Oh Bottom, Where Art Thou?
______________________________________
Monday April 2, 7:36 pm Eastern Time
SmartMoney.com - Pundit News
By Rebecca Thomas
<<THE FIRST QUARTER was ugly, no question about it. What's in store for the rest of the year?
As always, the pundits we track are rife with predictions. Our top-ranked guru, Goldman Sachs's Abby Joseph Cohen, continues to lead a pack of bulls who won't be humbled by the bear market. But Barton Biggs of Morgan Stanley Dean Witter, chief among the pessimists, argues that the economy is nearing — or is already in — a recession.
So who's right? If there's one lesson to be learned from the past 12 months, it's that market punditry is more faith than science. Time and again, we've been promised a rebound in equity prices — and time and again, we've been sorely disappointed. So before you start glancing into our pundits' crystal balls, remember this: they've been wrong before. Painfully so.
Flash back to December. That's when Gruntal's unflinching bull Joe Battipaglia predicted that 2001 would be ``yet another year of record earnings for most companies.'' Around the same time, Cohen came out brandishing a lofty 2001 price target of 1650 for the Standard & Poor's 500 index. The mood was even more upbeat following a brief January rally. ``Don't fight the Fed. Don't fight a cheap market. Never fight both!'' gushed our No. 2-ranked pundit, UBS Warburg's Edward Kerschner. Echoed Garzarelli Capital's Elaine Garzarelli: ``The bear market is over for all intents and purposes.''
Of course, it was far from over. In the first quarter, which ended last Friday, the Nasdaq Composite dropped 25.5%, putting it down 60% from its all-time high last March. Meantime, the Dow Jones Industrial Average sank 8.4% and the Standard & Poor's 500 index lost 12.1%. The Nasdaq and the S&P 500 have now registered four consecutive quarterly declines for the first time since 1984.
So why are two of our most bullish pundits — Cohen and Kerschner — still on top of the rankings? Our batting averages don't yet reflect many of their most controversial long-term forecasts. If a pundit considers stocks ``undervalued'' in December, for example, we wouldn't dare rank the call in March, since there's always the chance for a healthy mid- or late-year pop. But if a pundit forecasts in January that equities will rise 10% over the next month, that's fair game for the rankings. Both Cohen and Kerschner are pretty far out on a limb right now. Unless things turn around later this year, their rankings are in jeopardy.
Amazingly, while much has happened in the financial markets during the past three months, our pundits have made relatively few changes to their market predictions. Kerschner still thinks the S&P 500 will rise 32% to 1715 by year's end. Credit Suisse First Boston's Thomas Galvin sees ``no reason'' to change his 2001 price targets of 12000 for the Dow and 3000 for the Nasdaq.
To his credit, Jeffrey Applegate of Lehman Brothers is one of our few pundits to fess up that he's been ``bullish and wrong'' all year. In the past two months, the strategist has shaved his 2001 S&P 500 price target twice, by a cumulative 275 points. He now thinks the index will climb a more reasonable 20% to 1400 by year's end.
Of course, not all our pundits have been eating crow. Kudos to Prudential Securities' Ralph Acampora, who expressed his doubts back in December that the market had reached a bottom. And plaudits for Biggs and ISI's Ed Hyman, both of whom predicted that the coming economic slowdown would be far worse than most economists were expecting. Hyman was the first to foresee a big-time slowdown in tech activity; Wall Street laughed when Biggs first uttered the R-word in December.
No one's laughing now. More and more, our pundits are fretting the possibility of a painful, U-shaped recovery, or even a drawn-out L-shaped one. Deutsche Banc. Alex Brown's Ed Yardeni has become increasingly convinced that the outlook will remain weak through the end of the year as corporate profits contract — notwithstanding the Fed's relatively aggressive rate cuts.
David Jones, chief economist at Aubrey G. Lanston, agrees. Powerful forces — including rising consumer and business debt burdens, slumping corporate profits, falling asset values, excess production capacity and bulging inventories — are likely to act as a drag on the economy for some time, he says. Although consumer sentiment improved from near-recession levels in March, there's still a risk that rising unemployment and mounting portfolio losses will further dampen consumers' willingness to spend, pushing the economy over the edge.
Even worse, some of our pundits have lost confidence in the Federal Reserve's ability to manage interest rates. If Yardeni had his say, the Fed would have lowered rates by another full percentage point in March, rather than by just one-half percentage point. Biggs agrees that the Fed has gotten ``way behind the curve.''
If that's too bleak for you, take heart in the Abby Cohens and Ed Kerschners of the world. While reluctant to call a specific market bottom, our upbeat pundits say conditions are ripe for a rebound in equity prices. Interest rates have further to fall, consumers are still buying cars and homes, energy prices have stabilized and a tax cut is on the near-term horizon. Although profits have tanked as companies unload excess inventories, a two-month pickup in new equipment orders (as measured by the National Association of Purchasing Managers) suggests the pain may be short-lived.
``If we can weather the upcoming final two weeks of the earnings preannouncement storm and finally make progress with stock levels close to current levels, this market may never look back,'' wrote Galvin in a Monday research note.
It helps, of course, that stocks are already — to quote Kerschner — ``extraordinarily cheap,'' when adjusted for current levels of interest rates and inflation. The UBS Warburg strategist figures that S&P 500 stocks deserve to trade at 30 times future earnings, up from their current P/E multiple of 22. ``Today's market weakness will likely turn out to be as great a buying opportunity as the panic sell-off in the fall of 1998,'' he writes.
If only investors would agree.>> |
