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Technology Stocks : JDS Uniphase (JDSU) -- Ignore unavailable to you. Want to Upgrade?

To: zbyslaw owczarczyk who wrote (17822)	2/5/2001 9:52:13 PM
From: zbyslaw owczarczyk	Read Replies (1) \| Respond to of 24042

Joe Battipaglia Chairman of Investment Policy Gruntal & Co. Weekly Perspective February 5, 2001 The market shook off declining manufacturing output and falling consumer confidence during January. While it is clear that the manufacturing side of the economy has slowed dramatically, the larger service side of the economy continues to hum right along. With the Federal Reserve lowering interest rates very aggressively and tax cuts appearing more likely, business and consumer confidence should improve in short order. None of this was lost on the stock market or bond market during the month of January. In fact, the best performing groups for the month were exactly those laggards that bore the brunt of the market’s decline last year. Specifically, technology and telecommunication service stocks led the way for equities and high yield bonds turned in their best January since any time in the past ten years. Conversely, last year’s superstar groups based on their defensive characteristics, healthcare and utilities, dropped to the bottom of the heap in January. I believe this reversal in leadership belies improving fundamentals and supports the case for a bullish 2001. How are fundamentals improving? 1.Inventory adjustment is happening faster than originally forecast. Not only has the Federal Reserve moved decisively to add liquidity, but the process of inventory adjustment is well underway. Notable strength in automobile sales, for example, should speed along the process of recovery in that sector. For the month of January, automobile sales surged to a 14.2 million annualized rate despite falling confidence and waning year-end discounts. The rapid deceleration of new manufacturing does not indicate a severe falloff in demand as much as a need to draw down excess inventory. Idled plants and temporary layoffs are nothing new to the automakers that are working hard to clear out excess inventory levels and last year’s models. If consumer’s are willing to buy big ticket items such as automobiles, could it be that soft goods and other types of consumption should remain healthy as well? 2. Except for the most cyclical sectors of the economy, the broad economy continues to thrive. Since the mid-1970s the percentage of manufacturing jobs has been on the decline. Today, only 14% of the U.S. workforce is employed in factories, the remainder has moved to service or government jobs – both areas less directly tied to inventory led changes in the business cycle. The severity of the deceleration in the manufacturing side of the economy evidenced in the sagging NAPM and factory order data has affected fewer workers than in previous cycles. Last week’s employment data for January included an 81,000 increase in service related jobs which more than offset the 65,000 decline in manufacturing jobs for the month. 3. Earnings growth continues to surpass analysts estimates despite warnings. While they have not been anything to write home about, the fourth quarter earnings season has been better than reduced expectations. Q4 earnings growth is now expected to come in near 5%, slightly better than recently reduced forecasts. With the consumer sector healthy and with additional rate and tax cuts in the offing, I expect earnings growth to improve throughout the year, led again by the technology sector. 4. The contraction in market multiples, particularly for the NASDAQ, has already been felt. As mentioned a couple of weeks back, the most recent data on household wealth indicates that U.S. households are wealthier than a year earlier thanks to investments in real-estate and bonds. With the NASDAQ hard hit, buying opportunities have again emerged now that valuations have been compressed. Specifically, the top ten NASDAQ stocks by market capitalization are attractively priced when considering the overall level of earnings, earnings growth rates and multiples. Since 75% of the NASDAQ 100’s earnings come from the top ten companies, it makes sense to focus our attention here first. Today, the ten most valuable NASDAQ companies carry a combined market capitalization of $1.4 trillion and should generate roughly $37 billion in combined net income over the next 12 months. With long-term earnings growth rates near 23% the P/E/G rate for this group is 1.6 times – almost identical to the S&P 500. I am pleased to see the market’s response to what I consider positive developments on the road to a full recovery. I continue to forecast improving levels of output for the economy on the way to a 3% annualized growth rate by year-end. Along the way, earnings should rise ahead of analyst expectations. The combination of rising earnings, coupled with a modest rise in multiples (which has already begun) should put the major indices at much higher levels by year-end. Stay tuned. My year-end targets for the major indices remain 12,700 on the Dow 30, 1,650 on the S&P 500 and 4,300 on the NASDAQ composite.