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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Yogizuna who wrote (65296)	7/26/1999 1:19:00 PM
From: Mike M2	Read Replies (2) \| Respond to of 132070

Yogi, are the prodigy boards still going? how are Len and Mel ? Mike

To: Yogizuna who wrote (65296)	7/26/1999 1:38:00 PM
From: Les H	Read Replies (1) \| Respond to of 132070

The beginning of the end? The result is that the top 50 market-cap stocks in the S&P 500 accounted for 55% of the total market value of the index at the end of the first quarter of 1999. Those same 50 stocks had a median price-to-earnings (P/E) ratio of 32.8 compared with the median P/E of the remaining 450 issues of 18.4. The large-cap breakaway winners had a valuation that was nearly double that of the rest of the index. Thus, even with higher earnings growth than the rest of the index components, their P/E ratios were rising even faster than the rest of the index, giving a double boost to performance of the top firms. To codify this investor focus on bigness, the Dow Jones Company has just created a new "Global Titans" index, a benchmark of 50 of the world's largest multinational companies. The winner-take-all analysis tells us that in periods of extreme competitive pressures, even slight advantages garner excess returns. However, anything that acts to reduce competitive pressures, such as widespread economic growth and/or inflation, also should act to dampen the premium attributed to the best competitors. This is exactly what started to occur in the second quarter. As global growth restarted and U.S. growth remained stable at extremely high levels, lower-valuation and smaller-capitalization issues have rebounded. Similarly, as world economic growth has rebounded, pricing power has returned for certain industries such as oil, chemicals, papers and some industrial metals. As that happened, the valuation gap between these issues and the high-priced "winners" has begun to narrow. While some rotation is good in a bull market and while the extreme valuations of many of the largest-cap issues could use some deflating, these developments are positive only if they are temporary in nature. If excessive growth continues and inflationary pressures continue to build, then we will be witnessing the beginning of the end of this great bull market. Ever and always, too much real growth is the seedbed of inflation and the enemy of financial assets because it diverts money flows away from the financial markets and toward the real economy. By raising the its funds target rate by 25 basis points, the Federal Reserve Board has signaled its awareness of the changing background for growth and inflation. A serious challenge to the bull While waiting to see if the Fed's one-step increase in interest rates will be enough to slow the economy and keep inflationary pressures at bay, I would not be surprised to see equity prices decline by as much as 10%. If the Fed finds it necessary to raise rates multiple times in order to slow the economy, then the decline in equities could be much greater. Unlike 1994 when equities produced a flat performance despite six increases in interest rates by the Fed, the equity market in 1999 is significantly more highly valued and yet is unlikely to experience the high double-digit profit gains that offset the P/E declines in 1994. So far, equities have rallied through the Fed rate hike as evidence of benign inflation has been seen in the June Producer Price Index, and some slowing has become evident in June retail sales data. I actually would prefer to see a correction now because the advance in equities remains narrowly based and bonds remain under pressure. Lack of breadth and poor bond performance are evidence that there is insufficient financial liquidity to keep everything moving higher in tandem. These developments represent the most serious challenge to the bull market we have seen since 1994. intellectualcapital.com