Many good points in The Wall Street Journal article.
BULLS SEE CORRECTION, BEARS SEE RECESSION !
By Peter D. Henig
Red Herring Online
August 28, 1998
When Asia first faltered to crack, nobody seemed to care. The Dow tore
through 9,000 like a hot knife through butter. Questionable earnings?
Investors just shrugged. Internet stocks were the rage and technology
IPOs were going ballistic.
Suddenly, however, the world became a smaller place and investors are
now all ears.
Mexico's and Venezuela's currencies headed south, and Russia announced
it will no longer defend the ruble -- a full capitulation to
devaluation.
And then the Dow cracked.
Stocks plummeted on Thursday with the Dow falling 357, or 4.2 percent,
while the Nasdaq Composite Average dropped 82 points, or 4.6 percent. On
Friday, it was more of the same: The Dow sank to 8,051.68, down 114.31
-- just above the critical psychological level of 8,000 -- while the
Nasdaq dropped 46.73 to 1,639.68.
This leaves us with a Dow down almost 15 percent from its highs, while
the Nasdaq ended Friday more than 18 percent below its all-time high,
just short of the 20 percent drop that would suggest a bear market,
according to analysts.
Cocktail conversation
"Investors here have gotten wound up at something they know nothing
about," says Charles Crane, market strategist for Key Asset Management.
"It makes for great cocktail conversation."
Cocktail conversation about the Russian ruble? Yes, and more, say
analysts.
Some are as skeptical about the emotions driving the current downturn as
they were about speculation driving the bull market's momentum. Others
are genuinely fearful that the end is nigh.
"International problems have compounded everything going on here, and
technically, this just broke the back of the Dow," said Ron Rizato,
director of research for Tasin & Co. "Look at the advance-decline ratio.
It's a horror show."
Technology stocks, both small and large, were also a horror show. For
quite some time, they have enjoyed lofty valuations, but now, they're
flagging. The largest tech companies, like Lucent (LU), Cisco (CSCO),
Dell (DELL), IBM (IBM), and AT&T (T) have held up well, say traders, but
even those have shown signs of deterioration.
Among the Internet stocks, Yahoo (YHOO) lost 8 to 83.06, AOL (AOL) lost
8.25 to 96.25, and Amazon.com (AMZN) got flattened by 13.11 to settle at
105.89. Big-cap bellwethers hit the skids as well, with Microsoft (MSFT)
dropping 4 to 105.25, Dell down 6.13 to 118.75, and Cisco off 4.44 to
94.69. As well, the Russell 2000 and the S&P 500, which represent the
small- and mid-cap stocks of the market, are both nearing their lows for
the year.
"This is the most bearish I've see it in five years," said one Wall
Street trader. "It used to be called a correction; now I'm hearing 'bear
market.'"
Check your emotions at the door
What's driving analysts mad right now are the emotions driving this
move.
Traders have reported near-panic selling at times, even though many
marketwatchers suggest the fundamentals aren't all that different from
six weeks ago. "It's becoming chic to sell stocks," claims Mr. Crane.
"The U.S. economy, while softer, is not falling apart at the seams."
But what appears to have the market truly concerned -- some might say
overly concerned -- is the fact that right now one-third of the world's
economies are in recession or depression while much of the the other
two-thirds are in very fragile forms of expansion.
Commodity prices across the board have experienced steep declines,
indicating that deflation, not inflation -- the Federal Reserve's
constant worry -- may be upon us.
"What the market is telling us is there's a slowdown coming here," says
Mr. Rizato. "Look at how fast and drastic the CRB [Commodity Research
Bureau Index] has been falling here. You get those deflation worries,
and suddenly it smells like fear."
But what is really onerous, suggests Mr. Crane, is the potential price
decline in both goods and services worldwide. "If everything started
going down in price, especially now, that's what could really be scary."
To Russia with love
For now, however, Wall Street says don't panic.
"The Web will grow without Russia," trumpeted Keith Benjamin, Internet
analyst with Robertson Stephens, in his recent Weekly Web Report.
Mr. Crane was equally blas‚: "Russia's stock market capitalization is
probably less that of Yahoo's. Who cares?"
And for the ultimate denial, Abby Joseph Cohen, Goldman Sachs' market
guru, reiterated her bullish comments, times two.
"Stocks are 7 to 10 percent undervalued," said Ms. Cohen, repeating her
statement issued on Monday, when she considered the S&P 500 5 to 8
percent undervalued. Like most of the analysts we talked to, she added
that the selloff was due mostly to a shift in sentiment, not a
fundamental change in the business climate.
As for predictions, only Mr. Rizato, a technical analyst, sees the
market as continuing to sell off.
"I see another measured move to 7600-7800," predicted Mr. Rizato. "A lot
of people were too heavily weighted walking into the highs, and there
could be a lot of mutual-fund redemptions from here."
Mr. Crane and Mr. Benjamin, on the other hand, see a bottom in the
market's future. "I've been saying for a long time a trading range
between 8300 and 9300," says Mr. Crane.
Mr. Benjamin offered no more precise numbers: "It is impossible to
pinpoint the perfect day, but it is reasonable to believe these are
attractive levels."
Attractive levels for a correction? Or a midway point in a recession?
redherring.com
Correction or recession? You choose.
c Herring Communications |
