MARKET UPDATE: HAVE
THE FUNDAMENTALS
REALLY CHANGED?
By Peter D. Henig
Red Herring Online
August 31, 1998
"I'll bet you we see 3,000 before we see 9,000,"
said Rick Berry, director of research for J.P. Turner,
following Monday's vicious market selloff. Major
indices fell 6 to 8 percent in high trading volumes.
The Dow at 3,000? Are the fundamentals really that
bad?
While the bond market has benefitted from investors'
flight to quality, pushing the yield on the 30-year
Treasury bond down to 5.26 percent -- the lowest
level since the government began selling them in
1977 -- the broader markets have been getting
crushed.
The Dow Jones industrial average fell 512.61 to
7,539.07, the Standard & Poor's 500 fell 68.23 to
958.91, and the Nasdaq Composite Index, a
barometer for technology stocks, dropped 140.53,
or 8.6 percent, to 1,499.15, its largest one-day drop
and well below its opening 1998 level.
The advance-decline ratios were even more
miserable, with declining issues outnumbering
advancers by more than 7 to 1 on the New York
Stock Exchange, and 6 to 1 on the Nasdaq. Only
20 companies made new highs on the NYSE on
Monday, compared to 1,204 new lows, while on the
Nasdaq, there were 1,483 new lows to 4 new highs.
The Russell 2000 index of smaller companies
dropped 20.59 to 337.95.
The fundamentals of what?
But just what are markets' fundamentals? It depends
on what you mean by the term.
"When I say fundamentals, I mean earnings and
interest rates," says Charles Crane, market strategist
of Key Asset Management.
But, amid the current carnage, determining what
exactly the other "deteriorating market fundamentals"
are has become quite confusing.
For example, market analysts are in broad
agreement that as a trading partner, an obliterated
Russian stock market, a deteriorating Russian
economy, and a devalued Russian ruble are, for the
most part, irrelevant. Yet, the important and
disconcerting issue of Russia's uncertain political
destiny as a world superpower is fundamental news
to be reckoned with.
While news, is it a market fundamental worthy of
dragging all stocks and all sectors lower?
Not to Mr. Crane, who draws a line in the sand at
what can, and should, have an actual impact on
corporate earnings and gross domestic product.
"It's not like Russia was one of the horses leading us
to the promised land," says Mr. Crane. His concerns
are more centered on Canada and Mexico, the
U.S.'s more immediate trading partners. Their
currencies are plunging while their economies, tied to
our own, continue to worsen.
"I saw earnings growth at 3-5 percent this year, and
4-6 percent next year, and while those have
deteriorated, the interest rate on the long bond is so
low that there's now an argument for undervalued
stocks," says Mr. Crane. "Investors bought too
much on the way up, and have sold too much on the
way down."
And while Mr. Crane and other market watchers
admit that the international fundamentals have set the
market on edge -- "Hong Kong is a bit mushy," says
the analyst -- now they urge investors to examine
fundamentals that truly matter.
"Trade represents about 12 percent of GDP," argues
Mr. Crane, "but even a 50 percent drop in trade,
which would never happen, couldn't have as huge an
impact on our economy as everyone is now acting
like it could."
The real fundamental to watch is consumer spending.
"Consumers represent two-thirds of the GDP and if
they crawl under a rock, then that's what would have
a major impact."
Not so fast
Not everyone agrees, however.
"This is the inchoate rumblings of a bear, and I ain't
talkin' a Russian bear," says Mr. Berry. "I'm talking a
worldwide recession bear."
To say that Mr. Berry is bearish is to put it mildly.
The market analyst has set a near term target of
4,460 on the Dow -- "Just look at the monthly chart
on the Dow going back to 1989," says the analyst --
and argues that this decade-long bull market move
to 9,000 is over.
But somewhere in between Mr. Berry and Mr.
Crane lies a whole other range of analysts who don't
even want to predict a near term direction.
"I think it's a fool's game to predict specific market
direction in the short term," says Ryan Jacob,
research director for the IPO Value Monitor. "What
we're seeing is a vicious correction taking a lot of
fluff out of the market, but this international fear is
not going to effect a lot of these companies."
Mr. Jacob, like Mr. Crane, contends that what
drives his sell decisions are sector- and
company-specific changes.
"You've got to be able to endure the pain," shrugs
Mr. Jacob. "If the economy shrinks, there definitely
is an effect, but even then, I don't think it will be that
much."
For his part, Mr. Jacob and Mr. Crane say they will
stay relatively fully invested, holding some cash but
not much even as they see bellwether stocks get hit.
Monday was the day when bellwethers got more
than hit; they got obliterated. Whether it was
Compaq (CPQ), America Online (AOL), or Lucent
(LU) as the top-volume losers on the Big Board, or
Dell (DELL), Cisco (CSCO), Intel (INTC) or
Microsoft (MSFT) on the Nasdaq, or even the
brand-name Internet stocks like Yahoo (YHOO) or
Amazon.com (AMZN), the market showed no
mercy.
For his part, Mr. Berry could care less.
"Words can't describe how bearish I am," says the
analyst. "This is the real thing, and while you're at it
short some Coke (KO). Get it?"
Why is it always Coca-Cola?
redherring.com
I hope your prediction is right Ray.
Regards, Jeff
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