Birinyi alert! Birinyi alert!
Glanced at the cover of my just received September, '99 Bottom Line Personal Magazine/Newsletter, and spotted "Laszlo Birinyi, Jr. ... Wall Street's #1 Number Cruncher -- Picks the Next Hot Sectors"
Fortunately, this information from Birinyi appears to be very current, and definitely some changes from the recently posted Bloomberg article "An Optimist's Outlook".
Here's the Bottom Line Personal article:
I don't pay much attention to the stock market's day-to-day preoccupation with inflation and interst rates. Those issues are short term. Serious investors should ignore them, too.
I base my forecasts on computer analysis that identifies longer-term trends. I look at how much money is flowing into the stock market and where it is being invested.
My latest analysis shows that the amount of cash being invested is strong enough to support the bull market at least over the next six months.
This tells me that recent concerns over inflation and interest rates will soon fade. It also indicates that the Dow will finish the year at the 12,000 level a 30% gain for the year.
THE BIG FEARS
- Inflation. The economy has grown more vigorously halfway through 1999 than nearly all forecasters thought it would. This growth has come despite history telling us that when economic growth is this strong, the annual rate of inflation rises.
The Federal Reserve, too, has been concerned that the recent economic growth would pressure businesses to pay employees higher wages, triggering inflation.
My data show that inflation will remain at around its current 2% level through year-end. That's because wage pressures will be offset by continued weakness in commodity prices.
While the barrel price of oil did jump this year from $12 to nearly $21, due to both the war in Kosovo and Yugoslavia and, more recently, OPEC production cuts, these two catalysts are behind us, and I don't see oil prices increasing much further or inflation rising.
- Interest rates. The recent interest rate move this year -- from around 5% to just over 6% -- is an overreaction to the fear of rising inflation. As inflation fears ease, interest rates will come down, perhaps to about 5%.
Key indicator: My money-flow figures show that more investors are buying shares of utilities. Utility stocks do well only when interest rates are declining because utilities are huge borrowers of money.
The strong flow of cash into utility stocks now tells me that very sophisticated investors expect interest rates to decline.
- Corporate profits. Fears that corporate profits wouldn't be strong enough to sustain the stock market's high valuations had been the prime area of investor concern in the first half of the year. That concern seems to have faded. I think earnings will match or exceed expectations in each of the remaining quarters this year.
THE BIG CHANGES
While investment in the stock market will remain strong this year, my analysis does indicate a significant change in where the money is going now.
Market sectors that had been ignored are now drawing renewed investor interest, while sectors that had been hot are losing investors. The nature of the change will make it harder to pick winning stocks.
What we are seeing is both a broadening and a narrowing of the market. Here's what I mean:
- Broadening of the market. Recently, investors have been buying stocks in more sectors and in more areas of the market, and they are buying stocks that hadn't been part of their portfolios before, in industries such as manufacturing, retailing and utilities.
- Narrowing of the market. While interest in other sectors is growing, the most popular sectors of the market are no longer attracting the same level of investment that they had in the past six months.
Certain bank stocks, for example, no longer are appealing to investors. Investors are still buying the large, money-center bank stocks, such as Bank of America, Citigroup and JP Morgan, with the regional banks no longer the focus of investor fascination.
INVESTING STRATEGY
During the next six months, I expect investors to remain focused on large-cap growth and value stocks. But investment success will depend on which large-cap stocks you pick.
In the past few years, all you had to do was pick the right market sector and you could assume that all stock prices within that group would rise.
You would have been right, as large numbers of investors swept in and bought shares of many companies in those sectors.
But to do well for the rest of this year, you will have to pick the right sector, and then the best stocks in that sector.
TOP LARGE-CAP STOCKS
My investment choices are based on an analysis of the flow of money into the stock market. The data suggest that investors will likely do best by investing in large-cap stocks in financial services, manufacturing, retailing, technology and utilities. Here are my favorite large-cap stocks in these sectors:
- America Online, Inc. AOL I remain impressed with the tremendous impact the Internet is having on the economic landscape. Investors need to participate in the Internet; this stock is my first choice.
- BellSouth Corp. BLS In general, the Baby Bell stocks offer a good combination of growth potential and high dividend yield. This is my choice stock among the Baby Bells.
- Deere & Co. DE Large maker of agricultural and construction equipment and a provider of financial services.
- The Gap, Inc. GPS Clothing retailer that operates nearly 2,600 stores in Canada, France, Germany, Japan, the United Kingdom and the U.S. This out-of-favor stock is now drawing cash from investors.
- General Dynamics Corp. GD Manufacturer of defense systems to the U.S. and its allies.
- The Goodyear Tire & Rubber Co. GT Develops, manufactures, distributes and sells tires and rubber products.
- Texas Utilities Co. TXU Supplies energy to more than nine million customers in Australia, Europe, Mexico and Texas.
- United Technologies Corp. UTX Provider of high-technology aerospace and defense products and services.
SECTORS TO AVOID
My money-flow data point to only two areas of the market to avoid over the next six months:
- Small-cap stocks. Most cash is flowing into large-cap stocks, not small-cap stocks.
- Medical stocks. These include the big pharmaceuticals and hospital supply companies. Managed care has cut into corporate earnings, and many stocks have very high valuations, which are discouraging investment now.
Bottom Line/Personal interviewed Laszlo Birinyi, Jr., President of Birinyi Associates, an investment research and advisory firm, Box 711, Westport, Connecticut 06881 Mr. Birinyi was one of the first analysts to forecast a 12,000 Dow in 1999. Barron's has called him the definitive source of detailed statistics on the stock market. |
