SmartMoney Online: Nice Article "FAVORS NETSCAPE"
=SMARTMONEY ONLINE: The Week Ahead: Is the Worst Over?
by Karyn McCormack
SmartMoney Interactive
NEW YORK (Dow Jones)--The bailout of troubled hedge fund Long-Term Capital Management weighed on the markets all week with worry that other hedge funds may go under, dragging banks and brokerages down with them. But Friday, financial stocks rebounded as investors perhaps realized the 15% selloff in the group during the previous two days was overdone.
Without strength in financials, which make up about 45% of the S&P 500 index, the market can't mount a sustained recovery.
The Dow Jones Industrial Average rose 152.16 points, or 1.99% to 7,784.69. For the week, the blue-chip index fell 3%. The tech-heavy Nasdaq index rose 2.7 points Friday to 1615.03, but was down 7.4% for the week.
"Going forward, earnings reports will start to help the market," says trader Art Hogan at Jefferies & Co. Now that most companies have disclosed how earnings are shaping up in the current quarter, analysts have cut estimates, he says.
Richard Eakle agrees. "The market has absorbed all the possible dire results," says Eakle, who runs Navesink Capital, a hedge fund that invests only in stocks. "Now we're headed for the recovery ward." Eakle points to the relationship between the Dow Jones Industrial Average, the Dow Jones Utility Average and the bond market. "I've never seen an instance where a selloff ensued on the heels of new highs in the utility and bond markets," he says. Bonds and the utility average hit new highs on Friday.
Onetime market leaders such as Cola-Cola (KO), Gillette (G), Procter & Gamble (PG) and Dell (DELL) finally got hit in the last two weeks. Stocks traded on the New York Stock Exchange have tumbled an average of 45% from their 52-week highs, Eakle says, indicating that a broad correction -- usually defined as a 20% or more drop from highs -- has more than already taken place.
Lower interest rates should also fuel stocks higher, Eakle says. Tuesday's cut in the key short-term rate has the market clamoring for more easing as the economy slows.
"The key now is to watch for any indications of a slowdown in the economy," says Doug Schindewolf, senior economist at Salomon Smith Barney. Friday's employment report showed a reduction in job growth, while Thursday's National Association of Purchasing Managers report indicated a steady weakening in manufacturing activity. Considering that consumer confidence has cooled and sales of homes have declined, consumers may start to pare back spending, Schindewolf says.
The economic calendar in the coming week is light. The next important economic report is September retail sales on Oct. 14.
Schindewolf is betting it will show that the economy is deteriorating beyond the manufacturing sector. Schindewolf sees the Fed cutting the federal funds rate another 25 basis points to 5% when it meets Nov. 17. He thinks the Fed is also likely to reduce the discount rate by 50 basis points to 4.5%.
The wild card, of course, continues to be the economic woes in Japan and the emerging markets. Eakle notes that some Asian countries are improving. For example, Korea's currency has rebounded 26% this year and the government generated a budget surplus.
Japan's stock market rose slightly Friday after the lower house of government passed a badly needed banking reform bill.
This weekend, finance ministers from the leading industrialized nations and central bank governors are meeting in Washington D.C. to discuss the global economic problems. A highly anticipated presidential election takes place Sunday in Brazil.
Eakle sees cyclical stocks, such as paper and aluminum, taking the leadership role from consumer and financial stocks as the U.S. economy slows.
He also favors Internet stocks such as America Online (AOL), Excite (XCIT) and Netscape (NSCP) because they are forging alliances, and sales are growing at a fast clip.
A recovery in tech stocks is even possible if Asian economies improve. October is usually a month when stocks decline, though that doesn't bother Eakle.
(For more information and analysis of companies and mutual funds, visit SmartMoney Interactive at smartmoney.com
(END) DOW JONES NEWS 10-02-98
08:37 PM
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