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Strategies & Market Trends : Three Amigos Stock Thread

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To: James Strauss who wrote (9587)	10/25/1998 6:33:00 PM
From: Sergio H	Read Replies (3) of 29382

Jim the stock market was pretty calm last week, a bit different for an Oct. week full of earnings reports. The market is looking for some short term signal to give it direction and right now the focus seems to be on the Fed Nov. 17th meeting. Some of your earlier observations are truer now than they were when you made them. The time to discuss the virtues of the Fed's plan have come and gone. The Fed has set the course and we are on a new journey. So where are we going ? A lot of people believe that the Fed will once again lower interest rates, perhaps a 1/2 point this time. The stock market responded quite well to the last rate cut and banks have followed through on cutting lending rates. There still is a high spread between govt. bonds and comparable corporate bonds and while the stock market was calm last week, there was nervousness in the bond market. There is uneasiness over the slowdown in corporate growth. This slowdown is creating market pressures. A few thoughts: * A number of earnings expectations were previously lowered. Although more Companies beat earnings expectations than Companies that disappointed, this reporting season is demonstrating a slowdown in earnings growth. * The average PE for the S & P remains at a historically high 25 x earnings. The S & P deserved a higher valuation relative to historic levels while the dollar was stronger. The S & P will inevidently correct to more modest values as the dollar weakens subsequent to continuous interest rate reductions. * The rate cuts have made utility stocks more attractive. For a short time last week, the average PE on utility stocks was higher than the average PE of the Dow Industrials. Pending legislation in California, to deregulate the utility companies will give utility stocks a huge push if it's passed. Cal. always seems to lead the nation in setting a trend. * Oil prices hit short term lows last week and rallied to close the week. The trend remains down and the fundamentals haven't changed to indicate that the oil sector may be ready for a reversal. Stocks tend to remain in a trend for much greater periods of time. Why fight the trend looking for a bottom in the oil sector ? * There's a lot of good cheap stocks to be found within the small cap sector. A lot of analysts believe that if the larger stocks fall, they will take the small caps down with them. The Russell 2000 is made of mostly financially related stocks, therefore they are very interest rate sensitive and subject to perceptional adjustments. If there is fear of a credit crunch or of a recession, then the Russ2k takes it on the chin, as we've already experienced this year. How to play all of this and everything else that's going on ? ........very carefully...... and with a good sense of humor. Sergio

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