in Asia so that allowed the equity market to continue its Santa Claus rally," said Phil Orlando, chief investment officer of Value Line's Asset Management.
Nevertheless, blue chips succumbed to some profit-taking late in the session as many market players headed early for the exits.
U.S. stock markets will be closed Thursday for the New Year. They will resume regular trading hours on Friday.
While the Dow eased, advancing issues outnumbered declines on the New York Stock Exchange by an 18-to-11 ratio.
The Nasdaq Composite Index (COMP) ended up 5.34 points, or 0.34%, at 1,570.37. For the year, it rose 21.6%.
The Standard & Poor's 500 index (SPX) dipped 0.41 of a point, or 0.04%, to 970.43. For the year, it surged 31.0%.
TECHNOLOGY STOCKS
Technology issues drifted slightly higher following two days of solid gains. The Morgan Stanley High Technology Index (MSH) was off 2.60 to 447.52.
Netscape (NSCP), which recently had been benefiting from troubles for its chief rival, Microsoft, itself came under fire Wednesday. Morgan Stanley analyst Mary Meeker said there was a 60% chance the Web-browser maker might report earnings that fall short of estimates in the upcoming quarter; the consensus calls for earnings of 14 cents per share. Netscape shares dropped 2 1/2 to 24 3/8.
Some of the best news for tech stocks came from retailer CompUSA (CPU). The computer superstore reported that its second-quarter same-store sales jumped 8.8% for its 122 stores open more than a year. The stock was up 1 1/2 to 31 1/8.
The news wrought mixed results among the leading PC makers. Dell (DELL) was down 1 1/16 to 84, while Compaq (CPQ) gained 1 3/4 to 56 1/2. Gateway 2000 (GTW) shares, already driven up on takeover rumors, were down 1 3/4 to 32 5/8. Apple Computer (AAPL) was left behind, too, falling 1/16 to 13 1/8.
Cybex Computer Products (CBXC) said its third-quarter earnings will beat Wall Street estimates. The developer and manufacturer of PC parts was expected to earn 33 cents per share, according to First Call. The stock fell 1/4 to 24 1/2.
Intel (INTC) claimed its usual perch at the top of the most-active board, dipping 1 7/16 to 70 1/4. Other semiconductor and equipment-maker stocks were mostly positive. Texas Instruments (TXN) gained 7/8 to 45. Cyrix (CYRX) finished unchanged at 27 7/8, as did Altera (ALTR) at 33 1/8.
Amazon.com (AMZN) joined in some of the retailing bliss hitting non-wired issues, up 2 1/16 to 60 1/4. America Online (AOL), which had its fingers in a big chunk of this season's holiday shopping, was up 2 3/16 to 90 1/2.
Internet search engine Infoseek (SEEK) was up 9/16 to 10 3/4. Merrill Lynch reiterated its rating on the stock of "near-term accumulate, long-term buy."
EMC Corp. (EMC) jumped 7/16 to 27 7/16. Earlier in the week, the computer-storage-device maker announced a deal to supply its products to Yamaha Motor USA.
Microsoft (MSFT) reverted to its recently losing ways, down 1 to 129 1/4. A U.S. Court of Appeals for the District of Columbia agreed to give the software giant a quick hearing on its appeal of a preliminary injunction related to the combination of its Internet browser with its computer operating system software.
The tech Dow components were up. IBM (IBM) gained 1 1/2 to 104 5/8, while Hewlett-Packard (HWP) climbed 13/16 to 62 3/8.
In options trading, one of the biggest gainers of the morning was the PeopleSoft (PSFT January 40 put (.PQOMH). PeopleSoft stock traded 13/16 higher at 39.
Ascend (ASND) shares were heavily traded. The company announced it has shipped a beta of its "smart core" ATM switch on schedule. The stock rose 1/2 to 24 1/2.
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