A Mr. Meehan quote in here ho ho he must have been on his 6th can of Bud...
Stealthy bear whacks Wall St.
Handful of big stocks hold market up by a thread
By James Kim and John Waggoner, USA TODAY
A few big-name technology stocks have masked a mauling on Wall Street.
Even after two days of intense selling this week, most major stock indexes still look in fairly good shape. Neither the Dow Jones industrial average nor the Standard & Poor's 500 index are in what can be officially called a correction. The technology-heavy Nasdaq composite just set a new high Monday.
But the indicator that matters most is your portfolio statement, and you shouldn't be surprised if yours is looking a bit ugly. It seems that a "stealth" bear market has crept onto Wall Street. And it's unclear if it's going to soon depart, as Wall Street frets about interest rates, inflation, earnings and other issues.
"The market is on edge right now," says Paul Cherney, analyst at Standard & Poor's Marketscope.
And Federal Reserve Chairman Alan Greenspan may not have helped matters Thursday when he said banks should do more to prepare for the possibility of a sharp downturn in stocks and other assets.
Yet this much is clear: The popular market indexes haven't been telling the true story. The benchmark Dow rose 54 points to 10,287 Thursday, but it's still down 9.2% from its August high. The S&P 500 is in similar shape. The Nasdaq composite, after rising 6 points to 2807, is 3.7% down from its Monday record.
But consider the damage when you peel back the veneer :
The S&P 500. Considered a measure of the broader stock market, this index is up 4.4% this year. But the S&P, like the Nasdaq, is capitalization weighted, which means it is more influenced by stocks with the biggest market value. And just five large-cap stocks - Microsoft, Cisco, General Electric, Wal-Mart and Intel - accounted for 77% of the S&P's advance.
Perhaps most disturbing: The average S&P stock is down 26% from its 52-week high.
Technology stocks. The Nasdaq 100, a measure of the biggest technology stocks, closed at 2471 Thursday, near its record high of 2579 hit Monday. For the year, it is up 35%. But just seven stocks - Intel, Microsoft, Cisco, Dell, Oracle, Qualcomm and Sun Microsystems - account for more than half the index's year-to-date gain. While investors in the Magnificent Seven are smiling, the 100 stocks in the index are down an average 25% from their highs.
Internet stocks. Cross out a few big names and you have a junkyard. The USA TODAY Internet stock index is close to its high since being launched June 30. But the stocks in the Internet 100 are down an average of 44% from their high.
'Decimated'
When individual stocks fall that much, Wall Street analysts often term it a "stealth" bear market. "Most stocks have been decimated," says Bill Meehan, strategist at Cantor Fitzgerald. "A really small number of stocks is driving the whole works."
In fact, whole groups of stocks have been routed. Regional banks' stocks have fallen 19% from their highs. Homebuilders are down 34%. Health maintenance organizations are down 42%. "Most stock groups are down for the year," says Richard Hoey, chief economist for the Dreyfus funds.
So why are the market's gains so concentrated in a handful of big tech stocks? Wall Street experts theorize that when uncertainty grows, investors plow money into big names. The better a stock does, the more money it attracts. Such uncertainty may continue due largely to concerns about:
Interest rates. The yield on 30-year Treasury bonds has soared from a low of 4.79% in August 1998 to 6.32% Thursday. "The market has a hard time going up when bond yields are rising," says Cherney.
And yields could still move a bit higher. "There's nothing expected in the near term that would support falling bond yields," says Ian MacKinnon, head of bond funds for the Vanguard Group. He's expecting the 30-year bond yield to hit 6.5%.
Why the spike? Bond traders fear inflation, which erodes the value of a bond's fixed interest payments. Inflation is usually sparked by an economy that's growing too fast. Currently, bond traders are spooked by a parade of economic numbers indicating that the economy is simply growing too fast. And many expect the Federal Reserve to nudge short-term interest rates higher within the next six months.
All eyes will be on Friday's report on September producer prices. Wall Street is expecting the core rate - which doesn't include volatile energy and food prices - to show just a 0.2% rise. But any surprise jump in this key indicator of inflation could lead to more jitters in the bond market. That could push rates even higher and put even more weight on the stock market.
Earnings. Heading into the third-quarter earnings period, Wall Street was giddy with anticipation. But technology bellwether Intel shocked Wall Street this week when it announced that its third-quarter earnings lagged expectations.
Analysts remain confident, however, that third-quarter earnings for S&P 500 companies will still be 20% to 22% above depressed levels in 1998's third quarter. "I am concerned, but is it enough to make me change my 22% estimate? No," says Chuck Hill of First Call. "But if we get a string of Intels, then I will rethink."
Tax selling. Mutual funds typically sell stocks for tax purposes in October. And this season could be an exceptional one for tax selling, says Dreyfus' Hoey. Funds typically try to sell losing stocks to offset gains in other stocks, reducing their capital gains distributions to shareholders. So selling pressure could become intense this month as funds ditch losers.
The Y2K computer bug. "This Y2K thing may be baloney, but people may believe that there is a real problem. People with big gains may decide to shift out of stocks," says Meehan.
So what to do?
If you're a longterm investor saving for retirement, don't do anything. Stocks typically fare better over 15- and 20-year periods than bonds or bank certificates of deposit. But that doesn't mean you can't take advantage of opportunities that arise as the stock market gyrates. For example:
Bonds. Investors who want income from their investments now earn just 4.74% from the average money market mutual fund, or 5.3% from a five-year bank CD. But traders have bid corporate bond yields to the point of absurdity. "We're setting records for goofiness," Vanguard's MacKinnon says. For example, a note issued by Ford Motor Credit maturing in November 2004 currently yields a bit over 7%, nearly a full percentage point higher than the 30-year T-bond.
Beaten-up stocks. Just because mutual funds are dumping stocks for tax losses doesn't mean they are bad stocks. "There are a lot of cheap stocks out there," says Dreyfus' Hoey. "Just look down the list of stocks making new lows," he says. Many stocks hit new lows for good reasons. But it's a good place to start your search.
Value funds. Supposedly, value funds shield you from big downturns in the stock market. Often, they don't. But some funds, like Clipper, have a big stash of cash for when stocks look better.
Don't ignore technology. Sure, it's probably overpriced. (but buy the sh*t anyway)And it's risky.(as if) But tech is one sector where the USA clearly excels and will probably lead for years . This doesn't mean you should buy a fistful of Internet stocks. In fact, if you own a fund that simply tracks the S&P 500, your fund is 23% in technology already. But owning a basket of technology stocks, either in a diversified fund or a specialized technology fund, makes good longterm investment sense.
But don't expect a huge, lasting surge soon. Cantor Fitzgerald trader Philip Marber's prognosis: "More ugliness."
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