MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING MONDAY, JUNE 22, 1998 (4)
MARKET OVERVIEW, Con't
US Stock P/Es Still Look Pricey Despite Pullback
U.S. stocks' price-to-earnings ratios are beginning to shrink as profit expectations are scaled back, but valuations still look pricey and hard to sustain, analysts said.
"Clearly there is greater uncertainty about earnings going forward than there was before," said Chuck Hill, director of research at First Call.
"The P/Es (price-to-earnings ratios) show the bulls are still in charge," Hill said.
Current multiples should not be a worry as long as interest rates and inflation remain low, some analysts contend.
They point to near record low 30-year Treasury bond yields, and little sign of the Federal Reserve raising rates anytime soon while Asia is still gripped by financial woes.
P/Es and inflation generally move in opposite directions.
"It would be a reason to worry if interest rates were to back up on us, then the multiple would contract," said William Barker, chief investment strategist at Dain Rauscher.
The price/earnings ratio, or multiple, is calculated by dividing the price of a stock by its earnings per share.
The calendar 1998 P/E ratio or stock multiple of 23 for the Standard & Poor's 500 company index is among the highest in the past 30 years, First Call said.
I/B/E/S International, which also tracks earnings, said the 12-month forward P/E, which use expectations of future earnings, has dipped to 21.5 from a peak of 22 in mid-April, a sign that downward revisions in earnings forecasts are having an impact, it said.
Joseph Abbott, an analyst at I/B/E/S, said P/Es at current levels are still not justified and have been boosted by an inflow of Asian cash seeking safer havens in U.S. shares.
"We are just a little bit uncomfortable showing that equities are trading at 18 percent above fair value," Abbott said, adding that I/B/E/S is comfortable with an overvaluation of about 10 percent.
I/B/E/S uses a computer model used by the Fed to calculate overvaluations.
Forward P/Es have been at historical highs of well over 20 since last fall, First Call said. Before the current period of strength, the previous highs were around 18.5 in the first quarter of 1991, and 18.1 in 1968.
Earnings growth will be crucial in sustaining PEs at present levels, said Gail Dudack, chief investment strategist at UBS Securities.
"P/Es look very high even with the inflation outlook," Dudack said. "People have caught on eight years into a low inflation cycle that inflation and PEs are inversely related, but they are starting to take that belief to an extreme that's not sustainable over time."
Wall Street expects S&P500 earnings this year to grow 8.9 percent over last year when profits rose 11.0 percent, First Call said.
Earnings are forecast to rise 4.0 percent in the second quarter, down from a 5.2 percent forecast last week. Profits in the third quarter are expected to rise by 10.9 percent, and by 16.3 in the final quarter, according to First Call.
Apart from the tame inflation and rates outlook, Dain Rauscher's Barker said high multiples will also be supported as long as the cost of capital is low and return huge.
"But if the earnings don't come through, then these multiples will look pretty scary. If you have a high multiple stock that don't make the numbers, then the punishment is pretty severe," Barker said.
Monday's closing world markets: Jitters among investors drive down all markets
Most Asian stock markets fell Monday, with the key index in Hong Kong slumping 4.5 percent as investors dumped stocks in the absence of a firm plan by Japan to bolster its economy. The Hang Seng Index, the Hong Kong market's key indicator of blue chips, fell 387.70 points, closing at 8,204.21.
Brokers said investors were disappointed that Japan had not come up with any measures to boost its faltering currency and economy after world finance officials, including Deputy U.S. Treasury Secretary Lawrence Summers, met in Tokyo over the weekend.
The yen's slide in recent weeks rocked Asian financial markets by stirring concerns about a possible new wave of currency devaluations like those that triggered the region's economic turmoil last year.
Philippine stocks also tumbled Monday, dragged down by continuing concerns over the faltering Japanese economy. The 30-share Philippine Stock Exchange Index fell 52.02 points, or 3 percent, to 1,689.69.
In currency trading, the dollar averaged 41.235 pesos compared to 40.898 pesos Friday.
Thai shares also fell 3 percent as investors saw little hope of a short-term recovery in the stagnant Japanese economy. The Stock Exchange of Thailand index lost 8.42 points to 275.90.
Malaysian shares fell 2.1 percent because of the continuing weakness of the Japanese yen.
The Kuala Lumpur Stock Exchange's Composite Index lost 10.00 points to 457.61.
In Singapore, the benchmark Straits Times Industrial Index slumped 2.2 percent, or 24.48 points, to 1,098.45.
On the Tokyo Stock Exchange, the 225-issue Nikkei Stock Average edged up 41.11 points, or 0.27 percent, closing at 15,309.09. On Friday, the Nikkei had fallen 93.56 points, or 0.61 percent.
Attention focused on a dramatic decline in shares of Long-Term Credit Bank of Japan amid rumors, which LTCB denied, about the bank's health and a possible merger with other institutions.
Taipei: Share prices closed lower on profit-taking. The market's key Weighted Stock Price Index fell 126.11 points, or 1.61 percent, to 7,691.16.
Wellington: New Zealand share prices closed lower, with brokers citing a weaker U.S. share market Friday and a lack of buying interest locally. The NZSE-40 Capital Index fell 32.89 points, or 1.6 percent, to 1,942.31.
Sydney: Australian share prices closed higher, supported by a steady performance from Tokyo's stock market and by a stronger gold price. The All Ordinaries Index rose 8.00 points, or 0.3 percent, to 2,596.8.
Seoul: Share prices closed lower on worries that the yen could resume its plunge against the U.S. dollar. The key Korea Composite Stock Price Index fell 4.48 points, or 1.4 percent, to 311.27.
Jakarta: Indonesian shares closed lower in directionless trading. The Composite Index fell 4.794 points, or 1.1 percent, to 420.659.
Elsewhere:
Mexico City: Mexican stocks fell in cautious trading Monday, burdened by concern over prospects for global oil prices and Asia's economies. Traders and analysts said action was lackluster throughout, although stocks lifted off their session lows in bargain hunting late in the day. The leading IPC share index finished down 33.38 points, or almost 0.8 percent, at 4,320.36, after falling as much as 76 points earlier. Declining issues outpaced gainers by a margin of 49 to 13, out of 80 issues changing hands. Turnover was light at about 741 million pesos ($83 million).
European markets ended a lacklustre trading day with no help from a Wall Street still spooked by Asia.
London: British shares endured another session in the red as the tumble in Hong Kong and Japan's lukewarm promises to restructure the country's financial system cast a shadow over the session. The FT-SE 100 index fell 35.7 points, or 0.6%, to 5712.4.
Frankfurt: German shares retreated in late trade to only a slim gain. Participants put the change of heart down to market nervousness. "I'm not too optimistic. There is a lot of room for downside," said one dealer. The Dax 30 index closed at 5654.75, down 47.86 points or 0.8%. The Xetra Dax inched up 3.88 points to 5648.11. Among gainers, Mannesmann AG shares soared almost 6% on the weekend news of a share issue.
MORNING UPDATE
European stock markets turned mixed after advancing on a broad front in early cautious trade on Tuesday, while the dollar firmed after first drifting lower.
Traders remained wary, particularly in London, despite signs from the U.S. equity futures market that Wall Street might open slightly higher.
The dollar edged higher across the board after President Boris Yeltsin said Russia's financial crisis could lead to political and social instability and radical steps are needed to restore order to the economy.
Traders were also waiting to see how Japan would back up its promises of good intent and take steps to reform its economy.
Share prices in London were flat after ceding a 0.5 percent gain by midday. The mood remained more upbeat in Paris and Frankfurt which held onto gains of some 0.5 and 0.8 percent respectively.
MARKET PRICES AT 1101 GMT
MARK 1.7955/65
YEN 138.03/13
STERLING 1.6698/08
GOLD $295.45/295.85 +0.89 (pvs PM fix)
BRENT $13.61 +0.37
FTSE 5712.7 +0.3CAC 4040.89 +22.25
X-DAX 5694.17 +46.06
London's FTSE 100 of blue-chip stocks turned mixed after a 27-point advance evaporated, with falling stocks in a slight majority.
''It's very drifty, there was no follow-through,'' said one dealer. ''It's directionless and extremely quiet,'' said another.
French shares moved ahead in steady early trade, with the market buoyed by Wall Street's flat close but likely to be jumpy on the final day of the June account, brokers said.
The CAC-40 index was now clearly above the 4,000 threshold it broke down through in the recent Asia-inspired correction.
One technical analyst said the close could prove key -- a fall below the 4,000 level would point to a bearish head and shoulders configuration.
German shares nudged higher in quiet early trade and were seen holding gains as a dearth of corporate news left stocks without impetus.
''There is no reason to sell shares, so I think we will stay on the plus side,'' one trader said. ''There is no negative news.''
Earlier, Tokyo stocks slid to near the psychologically significant 15,000-point level amid concern the government was dragging its feet on measures to clean up bad loans choking the banking system, and Hong Kong ended 0.2 percent higher, but well off the day's highs as government measures to boost the economy disappointed investors.
In currencies, the dollar moved higher after Yeltsin's comments, after drifting lower in a range below 138 yen.
''The economic crisis has become so acute that there are social and political dangers,'' Yeltsin said at the start of a joint meeting of the government and parliament on the financial problems.
Yeltsin, speaking before Prime Minister Sergei Kiriyenko delivered a report on the government's planned anti-crisis measures, gave a thinly veiled warning to the State Duma (lower chamber of parliament) not to stand in the way of reforms.
Russia's financial markets have been hit by waves of selling in recent weeks due to investors' concerns over the state's ability to meet its debt obligations and defend the rouble.
Earlier, dealers said the yen was given a small boost by Japanese plans to come up with a bridge bank to help borrowers. The Japanese government and ruling Liberal Democratic Party (LDP) were meeting to work out details of the plan.
Softer Asian stocks underpinned the dollar on dips but wariness that the U.S. and Japan could co-ordinate yen buying as they did last week capped gains.
''The market is waiting for Japan to come up with a package to help sort out the bad loan problem,'' said Rob Hayward, economist at Bank America in London. ''Since this appears to be a rather long process, the dollar is likely to be rangebound.''
Hayward defined the dollar's range as between 135 and 142 yen as concern about Asia's economies and fear of central bank intervention pulled it in opposite directions.
Japanese Prime Minister Ryutaro Hashimoto said details of a bridge bank plan to help borrowers would be released as early as possible in July.
Plans being debated by the government and the LDP would ensure all bank debentures and all sound corporate borrowers were protected, he said.
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