Bears, bulls pick way through jungle
NEW YORK - The financial world has turned FUDDy, says famed
strategist Abby Joseph Cohen.
"Fear, Uncertainty, Doubt and Despair" have unleashed irrational selling
of U.S. stocks, says Cohen, Wall Street's most respected bull. The
immediate cause of the bad sentiment is the breakdown of government
and finance in Russia. The selling, Cohen says, has left the Standard &
Poor's 500 7% to 10% below fair value.
Cohen's "FUDD" line, which she used Friday on her latest market
analysis for Goldman Sachs clients, is part of the smorgasbord of
opinions being offered by Wall Street strategists. Here's a roundup:
Barton Biggs, Morgan Stanley Dean Witter. Biggs, who is bearish
on stocks and bullish on bonds and has been forecasting widespread
deflation for months, writes that a selling climax is still to come. Falling
prices around the globe could still produce a big financial accident
worse than the bank failures so far. This could trigger widespread
financial panic before the markets bottom. It would be a mistake to
play interim rallies.
Christine Callies, Credit Suisse First Boston. The correction since
July's high was normal, but last week's selling was an overreaction.
"Once the urgency of the situation begins to subside, investors will be
able to look at the conditions in the United States, which remain good.
Some investors believe that the financial systems were breaking down,
(but) the countries that have recently encountered some difficulty have
been suspect for a while."
Chuck Clough, Merrill Lynch. While markets overreact to news
from Russia, U.S. stocks have a more fundamental problem: slowing
capital investment after years of overbuilding of capacity. "We are
beginning to see signs that the investment boom might be peaking,"
Clough says. He cites slowing lending, particularly for real estate
investment. Also, shares of telecommunications firms that have been
investing heavily are down sharply.
"Profits are at risk" and could be for a long time following eight years of
economic expansion and slowing inflation. Clough recommends holding
more bonds than stocks.
Cohen, Goldman Sachs. Russia has little direct economic
consequence to the USA, accounting for less than 1% of exports and
no sizable loans from U.S. banks. Slowing Latin American economies
are not as significant as tumbling financial markets suggest. There will be
no global recession. The majority of U.S. exports are unique goods and
services, which are less vulnerable to weak global conditions and
currencies than commodity products.
Even with weakness in Asia, earnings from continuing operations of
S&P 500 companies are still growing 6% to 7%. Her year-end targets:
Dow 9300, S&P 500 1150, Nasdaq 1850.
Gail Dudack, Warburg Dillon Read. "It's a bear market. What's
going on outside the U.S. is having a big impact on psychology and
earnings." Companies in the S&P are four times more sensitive to Asian
economies than is the entire U.S. economy.
"What's happening right now should be disturbing to the public because
the stock market is falling as interest rates are falling.
"The public may start to learn about the value of cash in a falling market
if the Dow breaks 8000" - only 52 points below Friday's close.
Don Hays, Wheat First Union. "The massive supercycle bull market
of 1982-1998 is over." Occasional rallies will interrupt as the slide
continues, taking the Dow perhaps as low as 6000. The Fed will begin
cutting interest rates to restart stock investing, helping end the bear
market around March. Meanwhile, hold onto cash.
Edward Kershner, PaineWebber. Foreign economic problems are
not enough to pull S&P 500 profits down. The Fed is not going to let
the USA slip into recession. With inflation low, "the Fed can let rates go
as low as necessary to avert a domestic slowdown. (The) potent
combination of lower rates and even just modestly rising earnings
should move stocks to new highs over the next 12 to 18 months."
Elizabeth Mackay, Bear Stearns. The correction is about over, but
the bull is unlikely to come charging right back. "We'll come back and
retest this low."
Her assumptions: China won't devalue its currency, interest rates won't
rise, inflation will remain low, profits will grow modestly. The market
has gone from irrationally exuberant to irrationally discouraged.
Still, "if you were particularly rattled by what happened the last couple
of weeks, you want to lighten up on stocks to the point that you can
sleep at night. . . . This is the highest risk environment since 1994, if not
1990."
By David Henry and David Rynecki, USA TODAY
usatoday.com
Regards, Jeff
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