Is the Bear Dead?
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Wednesday April 18, 7:20 pm Eastern Time
TheStandard.com
By Eric J. Savitz
<<Wednesday's wild rally on Wall Street certainly was a nice surprise -- the Nasdaq soared more than 8 percent, and our own Industry Standard 100 index galloped ahead more than 10 percent. But the action -- and the surprise Fed rate cut that spurred the move -- raise as many questions as they answer.
First, investors are asking whether the rally is for real. To some observers, Wednesday's rise is reminiscent of the short-lived January rally, which kicked off Jan. 3, as the Fed made the first of this year's four rate cuts. On that day, the Nasdaq rallied more than 324 points, or 14.2 percent, to 2616.69. People were feeling pretty good about stocks that afternoon, too.
Second, there's the odd combination of factors that had the market in rally mode. Stocks were rallying broadly Wednesday morning even before the Fed made its move, primarily due to some modestly optimistic comments from Intel late Tuesday about the outlook for the second half of the year. Then the Fed came in with its surprise rate cut, warning, "The persistent erosion of current and expected profitability in combination with rising uncertainty about the business outlook seems poised to dampen capital spending going forward," as well as of slower growth abroad.
So while Intel might see better times ahead, the Fed apparently did not. Which raises question No. 2B: Does the Fed know something we don't know? Is there new evidence of a recession that will be revealed in upcoming economic data?
Third, there's the question of what the Fed is likely to do at its next regularly scheduled meeting, in mid-May. In short, some observers are wondering, did the Fed kick in an extra rate cut -- or did it simply give us the expected mid-May reduction a few weeks earlier? And if the markets begin to suspect that the Fed would move more modestly -- or not at all -- in May, could stock prices hold up?
Finally, there is the question of whether the ongoing rate cuts actually solve the over-capacity problems that continue to plague technology stocks. In other words, if we assume for the moment that we have in fact hit the bottom for tech stocks -- and not every one thinks so -- then will the rate cuts pull us out of the hole?
Alas, there are more questions than answers.
The bearish camp thinks that we're repeating what happened in January, that this is simply one more example of a classic bear rally, short and sharp.
Fred Hickey, who writes the High Tech Strategist, a Nashua, N.H.-based newsletter, remains unrepentantly negative. Valuations, he says, remain "ridiculous beyond belief." He's particularly struck by the paradox of the two stories moving the markets Wednesday.
Hickey notes, "What's amazing here is that the market was reacting to the fact that [investors] thought the market was improving -- but if that were true, the Fed would not have had to come in with another desperate rate cut."
The Fed, he contends, seems to be a little panicked. "The Fed is so desperate that they have to do things in the middle of the morning on an options-expiration day, clearly trying to manipulate the stock market," Hickey says. "We haven't learned anything. There are no signs of a bottom here. If we were at a bottom, investors wouldn't be throwing money at the market like this."
Also cautious is Carl Weinberg, an economist with High Frequency Economics in Valhalla, N.Y. Weinberg warns that "tech stocks clearly have a problem" even after the surprise rate cut. He contends that it would be unlikely to see the tech sector stage an extended recovery right now.
"We are unlikely to have a resurgence, not in the near term," Weinberg says. "There's still over-capacity and over-investment in the sector." And lower rates, he says, are not going to cure those particular ills.
Still, some on the Street are feeling more optimistic Wednesday afternoon. Mat Johnson, growth stock strategist at Thomas Weisel Partners, notes that in recent weeks, investors have been reacting less and less to negative earnings news -- that investors have long since priced into stock prices a very weak first half. "What's still uncertain," he says, "is whether investors can continue to handle a relatively bad earnings season and take solace from the Fed."
Johnson thinks that lower rates lay the ground work for better times later. For instance, reduced rates tend to benefit financial services companies, which happen to be among the largest buyers of technology goods and services. "It bodes well for enterprise software and storage," he says.
But he does have a caution to offer. Even with Wednesday's cut, the consensus view is that the Fed will cut again in May. Johnson warns that investors are going to be disappointed if the Fed goes into fine-tuning mode and cuts by only 25 basis points at the May meeting."
Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis, is bullish on stocks for the long haul, but he expects stocks to spend the next few quarters going sideways.
"We need to get used to companies not growing at the rate they once did," Belski says. "Yes, the climate is better, but no, we're not off to the races."
He suggests that investors look at tech stocks at the bottom of the food chain -- chip makers and semiconductor equipment companies such as Advanced Micro Devices, Micron Technology and Applied Materials, as well as computer makers such as Dell and IBM.
Greg McClenon, director of research at Hotove Pomeranz, a San Francisco-based brokerage firm, is looking in the same places as Belski. The personal computer industry, he says, has largely cleaned up its inventory problems, and the chip industry is right behind. But he expects problems to linger for several more quarters in the communications equipment business, where sales are tied to the buying plans of slow moving telecom service providers.
Finally, if you are looking for a theory on why the Fed moved so suddenly, McClenon has one.
"I think we're in a recession and have been for a couple of months," he says. "Not a very long one, not a very deep one, but the underpinnings are all there. We had this large bubble of paper wealth that people were spending -- that bubble has burst, and we have to let that work through the system.">> |
