<MAYBE... SOX is certainly on trask for a meltdown. >
Please stop saying such unbullish things!! This may help you're attitude:
*FUNDAMENTAL BACKDROP FOR US ECONOMY, STOCKS "REMAINS QUITE FAVORABLE" ABBY
COHEN
Abby Cohen says investors' euro, oil angst overdone
NEW YORK, Sept 21 (Reuters) - Goldman Sachs & Co. chief
strategist Abby Joseph Cohen said on Thursday that equity-market concerns about higher oil prices, a weak euro and corporate profits are "overdone" and will be "short-lived." "Investors have been recently unnerved by an assortment of developments and concerns," Cohen said in a note to clients. "We conclude that the reaction to these has been somewhat overdone and that the intermediate- and long-term view remains quite bright." Cohen, one of Wall Street's most widely watched strategists, said the backdrop for the U.S. economy "remains quite favorable" and reiterated her year-end price target of 1575 for the Standard & Poor's 500 Index and 1650 by mid 2001. The S&P 500 index on Wednesday was at 1451.
She retained her recommended asset allocation mix of 65
percent equities, 27 percent fixed income, 3 percent commodities, and 5 percent cash. The mix has been unchanged since March this year.
And incase that didn't help, here comes our reasoning:
Investment Strategy: Strong Backdrop, Short-Term Impediments
09:41am EDT 21-Sep-00 Goldman Sachs (Abby Joseph Cohen) No Symbols
Goldman, Sachs & Co. Investment Research
Investment Strategy: Strong Backdrop, Short-Term Impediments
***************************************************************************
* The fundamental backdrop of the U.S. economy, and the equity market, *
* remain quite favorable. The dramatic gains in recent years, with regard*
* to improved business management, enhanced labor productivity, and *
* capable government policy decisions, will not soon be lost. *
* Nevertheless, investors have been recently alarmed by a confluence of *
* factors. These include high oil prices, the weak Euro, and short-term *
* profit concerns. We believe that these worries will be short-lived. *
* The next few weeks will also bring greater clarity on the election *
* outcome and will get us past the usual (October) end-of-year portfolio *
* cleanup by mutual fund managers. *
***************************************************************************
Abby Joseph Cohen, CFA (New York) 1 212-902-4095 - Investment Research
Gabrielle Napolitano, CFA (New York) 1 212-902-2019 - Investment Research
=================== NOTE 9:28 AM September 21, 2000 ===================
INTRODUCTION: SOLID ECONOMIC STRUCTURE
The United States economy has benefited in recent years from numerous
structural improvements. These include appropriate government policies
(e.g., the shift to a large fiscal surplus, movement toward open trade, and
capable monetary policy); and improved business decision making (e.g.,
increased emphasis on measures such as ROE and ROA, boost in long-term
corporate investment, and tighter inventory controls). As a consequence of
these changes, and others, the U.S. economy is the most efficient ever.
The potential rate at which GDP can expand without inciting inflation has
undoubtedly been lifted by the notable increase in labor productivity.
There is little on the near-term horizon to suggest that these longer-term
structural gains will soon lose their potency. Yet, investors have been
recently unnerved by an assortment of developments and concerns. We
conclude that the reaction to these has been somewhat overdone and that the
intermediate and longer-term view remains bright. We are making no changes
to our price targets for the equity market. Specifically, we continue to
project that the S&P 500 will reach 1575 by yearend and 1650 by midyear
2001. We are making no changes to recommended asset allocation in our
balanced portfolio. This stands at 65% equities (a 'normal' weighting that
implies 'normal' returns), 27% fixed income, 3% commodities and 5% cash.
This allocation has been unchanged since late March 2000.
The remainder of this comment will focus on several of the concerns that
have recently come to the fore of investors' attention. These are (1)
economic and profit deceleration; (2) weak Euro; (3) strong oil prices; (4)
uncertain Fed policy; (5) campaign rhetoric; and (6) mutual fund tax-
related selling pressures. Many of these factors are likely to fade away
during the next few weeks and months.
1. THE ECONOMY AND PROFITS ARE DECELERATING: NO SURPRISE
Since late last year, our 2000 outlook has assumed a notable slowing of
economic and profits growth. We viewed last winter's rapid pace of growth
as unsustainable, and projected that GDP and S&P 500 EPS growth rates in
the fourth quarter of 2000 would be roughly one-half those of the fourth
quarter of 1999. Factors contributing to the deceleration would be the
impact of tighter Federal Reserve policy, and in some large-ticket
categories, a partial satiation of pent-up demand. Please refer to our
July 17 comment, 'Slowing, Naturally.'
Our estimate for 2000 S&P 500 operating EPS has been $56.00 for many
months, and is used in the valuation work that leads to our 1575 yearend
price target. Yes, profit growth is now decelerating. Even so, our
initial estimate is likely to be too low for the year. Through the first
half of 2000, actual operating earnings per share have exceeded our
forecasts by roughly $1.50.
We have consistently argued that second half earnings would be less
impressive than those of the first half due to (1) economic deceleration,
(2) tougher year-on-year comparisons, given the exceptional economic vigor
of late 1999, and (3) the sharp boosts to consensus profit estimates early
in the year. Following the impressive EPS reports for each of the first
two quarters, the I/B/E/S earnings revision ratio (the number of upward
estimate revisions divided by the number of downward revisions) exceeded 2,
and occasionally approached 3. This meant that 3 estimates were upwardly
revised for every one that was revised lower. In turn, this has made
positive earnings surprises more difficult to achieve in the subsequent
quarters. During the current preannouncement period for 2000 Q3 EPS, the
revisions ratio for 2000 has slipped below one; this is not surprising
since most preannouncements are negative.
Most importantly, the economic deceleration will bring us to a pace
consistent with an even longer-lasting expansion. It is the usually the
durability of profit growth, not its pace, that supports equity prices.
2. THE EURO HAS FALLEN AND IT CAN'T GET UP
Weakness in the Euro has attracted attention throughout the world. While
it is apparently disturbing to some that the currency is reaching 'all time
lows,' the fact remains that the decline this year is not especially large.
The Euro has been weak relative to the dollar since its inception with most
of the damage inflicted in 1999. It is true that a handful of U.S.-based
multinational companies have pointed an accusatory finger at the Euro as a
partial explanation for earnings shortfalls. But most companies have not
done so. For many U.S. companies (who both produce and sell their wares in
Euroland) the issue is not currency, but rather, weak aggregate demand on
the Continent.
Our currency team in London believes that the Euro is now undervalued
relative to the dollar and is likely to regain some of its lost value in
the coming months. If correct, the currency argument for weak earnings is
likely to fade. More importantly, if the Euro's recovery is driven by
improved economic conditions, many companies will experience improved
demand.
3. OIL PRICES ARE UP AND THEY WON'T GO DOWN. AT LEAST NOT YET
There have been dramatic rises in commodity energy prices since late 1998.
At that time, when crude oil was under $12 per barrel, we first suggested a
notable overweighting in energy stocks, including natural gas providers.
Crude oil has since trebled in price; we are currently advising a moderate
overweight, with an emphasis on oil service companies and a small number of
integrated producers.
The judgment of our research teams is that high energy prices are here to
stay, but only for a few more months. The current situation is commonly
viewed as the consequence of growth in aggregate demand exceeding growth of
supply (rather than supply disruptions, such as occurred in the 1970s).
The high prices themselves lead to (1) increased production that lowers
prices, and (2) slowing economic growth that, in turn, acts as a drag on
energy demand. |
