DLJ Comments this am:
Important Points:
1. We remain confident that the U.S. economy will remain vibrant &
we view the
recent equity fire sale as a buying opportunity. Because of
excessive share
price weakness relative to fundamentals, we are increasing the
exposure to
financials, consumer cyclicals, transports and staples to the
detriment
of energy basics, and capital goods.
2. Consistent with our asset allocation changes, we have made
several changes
to the DLJ Focus List. Specifically, we have added American
Online Inc.(AOL),
American Express (AXP), Cambridge Technology Partners, (CATP),
Chubb Corp.(CB)
Centocor, Inc. (CNTO), Dayton Hudson (DH), U.S. Airways Group (U)
& removed
3Com (COMS), Ace Limited (ACL), Biogen Inc. (BGEN), British
Petroleum (BP),
Champion International (CHA), EVI Weatherford (EVI), Praxair (PX),
Reynolds
Metal Corp. (RLM).
3. The August 1998 stock market was this month's worst performance
on record.
The average NYSE and NASDAQ stock is now down over 40% fr their
52-week highs
as compared to 14% for the Dow & S&P500.The breadth & sentiment
deterioration
are quite comparable to the 1987 Crash with one-third of the
universe down
50% or more. When stocks finally bottomed in December 1987,
bearish sentiment
had peaked at 45% which is not far from the 39% level recorded by
Investors In
Intelligence on August 25th.When updated again this week, bearish
sentiment
will likely come close to the all-time high.
4. We do not expect an imminent interest rate cut at least & until
Japan legislates
constructive bank reform and economic stimulus packages or U.S.
unemployment
rises sharply. Although the linkage has recently broken, our
valuation work
suggests that the declines in T-bill and bond yields should
provide support
for equities and ultimately a favorable recovery backdrop.
5. The new issue calendar is drying up.Relative to this point last
year, the
backlog is down roughly 20% and more than 50% from two months ago.
At the same
time, companies have begun to aggressively repurchase shares.
Also, Vickers
reports that insider buying has dramatically picked up.All
totaled, we find the
supply-demand conditions for equities to be very positive.
6.We expect this week that the LDP & opposition parties in Japan
will structure
a compromise to move forward bank reform legislation which may
begin to
restore investor confidence.Some comfort shld be seen that Tokyo
real estate
prices have stopped falling and the decline in car sales is
stabilizing.
7.Our forecast for real GDP in 1999 anticipates 3.4% growth
following 3.2% full
year 1998 gains & only 1.7% 2H98 increases as the inventory
reduction process
should be completed and foreign economies become healthier.
Better economic
conditions and a flat or comparatively weaker dollar should
combine to push S&P
profits to $54 next year from $48 in 1998. As investor confidence
is slowly
restored, we look for the S&P 500 to melt-up to 1350 within 12 to
18 months.
Accordingly, our asset mix is aggressive at 75% stocks, 20% bonds
& 5% cash.
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