RM......
Wall Street's Thrill Turns Into Defeat
NEW YORK (Reuters) - Investors who've gotten used to
Olympic-sized gains for the last five years are no longer
feeling the thrill of victory. Instead, they're tasting the
agony of defeat.
But don't think they're willing to toss in the towel yet.
What's happened is that after years of denial, investors
are realizing that stock valuations and earnings do matter,
after all. Stocks had risen so high that people began to
believe there was no end to their expectations.
But this year's third quarter has sobered up a lot of
die-hard bulls. Some of the high-profile names such as Lucent
Technologies, (LU.N) the world's largest telecommunications
maker, and Motorola Inc., (MOT.N) the second-biggest cell phone
maker and Yahoo! Inc. (YHOO.O), one of the largest Internet
companies, have warned of lousy results.
What's scary is that the Street should not expect the
earnings story to suddenly turn brighter, experts say.
``This is an extremely unhealthy market environment but one
in which investors will take a slap in the face, a punch in the
gut and are still willing to come back for a kick in the
pants,'' says John Hussman at Hussman Econometrics Advisors.
Most companies have cited higher oil prices, Europe's weak
single currency, the euro, and a slowing U.S. economy for their
poor showings.
But the concern is that these nasty problems will not go
away anytime soon.
YOU AIN'T SEEN ANYTHING YET?
While the market has been rocked by earnings warnings, the
betting is that the fourth quarter will bear the brunt of the
damage from the euro and oil.
Also, the lag of up to nine months between the time the
Federal Reserve raises interest rates and the impact on the
economy, means that the bulk of the central bank's six credit
tightenings, which first started in June 1999, have not fully
filtered through the nation's economy.
Experts say the earnings warnings and plain disappointments
could last into next year.
``We aren't looking at short-term phenomena,'' said Ned
Riley, chief investment strategist for State Street Global
Advisors in Boston.
``All of the nasty factors popped up in the third quarter
but what happened is that the companies, after being able to
absorb a tight labor market and high wages for years while
still generating high profits, are now finding out that they
just can't do it any more.''
The slumping euro slammed Intel Corp. (INTC.O) and
Microsoft Corp. (MSFT.O) and other U.S. multinationals that do
a lot of business in Europe. The currency has been battered
since it was introduced in January 1999.
The multinationals face two problems overseas. The euro's
weakness against the dollar makes American goods more
expensive, thereby cutting into sales. The companies' earnings
are further slammed when they convert euros into dollars.
Other U.S. firms that have been hurt include consumer
products kings Gillette Co.(G.N), Colgate-Palmolive Co. (CL.N)
and Procter & Gamble Co. (PG.N).
Riley said the stocks of ``New Economy,'' or technology,
companies are in their darkest period as investors realize that
they've had extremely high expectations for their earnings.
But the Dells, Apples and Nextels will bounce back because
they still have a healthy growth trend, he said.
``We are going through a transitional period with companies
returning to a more normal growth rate after the stock market
has gone from $3 trillion in value to $15 trillion in 10
years,'' Riley said.
``People are acknowledging that companies that grew at 30
and 40 percent a year are not going to continue,'' he said.
''Unfortunately, investors had wrongly priced stocks on the
assumption that the big gains would go on forever, such as the
Yahoos of the world at 215 times earnings.''
Historically, corporate earnings have risen 7 percent a
year and the slowing economies in the United States and Europe,
will make a tough task of lifting profits even tougher.
A FAIR PRICE, EVEN FOR SUPER GROWTH STOCKS
During the bull market, people reckoned that pricing
stocks based on the level of interest rates and inflation had
gone out of style. Based on the new rules, companies that spent
millions in grabbing bigger market shares would fetch stronger
future earnings, which could justify higher P/Es for their
stocks.
The current market carnage, which slaughtered stocks that
used to trade at three digit levels, proved once again that
there is a fair value for everything, even the super growth
stocks.
For example, CMGI Inc. (CMGI.O), the huge Internet
investing company, has seen its stock plunge in the past year
to $22 from $163. It has left a nasty bruise on a lot of
Internet groupies, even though CMGI is one of the sector's blue
chips of the future. Yahoo! is at $65, down from $250.
The P/E for the 500 companies that comprise the Standard &
Poor's 500 Index is still nearly twice the norm at 28, which
would suggest there is still room on the downside for the
market to slide, especially after big companies have warned
that there are storm clouds ahead.
But the ``Old Economy'' companies may have a tougher time
bouncing back than the New Economy firms because they don't
have as much top-line growth to bail them out.
``What's causing more issues for the market is that the
cracks that developed in the tech sector have now developed
into major fault lines in the economically sensitive stocks,''
he said.
``Chemical companies are suffering in this high energy price
environment and the retailers are getting eaten up by rising
prices at a time when they aren't able to pass on higher prices
to consumers,'' he said.
So, the earnings of traditional companies will continue to
be undermined by a slowing economy and rising costs, which in
turn will cut off the supply of elixir that has fueled the
stock market's spectacular growth for the last five years.
Experts say the outlook is bleak for the euro -- a currency
without a country. The unit is being jostled around by
contradictory statements from euro-zone policy-makers about
whether the currency is dangerously low or not. The worrying
comments have rattled currency traders' confidence in the unit.
Also weighing on the euro is the European Central Bank's
focus on heading off inflation by raising interest rates at the
risk of slowing the region's growth.
Despite seven rate increases in the past year, the euro has
stayed under water and the dollar has risen. The reason:
currency traders have attached a premium to the dollar because
the U.S. Federal Reserve's policy is aimed at both tempering
inflation pressures while still promoting a reasonable level of
economic growth.
The surge in crude oil prices has also raised the risk that
energy costs may be an economy-killer for the Europeans, who
are paying for higher oil prices with a rising U.S. dollar.
For the week, the Dow Jones industrial average slumped
404.36 points to 10,192.18. The Nasdaq composite index was off
44.48 at 3,316.53 and the Standard & Poor's 500 index was down
34.86 at 1,374.13. |
