some reading for the weekend
I really like the part of the shepherdesses at the end
moneycentral.msn.com
Extra!
There's light at the end of summer
Yes, it was a painful week. Yet the weighty factors that affect stocks most are as bright as they have looked in past years. Every uplift must begin somewhere.
By Laurel Kenner and Victor Niederhoffer
The market ended one of the worst weeks in history. In just six trading days, the Nasdaq Composite ($COMPX) dropped 12% and the S&P 500 Index ($INX) lost 5%. The Dow ($INDU), the relative stalwart, fell 3%.
The Nasdaq closed at the lowest level since June 1, and the S&P ended the month just below where it closed on May 30, the day after Memorial Day, after going up and down Jacob's Ladder from 1,422 to 1,510 on July 17 and back down to 1,419. It was the worst July week in the past decade, and perversely followed the best July week in the past decade.
Realize that Friday's declines in both the Nasdaq and S&P were of magnitudes fortuitously visited on investors only two or three times a year. These visitations are designed to shake investors from their positions just before a major rally. During the summer, there is not an excess of chips to go around, and the evil invisible hand of the market often searches for weak longs.
In the summers of 1997 and 1998, and now the summer of 2000, the market found stocks the field of least effort. The S&P 500 also topped out on July 17 in 1998. In 1999, it peaked on July 16 (July 17 was a Saturday that year).
Taking out the pencils and slide rules from our pockets to calculate what has happened after past routs of similar magnitude, we can say that to the extent that past is prologue, the odds are 4:1 that in two weeks we will be substantially higher than we are today.
The weighty factors look good
At times like this, it's good to reach for the roots upon which investments are built. The three major determinants of stock prices are earnings growth, interest rates and risk.
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The profit outlook is perhaps the best it has ever been. With four-fifths of the companies in the S&P 500 having reported second-quarter earnings as of yesterday, the average gain over last year's second quarter was 16%. If companies do well in one quarter, they're likely to do well in the subsequent one. Further, 65% recorded positive earnings surprises. This augurs for raised estimates and better actual earnings for the future.
Long-term bond yields, the second leg of the stool, are at 5.78%, close to 16-week lows, and well below the magic 6%.
As for risk factors, the market is likely to maintain itself on an even keel until the presidential election, so that incumbents will be able to maintain the power of the purse to as great an extent as they can manage. With the federal, state and local governments accounting for some 50% of personal income these days, that extent is very large.
In short, the three factors that affect stocks the most are as favorable as they have looked in past years.
Is there a rally in the offing?
The one negative is the incessant drumroll of bearish imprecations emanating from those who have missed the market for the last 10 years and still cling to hoary rules of thumb that went out of date when Ben Graham threw in the towel in the early 1950s.
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Read Briefing.com's weekly market recap on MSN MoneyCentral's Investor.
With a feeling of supreme confidence, then, we regretfully must report that we will be unable to share calming words during the next month. We will be away on that eternal summer quest to find the sources of good and bad in the market. Vic plans to retrace the steps of Don Quixote in Spain with an entourage of 10 family members, searching for the golden days when damsels could wander through the woods unmolested and trees offered their fruit to all who were hungry. Laurel, for her part, will look high and low for truths about stocks, starting out in the Colorado mountains at the annual Eris Society meeting and proceeding to the California shores.
Before we leave, we will share some uplifting results from a study of this month's losses, as well as reviews of the performance of two of the portfolios we have recommended since beginning this column in April.
The Week Ahead
Economy
Tuesday is loaded with economic reports: The Commerce Department releases Personal Income, Auto Sales and Construction Spending figures. Wednesday brings New Home Sales from Commerce. On Thursday, look for the Labor Department's Initial Jobless Claims numbers and Factory Orders from Commerce. Friday, expect Unemployment Rate figures from the Labor Department. Economic Calendar
Companies
Earnings are slowing to a trickle again. On the tail end is Hewlett-Packard's (HWP, news, msgs) report, coming Friday. Hobnobbing with analysts this week are Motorola (MOT, news, msgs), Alcoa (AA, news, msgs), Exxon Mobil (XOM, news, msgs) and EMC Corp. (EMC, news, msgs). At midweek, look for the Adams, Harkness & Hill Summer Conference, featuring CMGI Inc. (CMGI, news, msgs), Sapient (SAPE, news, msgs), Scient (SCNT, news, msgs) and Teradyne (TER, news, msgs). Thursday is the start of the Morgan Stanley Dean Witter Internet & Financial Conference, New York.
Events Calendar | Splits Calendar
Life
Summer sunshine is interrupted Sunday with a partial eclipse of the sun, visible in western North America in late afternoon and lasting about 90 minutes. Monday starts the Republican National Convention in Philadelphia. The National Black Arts Festival opens in Atlanta this weekend and continues through Aug. 6, showcasing 1,500 artists in music, theatre, film, literature, dance and visual art. Ted Turner speaks at the Bison Are Back 2000 conference next week in Edmonton, Alberta (Turner owns some 17,000 of the shaggy beasts). And don't forget the Maine Lobster Festival, next week through Aug. 6, in Rockland. The American Psychological Association annual meeting begins Friday in Washington, D.C. Triple word score: Don't miss the National Scrabble Championship, through Aug. 10, in Greenport, N.Y.
Every uplift must begin somewhere, and July has provided more than its share of starting points. Many stocks suffered tremendous one-day declines, some related to earnings reports or profit warnings, and others seemingly just bystanders in an ornery market.
When we started counting, we found that no less than 43 of the Nasdaq 100 ($NDX.X) recorded one-day drops of 10% during July. Eight did it twice, with the ignoble roster consisting of Ciena (CIEN, news, msgs), MedImmune (MEDI, news, msgs), KLA-Tencor (KLAC, news, msgs), Vitesse Semiconductor (VTSS, news, msgs), BroadVision (BVSN, news, msgs), RealNetworks (RNWK, news, msgs), QLogic (QLGC, news, msgs) and Atmel (ATML, news, msgs). Altera (ALTR, news, msgs) got hit three times.
Twenty-two of those 10% declines occurred today and Thursday. The biggest losers in the group Friday were ADC Telecommunications (ADCT, news, msgs), SDL (SDLI, news, msgs), Ciena, Gemstar-TV Guide International (GMST, news, msgs), Sanmina (SANM, news, msgs), Nextlink Communications (NXLK, news, msgs), Adelphia Communications (ADLAC, news, msgs) and Apollo Group (APOL, news, msgs). American Power Conversion (APCC, news, msgs) was in a class by itself, with a 44% loss.
Always alert to the lucrative smell of panic, we looked at the 18 instances where July decliners in past years have had the opportunity to recover for one week. On average, they were up 6.8% a week later, better than the 2.7% an investor would have gained from buying Nasdaq 100 futures.
Stocks that have had two weeks to recover have done even better. The average move was a rise of 10%, compared with a 1.3% advance for the Nasdaq 100 futures.
It is appropriate, now that almost half of the Nasdaq 100 have experienced 10% corrections, to recall the dark days of April and May, when dozens of stocks tumbled from the firmament above $200 to the hell below $100. On May 5, we recommended a list of 35 of those fallen stars. We are pleased to report that as of Thursday's close, our Down 35 stocks were up an average of 70%.
Using the Nasdaq 100's 0.2% decline in that period as a benchmark, we might be tempted to perform high fives if our rules didn't require us to immediately get out of our positions whenever high fives are exchanged.
Our Insider 20 portfolio also has outperformed its benchmark, with an average move up of 3.8%, compared with a 0.7% gain for the S&P Midcap Index ($MID.X).
We will miss our readers over the next month, and are sorry to take our leave. On our journeys, we will not refrain from wireless communication with any correspondent who has wisdom of a universal nature to share, whether we are in mountains, desert or sea, beset by giants or within striking distance of dragons.
We fully expect that when we return in September, having gained knowledge from our pilgrimages and wealth from our open long positions, that everyone who uses proper money management in adding armor to their investment portfolios will be in a much more halcyon state of mind.
Until then, we leave you with the words of Miguel de Cervantes, from Chapter 11 of "Don Quixote":
Happy times, and happy ages, were those which the ancients termed the golden age! In that blessed age, no other labor was necessary than to raise their hands and take it from the sturdy oaks, which stood liberally inviting them to taste their sweet and relishing fruit. The limpid fountains and running streams offered them, in magnificent abundance, their delicious and transparent waters. In the clefts or rocks, and in holly tress, the industrious and provident bees formed their commonwealths, offering to every hand, without interest, the fertile produce of their most delicious toil. All was peace, all amity, all concord. Then did the simple and beauteous young shepherdesses trip from dale to dale, and from hill to hill, their tresses sometimes plaited, sometimes loosely flowing, with no more clothing than was necessary modestly to cover what modesty has always required to be concealed |
