Some more food for thought. This from CSFB's Thomas Galvin, Jan. 16, 2001:
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· In years that followed 20% total return gains by treasuries as we witnessed in 2000, the S&P 500 has averaged a 17% gain, which is essentially in line with our year-end price target of 1600. When the 10-Year Treasury bond yields 5% or less, buying stocks has proven opportunistic. Low nominal yields will force investors to move up the risk spectrum in search of greater returns. ·
Contrary to popular belief, periods when the mutual fund industry suffers outflows as they have this past month, have proven good times to buy the S&P 500. Outflows from aggressive growth funds portend especially fruitful futures for NASDAQ devotees.
· Money market funds took in $88 billion last week, an amount greater than the last six months of equity mutual fund flows combined. This suggests that there is powerful fuel available to help boost the market. The ratio of money market fund assets to the Wilshire 5000 is at its highest level since 1991, which is only notable because the decade-long bull market began thereafter.
Investment Conclusion
Answer: One small stride by the NASDAQ, one giant leap for investor-kind.
Question: What is the significance of the NASDAQ Composite brushing aside earnings warnings from Cisco and Yahoo and stringing together the first three consecutive daily price increases since September 1?
The improvement in market breadth is even more striking than the Composite price gains. On the day that Cisco essentially lowered revenue and earnings guidance, 70 of the NASDAQ top 100 largest stocks were moving up. Selling pressure has finally become discriminating. A few months ago, CSCO or YHOO’s negative comments would have destroyed the entire market. Individual stocks are being singled out rather than razing the whole sector. Outside the NASDAQ, breadth is more compelling. The cumulative advance/decline line for the NYSE is breaking above the 200 day moving average, which is a significant technical improvement. Though it seems blasphemous to mention amidst today’s sea of pessimism, major bull market legs have been initiated following such technical recoveries (see front right graph). Given that CSFB and other research houses last week were officially revising downward economic forecasts to hard landing or recession levels, we found many investors and analysts somewhat puzzled by the positive ground gained. What gives?
The dawn of a new market day is the function of a few noteworthy positives, greater awareness of the negatives, timing and valuation. The positives are primarily monetary. As the market has had time to digest to the Fed rate cut, it has become clear that they will act whenever and with whatever means to inject liquidity into the economy. To get back to the long-term average of 3% real interest rates, the Fed could easily cut rates another 100 basis points. The action by the Fed instills confidence to the markets, which then multiplies through the capital markets as a green light to reopen. Following the rate cut, two CLECs, namely McCleodUSA and XO Communications, were able to price much larger than expected high yield and convertible securities deals that could not have occurred over the past several months. Charter Communications, a cable television firm, initially looked to offer $800 million of junk bonds but was instead able to walk home with $1.75 billion or the largest pricing since Level 3 Communications last February. I think this is very big stuff! The credit crunch took the economy and stock market to its knees and now the processes are beginning to reverse. Freddie Mac said that the average rate for a 30-year fixed rate mortgage dropped below 7% last week.
Though the estimates vary, it is calculated that about $1.2 trillion of the roughly $5 trillion in outstanding mortgage debt can be refinanced profitably. A month ago when rates were 7.5%, only about $150 billion worth of loans could be refinanced profitably. Typically the refinancing savings are earmarked for debt pay down or consumer purchases. House ownership far outweighs stock ownership in this country with respect to asset significance, therefore consumer balance sheets are set to strengthen from an upcoming rush of refi activity. Also, Lipper Inc. reported that the average stock mutual fund declined only 4.5% in 2000, far less than popular indexes. In other words, the 50% decline from NASDAQ’s March peak is clearly not going to bankrupt most consumers, particularly in light of lower interest rates and falling prices for retail goods.
On the negative front, First Call reports that fourth quarter pre-announcements for the S&P 500 have reached 287. Yes - half of them are negative and the fourth quarter 2000 growth rate has collapsed from 15% on October 1 to below 5% presently. In tech land, most big cap companies have disclosed lower guidance. Put another way, the majority of Index firms have confirmed or confessed, which incrementally reduces the frequency of bad news going forward. The fourth quarter market decline discounted ugly economic news for the first quarter and first half. Stocks move before fundamentals. As a result, they will begin to price in fewer dark clouds later this year as excess inventories are worked down via production and price cuts, consumers enjoy tax cuts via fiscal policy and lower energy prices, and Fed and capital market efforts gain traction and reliquify the economy. The valuation reflects the front page NASDAQ rate of change chart that is poised for a rebound as well as most S&P 500 stocks with P/E multiples approaching three year lows.
This report lays out four indicators flashing a Buy signal.
First, in years that followed 20% total return gains by treasuries as we witnessed in 2000, the S&P 500 has averaged a 17% gain which is essentially in line with our year-end price target of 1600.
Secondly, when the 10-Year Treasury bond yields 5% or less, buying stocks has proven opportunistic. Low nominal yields will force investors to move up the risk spectrum in search of greater returns.
Third, contrary to popular belief, periods similar to the past month when the mutual fund industry suffers outflows have proven good times to buy the S&P 500. Specifically, outflows from aggressive growth funds, which happen rarely, portend especially fruitful futures for NASDAQ devotees.
Finally, the ratio of money market fund assets to the Wilshire 5000 is at its highest level since 1991, which is only notable because a decade-long bull market began thereafter. Money market funds took in $88 billion last week, an amount greater than the last six months of equity mutual fund flows combined. This suggests that there is powerful fuel which could help boost the market.
The common thread to these buy indicators has been periods of fear. Some of our best buy signals occurred in 1990-91, 1994-95 and in late-1998. Cash levels then, as they are today, were going up while confidence in the economy and earnings were going down. Waiting for the investing sky to turn a sunny clear blue is rarely opportunistic. Seems to me like same old hand wringing, different day, with the added kicker of low yields and lots of cash.
Now that the wheels of liquidity are reversing, we continue to focus on sectors most damaged by the credit crunch: technology, telecom and financials. Out overweight in healthcare allows us to outlive the earnings storm. For those that are keeping track, Tom’s Top Five Stocks – NOK (Strong Buy, $41.38), AMCC (Strong Buy, $71.63), CLS (Strong Buy, $61.06), MCLD (Strong Buy, $19.75), MWD (Strong Buy, $85.13) - rose on an unweighted basis by 9% last week versus 2% for the S&P 500. Year-to-date the fearsome five are up 14%. So far so good with macro going micro! |
