Friday February 20, 8:58 pm Eastern Time
FOCUS-Stock mkt divorcing itself from real econ story?
By Pierre Belec
NEW YORK, Feb. 20 (Reuters) - The economy is slowing, corporate earnings
are slipping and Asia is still a time bomb just waiting to explode again
but the stock market keeps making new highs. Has Wall Street gone nuts?
The Dow Jones industrial average rocketed to a six-day streak of record
highs in a head-spinning rally that took the world's most closely
watched index of 30 blue-chip stocks this week above the 8,400-point
level for the first time ever.
But some experts say the market is ignoring a bunch of negative factors
that threaten to put the brakes on one of the most powerful bull markets
in history. Stocks have produced annual 20 percent-plus gains in the
last three years.
Aside from the lag in growth of the economy and corporate profits,
there's the threat of a U.S.-led military attack on Iraq.
The White House sex scandal involving President Clinton could be another
negative. Wall Street is worried that a weak president could mean a weak
stock market.
After a miserably flat performance in January, the Dow raced higher in
February, standing 6 percent up for the year.
The rally is being fueled by mutual fund managers, whose trading
activity has added tremendously to the market's upward momentum.
''The fund traders have got to put their money in stocks every day and
they don't get paid to build up a lot of cash,'' said Alfred Kugel,
senior investment strategist for Stein Roe & Farnham, which manages $5
billion in mutual fund assets.
''During the events of Asia at the end of October, the fund managers
might have raised their cash holdings from three to five percent, but
with all the money that keeps coming into 401K and Keogh retirement
plans, they had to stay invested,'' he said.
There's concern that the mutual funds' spectacular gains over the last
few years might be creating a false sense of confidence that the market
can only go higher.
The mutual funds, the experts say, seemed to have abondoned reason and,
as a result, they've created a market that is technically strong but
fundamentally weak.
The constant flow of cash into stocks has forced the market to
essentially divorce itself from the real economic picture, they said.
The fund managers' cash positions are now at the lowest ebb since early
1972, and the upthrust behind the market seems to be simply the
exuberance of fund managers who must keep their money in play.
The mutual funds' philosophy is that if customers are paying someone to
manage their investments in stocks, than the fund had better be in
stocks.
Liquidity has been a big force behind the fast-rising market but the
problem now is that the higher the market goes, the bigger the appetite
for money to support it and to keep prices going still higher.
There are warning signs of possible trouble for this liquidity-driven
market. So far this year, average weekly cash flows into mutual funds
have slipped to $1.7 billion, which is well behind last year's pace of
$4.1 billion.
Indeed, investors were fascinated with the market last year as they
threw $200 billion at stock mutual funds, bringing the total assets of
equities funds to slightly more than $2 trillion.
Don Hays, director of investment strategy for Wheat First Union in
Richmond, Va., said Wall Street is only looking at one side of the
''Great Mutual Fund Story.''
Corporate stock buybacks are also responsible for boosting the market,
he said.
''The popular story that people are talking about is that the public has
been buying billions of dollars in mutual funds but the truth is that
this is only part of the equation,'' he said.
''While the Baby Boomers bought $156 billion worth of stocks, the Golden
Agers sold $336 billion of direct ownership of stocks in the last 12
months, and this works out to a net withdrawal of public holdings in the
stock market,'' he said.
''I can't find another source for all the market's gains except the
corporations' buybacks, mergers and acquisitions ... and they are buying
back stocks like there's no tomorrow,'' Hays said.
General Motors Corp. [NYSE:GM - news] and Chrysler Corp. [NYSE:C - news]
are each repatriating 10 percent of their stocks, and International
Business Machines Corp. [NYSE:IBM - news] is buying back $7 billion in
stock.
''When you realize that their entire market capitalization is only 22
percent, they could totally go private in the next 10 years if they keep
up this pace,'' he said.
Hays said the market could be skating on thin ice if business conditions
go bad and the companies run out of cash to keep buying stocks and
cancel their ambitious repurchases programs.
''That would be the thing that could actually stop this crazy bull
market,'' he said.
Hays believes 1998 will be bearish for stocks and he expects to see the
''scars'' of slower earnings growth from the Asian economic meltdown and
dampened U.S. activity.
''As we get closer to March 15, companies will start to report a huge
number of negative surprises for the first quarter because of Asia's
pricing power,'' he said.
The impact of the Asian turmoil, which will cut the Pacific Rim region's
purchase of U.S. goods and bring a flood of low-priced Asian products
here, Hays said, came too late to ravage corporate earnings in the last
three months of 1997.
''The first quarter will just be the beginning of bad profit stories and
I think every other quarter will get a little bit worse,'' he said.
If mu does not get any further estimate revisions downward and they come in -0.25/-0.50 instead of just a -.14 does anyone think that may make investors alittle nervous? LD says last time mu severly disappointed in dec. stock went up over 60%. So if it loses more it should go up even higher this time. Mus earnings have steadily been decline for many qtrs. into real serious red ink this year. They will have to dig themselves out of a very deep hole. By their own admission if korea can stay in business mu may go out of business. The consolidation of the industry will only sharpen competition. Who would want to risk buying a stock with so much uncertainity at such high levels? Maybe a fund manager with to much $ needing to spend it on something, anything and gs and friends whispering in his ear buy this one its a great deal,worst is over and over and over,bottom of cycle,dram is firming, shortages in the future, mu lowest cost producer, was once 95, trust me on this one we'll handle the order and get you in at the best price(remember ML supposed generated more income from the buying and sell of mu last year then any other stock) and then pigs actually fly. |
