MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 5, 1998 (4)
THE WEEK AHEAD
Long Weekend Unlikely To Stem Upward Bias
MSNBC
To quote Bruce Springsteen: "Say goodbye, it's Independence Day." Financial markets are closed Friday in observance of the Fourth of July amid expectations the weekend festivities will continue when trading resumes Monday.
Hopes are rising the Dow will soon make a run at its current record of 9,211.84. The blue-chip proxy looks to play catch-up to the S&P 500, which hit four record closes in the six trading days prior to Thursday's modest setback. The Nasdaq, meanwhile, stands 23.61 points below its April 22 standard of 1,917.61 following Thursday's 1.1% decline.
Assuming the recent pattern of stability in Asian financial markets does not reverse, Wall Street's focus is likely to turn to domestic issues. The second-quarter reporting season begins next week with a smattering of releases. Included in the mix are reports from Motorola (MOT), Yahoo! (YHOO), Advanced Micro Devices (AMD), and Dallas Semiconductor (DS). Outside of tech, FDX Corp. (FDX) is the highlight.
The economic calendar for the week ahead is fairly light. Friday brings the Producer Price Index for June and the University of Michigan Consumer Sentiment Index for July. Reports on car sales, retail sales and wholesale inventories are due earlier in the week. With the Fed having left interest rates unchanged this week amid signs an economic slowdown is at hand, the data are not likely to provide any dramatic impetus for trading.
Given the fact that little or no fireworks are expected from earnings and the economic calendar, further gains will have to come from other factors. Namely, optimism that forthcoming earnings will not be as woeful as once feared and a continuation of the momentum demonstrated in the past two weeks. Even some of the market's less optimistic players concede more gains are likely in the days ahead.
"Technically, the market can go higher because it acts well on good volume," said Tony Dwyer, chief market strategist at Landenburg Thalmann & Co. "All the favorable fundamentals remain in place."
Dwyer is troubled, however, that -- by his estimation -- the familiar refrain of solid economic growth and low inflation is already incorporated into the market. "A lot of the good news is already priced in," he said.
The strategist said blue-chip stocks have risen to egregiously high valuation levels and recommends investors switch some funds into smaller caps. That strategy has repeatedly proved to be dangerous, but Dwyer says investors with "patience" will be rewarded.
"You can have more upside because the risk-reward [in blue chip stocks] isn't favorable in my opinion," he said. "I'd rather be in the beaten down small-cap arena because if the Dow comes down, small caps may not rally, but they will go down less."
Dwyer is further bullish on the group because many smaller stocks trade at price-to-earnings ratios that are paltry relative to larger issues, given their higher growth prospects.
Among the names Dwyer recommends is real estate developer Bluegreen Corp. (BXG), which trades at a P/E of 12.7 times its fiscal 1999 earnings, which are projected to grow 56.5%. Also, he likes women's fashion concern Candie's (CAND), which trades at 14.7 times fiscal 1999 earnings that are expected to grow 62%. Conversely, the S&P 500 is trading at some 22.4 times 1999 earnings, which are projected to grow just 7.5%.
A less restrained view of the prospects for major indices comes from Bill Meehan, chief market analyst at Cantor Fitzgerald, although he suspects more profit taking could be in the immediate future, particularly for tech stocks. Thereafter, he believes the tech leadership will recover while financially sensitive sectors like banks and housing will return to levels not seen since April.
"If there's a surprise out there, it will be the market rallies much stronger than even a lot of the bulls believe is possible," Meehan said. "I think there are things coming to a point where we could turn excessively positive and run this market up substantially."
The market watcher said the Dow could approach 10,000 by the end of the third quarter or beginning of the fourth.
But hold the champagne and party streamers.
Meehan further reports the S&P 500 in the last 200 days is moving in lock step with the pattern of the 200 days beginning August 22, 1986, according to a computer program he asked to search the entire history of the market for chart patterns similar to the current environment.
"If the pattern continues, it would indicate you have the potential for a summer rally here that would blow away most of the bulls' targets," he said. "It could get us to levels that are absurdly valued [but] we know how that ended last time."
For those of you without long memories, 200 days from Aug. 22, 1986 was the onset of a big run-up in the S&P 500. Those gains topped out in August 1987, auguring the Dow's 22.6% debacle on Oct. 19, 1987.
Meehan expects major indices to decline as much as 30% from the heights he sees them reaching in the coming months. But there's a silver lining. First, a 30% drop from 10,000 leaves the Dow at 7,000, which "wouldn't wipe out much of the current bull market," he observes. Secondly, Fed Chairman Greenspan has "plenty of room to maneuver when you-know-what hits the fan, because the Fed has kept short-term rates relatively high."
There, feel better?
What To Watch Out For This Month
Money Daily
July 1, 1998
The economic slowdown will have a big impact on your investments. Here's a guide to economic news that will help you understand how.
When the going gets tough, the tough go shopping. This old twist on an even older maxim pretty much explains the astonishing growth of the U.S. economy in the face of an Asian- induced worldwide slowdown.
It's been the American consumer against the world, and the consumer's been winning.
But now it appears that the American shopper is losing the battle. A sharp upturn in the trade deficit, because the U.S. is exporting so much less to Asia, combined with a few other factors, may have nearly flattened U.S. growth for the second quarter.
In some ways, this is a good thing. The slowdown removes any fear the Fed will raise rates in the near term, a move that would have taken the steam out of stocks and driven bond prices down.
But will Asian weakness make the U.S. economy slow too much? If not, will the tight U.S labor markets finally spark wage and price increases big enough to cause inflation? And will job growth remain strong enough to sustain the consumer-led economic expansion?
These are some of the questions that will have economists turning to the indicators listed in our economic datebook this month. Here are the ones to pay attention to, and why.
* Trade Top on the list are the trade figures. The U.S. trade deficit slipped from an average of $11.5 billion a month in the first quarter, to probably $14.5 billion in the second. That's a lot. "Things could fall apart," says Stan Shipley, an economist with Merrill Lynch. "At some point, the trade deficit may get so bad, it becomes an unstable situation." Not likely this year, but possible in 1999, he says. Part of the problem is the strong U.S. currency. "It looks like we may be losing market share in Europe because of the strong dollar," says Robert Mellman, senior economist at JP Morgan.
* Economic growth Along with the ballooning trade deficit, two other factors are causing an economic slowdown. One is the sharp reduction in the first quarter buildup of inventories. "A significant inventory adjustment will cause a hit to GDP and a hit to production," says John Silvia, the chief economist at Scudder Kemper Funds. The second factor putting the brakes on growth is a cutback in capital spending by firms. Will this be enough to slow down job creation and thus cut back on income and consumer spending? To find out, economists will be watching durable goods orders, which show how much businesses are putting into capital spending.
* Job growth Even though the economy has probably slowed dramatically in the second quarter, many economists are still worried that a tight labor market may cause wage inflation. They will be looking at the employment cost index to find out. Productivity numbers are also important. If productivity increases, companies can pay workers more without causing inflation, so wage hikes are less of a concern.
* Consumer spending Too much job growth can cause another problem as well -- excessive spending that can lead to concerns the Fed may start worrying about inflation again. "The Fed does not like job growth of 230,000 a month, because at that level you are getting too much income, and consumers are spending more," says Shipley. "The Fed will accept 190,000 a month growth."
Finally, don't forget about a new twist: the General Motors (NYSE: GM) wild card. The strike against GM, which has shut down 90% of the company's North American capacity and is causing difficulties for suppliers, will create problems for economists, too.
Because of the strike, economic data will contain much more "noise" than normal. It will have a big impact on everything from reported hourly earnings to GDP growth.
How much? No one knows for sure, and that is the point. Shipley thinks the strike will knock a half a percentage point off of growth in the second quarter. He may or may not be right. But one thing is certain, the strike will make it harder for economists to understand underlying economic trends. And that will add to confusion among investors -- who dislike few things as much as they dislike uncertainty.
New Reports Point To Slower Growth
Associated Press
A couple of new economic reports from the government point to signs that the U.S. economy's robust growth rate is slowing.
Asian economic turmoil and the General Motors strike slowed U.S. job growth in June, pushing the unemployment rate up to 4.5% from a 28-year-low during the two previous months.
Despite the increase, from 4.3%, the seasonally adjusted unemployment rate remained well below the 5% rate of a year ago, the Labor Department said Thursday.
"It was still quite low by recent historical standards," said Katharine G. Abraham, commissioner of the Bureau of Labor Statistics.
Employers added a moderate 205,000 jobs to their payrolls in June, compared with 309,000 in May. Most of the gains came in services. Manufacturers cut 29,000 jobs, the fourth decline in five months and the worst since March 1996.
That reflected drops in industries either facing stiff competition from Asian imports or loss of export sales to Asia, including apparel, textiles, paper products and electronic components.
"This is a definite sign the economy is slowing," said economist Sung Won Sohn of Norwest in Minneapolis. "The danger is it will continue to slow and decelerate for too long. Toward yearend we could be talking about an economy that is too weak rather than too strong."
Payrolls fell by 6,000 in the auto industry, reflecting the June 5 strike at GM's stamping plant in Flint, Mich. The report hasn't yet registered the impact of subsequent shutdowns.
In another report, the Labor Department Thursday said the number of first-time applications for unemployment benefits surged last week because of the GM strike. They jumped by 24,000 to a seasonally adjusted 390,000, the highest level since March 1997.
That followed increases of 35,000 the previous week and 17,000 two weeks earlier. The department said the bulk of the latest increase came in three states - Michigan, Ohio and New York - and officials there attributed most to the strike.
A third report, on factory orders in May, reflected distress in manufacturing even before the strike. Orders dropped 1.6% to a seasonally $333 billion, the Commerce Department said. It was the first decline since February and the worst since December.
Decreases were widespread. They were sharpest in electronic components, aircraft and food products. A survey by the National Association of Purchasing Management, released Wednesday, suggested manufacturing activity declined again in June.
The June unemployment and May factory orders reports, along with other signs economic growth has moderated from the very rapid 5.4% annual rate of the first three months of the year, probably helped persuade Federal Reserve policy-makers Wednesday to leave short-term interest rates unchanged.
The increase in the overall unemployment rate was the largest since June 1997, when it also rose two-tenths of a percentage point, to 5%.
Service industries, meanwhile, continued to report strong job gains in June. Temporary-help firms added 32,000 and engineering and management services increased by 25,000.
Employment in finance, insurance and real estate grew by 30,000 over the month. During the past year, the industry group has grown about 50% faster than the rest of the economy, adding a quarter of a million jobs.
Computer-related and health services also showed large advances. Retailers added 53,000 jobs - 21,000 of them at restaurants and bars. Construction jobs increased by 20,000, helped by a housing boom spurred by low interest rates related to the Asian crisis.
In two other signs of softness, the average workweek for nonfarm, nonsupervisory workers edged down to 34.6 hours from 34.7 hours. Average hourly earnings rose just one cent, to $12.74. It was the smallest increase since February 1996.
By demographic group, the unemployment rate in June was 3.7% for men, 4.1% for women, 14.6% for teen-agers, 4% for whites, 8.2% for blacks and 7.6% for Hispanics.
Summertime, And The Buying Is Easy
CBS MarketWatch
It's at sleepy times like these, when Manhattan becomes a ghost town, that individual investors can dance on Wall Street without getting trampled by the herd.
Jefferies & Co. strategist Art Hogan sees stocks "drifting higher in lackluster volume" as a Fourth of July holiday mode prevails. He even noted the thin automobile traffic coming into Manhattan on Tuesday.
Sure, the spurt of oil prices and oil stocks Tuesday has a lot to do with reports of a U.S. aircraft strike in Iraq. But you can bet your portfolio that oil's price swings were exaggerated because of light trading activity on Wall Street and in futures pits.
We may see the same exaggerations, those unreasonable highs and grotesque lows, in the wake of economic numbers that will wash over Wall Street this short holiday week. It may be summer, but Washington is working.
Besides Thursday's June non-farm payrolls report, Washington will release factory orders and construction spending. Bond and stock investors also will keep an eye on the National Association of Purchasing Managers' June manufacturing index on Wednesday, the first day of July.
Strong signs of a wildfire economy are almost certain to send bond yields spurting and bond prices sliding -- at least for an hour or two. That's where the summer opportunity arises.
CBS MarketWatch chief economist Irwin Kellner and interest rate commentator Michael Bazdarich both see an opportunity for investors looking for bonds. (See our Kellner and Bazdarich reports.)
You'd think, with the 30-year U.S. Treasury bond yielding near all time lows of 5.6 percent, that bonds belong in a nursing home. Not so.
"The yield on the government's bellwether 30-year bond is determined by two factors: supply and demand and the rate of inflation," says Kellner from New York. "With Washington running a budget surplus, the supply of long-dated Treasuries is being reduced. This makes them more valuable, thus boosting their price and cutting their yield."
And the spread between consumer inflation and the bond's yield? "It should be around 3 percentage points; it is over 4 points today," Kellner says. "This suggests that long-term rates should descend towards the 5 percent zone by year-end, and move even lower next year."
If that happens, and investors use any signs of a sizzling hot economy later this week to buy bonds at a bargain, bond holders will be getting a thick yield and capital appreciation as bond prices rise.
That's one example of how investors can seize the summer day.
Others are in the stock market. We've heard a lot about fund managers dressing up their porfolios at the end of the June quarter, which happens Tuesday. Amid Nasdaq and NYSE trading that might fall 20 percent or more below average volume, investors might find this is a good time to both search for bargains and sell their winners.
That's because fund managers generally dump their losers by quarter's end and fortify their winning positions. CBS MarketWatch's New High-Low screen might point to companies whose shares are hitting those unreasonable highs or nasty lows. (The screen is updated every 15 minutes and shows new 52-week highs and lows on Nasdaq and the New York Stock Exchange.)
On the low (read: possible bargain) end, investors Tuesday continued to dump shares of closed-end Indonesia Fund (IF) on the NYSE. After all, what red-blooded American fund manager wants his customers to see a stake in Indonesia these days? The country's currency has collapsed; its largest companies are bankrupt.
On Nasdaq, shares of CyberMedia (CYBR) are struggling after a CEO resigned and the maker of personal computer self-help software diappointed Wall Street. Is it a bargain or a sinking ship?
On the positive side, America Online shares (AOL) are hitting highs. So are shares of network equipment maker Cisco Systems (CSCO). These two tech stocks, participating in the Internet boom, might just have room to run, Wall Street experts say.
One high-flier that might be ready for a pause is Seattle department store chain Nordstrom (NOBE). As consumer confidence notches 30-year highs, wary investors just might want to ask themselves whether a steep fall in U.S. economic growth this summer might be a forewarning of a miserable autumn and winter for retailers.
'Do As I Do, Not As I Say' Investor Strategy
Seldom are words more reassuring to investors in individual stocks than those of Peter Lynch and Warren Buffett as they talk honestly about how they use common sense to recognize great buys.
Buy what you know, says Lynch, who made his legend at Fidelity Magellan Fund as he invested in stocks including carmaker Chrysler, baker Au Bon Pain and undertaker Service Corp. Buy great brands that in the long run will deliver superior earnings compared with today's stock price, says billionaire Buffett, whose company Berkshire Hathaway is sitting on a 1,200%, $16 billion profit in Coca-Cola.
What's that laughter you're hearing off to the side? None other than Paul Samuelson, the Nobel laureate, professor emeritus at Massachusetts Institute of Technology and best-selling textbook author known to virtually every student who read assignments in Introduction to Economics.
Samuelson is saying it is impossible for great investors and stellar traders to really explain how they succeed. "I know a lot of guys who laughed all the way to some very big banks, but they could not pass it on," Samuelson was saying last week in a Manhattan auditorium at giant pension fund manager TIAA-CREF.
His audience of a few hundred of Wall Street's best number-crunchers was chuckling, charmed by the spunky 83-year-old and his attitude toward the markets. As a group, the crowd believes everything in the financial markets can be demonstrated in an equation, such as the Black-Scholes options pricing model co-authored by the late Fischer Black. The crowd was gathered for a symposium inaugurating the Fischer Black Memorial Foundation. The Black-Scholes model underlies most derivatives trading and was celebrated with a Nobel prize last year. The foundation honors the late co-author.
Explanation laughable
Paraphrasing Lynch, Samuelson is saying, "Invest in something you know." He sneers and pauses for effect. "There's a good candy bar in your vicinity. Buy a stock. Can you make it any more stupid," he asks, joining the laughter that fills the auditorium.
Don't take him wrong. Afterward, Samuelson emphasized that he meant no offense. Indeed, he had been quick to recognize both men as brilliant. Lynch knows individual stocks in detail.
"He could enumerate 175 different savings and loan companies and tell you where the bodies were buried in each one of them," Samuelson recounted. Of course, Lynch could do this with the extraordinary help of Fidelity analysts and the best Wall Street research.
"I have great respect for Warren Buffett. He's a lot richer than I am," Samuelson said. "But I don't have great respect for his explanation of how he does it. He says any fool would know the Washington Post Co. was a steal at the price that he bought it." But when Buffett bought that stock in 1973, Samuelson was writing a column for Newsweek, a Washington Post unit, and did not recognize the value Buffett and his fools could see.
Gleaning insights
Samuelson provides comfort to anyone who has bought a how-to book on stock picking and then become frustrated trying to follow its generalizations printed as boldfaced rules. Consider, too, the case of the three sharp authors of a book selling well now, The Gorilla Game: An investor's guide to picking winners in high technology. As they were completing the book and their summary of what had made their own stock picking outstandingly successful, they could not agree on which 10 stocks their rules said to buy next.
So why bother reading Buffett, Lynch or any other proven investor? Because they are frequently fun, upbeat and great with a phrase. Note, too, that Buffett learned much of his technique from Ben Graham. He's the author and father of security analysis who influenced enough people that rarely does a stock fall to levels he would consider a bargain.
Plus, there's always the chance that you might be capable of gleaning insights and using them to pick stocks successfully. Somebody has to sort good stocks from bad and make the market efficient. We can't all be mindlessly in index funds.
A Look Ahead
cnnfn.com
Week's Upcoming Earnings
canoe2.canoe.ca
Market Watch
tfc.com
|
