DD,
A sample of what we were just talking about:
Saturday October 14 8:39 AM ET
Wall Street's Thrill Turns Into Defeat
By Pierre Belec
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, (NYSE:LU - news) the world's largest telecommunications maker, and Motorola Inc., (NYSE:MOT - news) the second-biggest cell phone maker and Yahoo! Inc. (NasdaqNM:YHOO - news), 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. (NasdaqNM:INTC - news) and Microsoft Corp. (NasdaqNM:MSFT - news) 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.(NYSE:G - news), Colgate-Palmolive Co. (NYSE:CL - news) and Procter & Gamble Co. (NYSE:PG - news).
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. (NasdaqNM:CMGI - news), 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. |
