a nice sugary treat for the Bulls, from Boomberg.com.
<<03/18 11:42
Merrill Lynch, Salomon Boost Economy Growth Estimates (Update7)
By Perri Colley McKinney and Rob Dieterich
New York, March 18 (Bloomberg) -- Merrill Lynch & Co., the biggest brokerage, and Salomon Smith Barney Inc. said the U.S. economy is rebounding from recession faster than they had expected.
The largest economy is growing at an annual pace ``close to 6 percent'' in the first quarter, said Merrill chief economist Bruce Steinberg, who raised his forecast from 3.5 percent. Salomon, a unit of Citigroup Inc., expects first-quarter growth to top 5 percent, economist Steven Wieting wrote in a note.
``We're starting to see the self-reinforcing aspects to growth,'' Merrill senior economist Gerald Cohen told Bloomberg Radio. He said last week's stronger-than-expected government report on inventories suggested increased consumer and capital spending will follow as companies increase production. ``The economy is recovering very strongly.''
As recently as December, economists expected the economy to shrink 0.1 percent in the first quarter. The revised forecasts put Merrill and Salomon among the most optimistic Wall Street firms. The average forecast of the 18 analysts tracked by Bloomberg News is for growth of 3.1 percent in the first quarter, up from a 1.4 percent rate in the fourth quarter.
The U.S. last expanded at rate of more than 5 percent in the second quarter of 2000, when it grew at a 5.7 annual pace.
Inventories Expand
Benchmark stock indexes reversed early gains as some investors said the economic rebound may not translate into a stronger-than-forecast bounce in corporate profits.
Investors' expectations for strong earnings growth ``are going to be disappointed,'' said Kevin Bannon, chief investment officer at BNY Asset Management, which oversees about $60 billion, on Bloomberg Television. He's been adding to holdings in Colgate- Palmolive Co., Johnson & Johnson, United Parcel Service Inc. and Home Depot Inc. The Dow Jones Industrial Average, up the past five weeks, slid 14.39, or 0.1 percent, to 10,592.84.
Business inventories unexpectedly rose 0.2 percent to $1.137 trillion in January, a sign companies are boosting stockpiles to meet heightened demand as the economy rebounds. It was the first increase in 12 months.
In a speech last week, Federal Reserve Chairman Alan Greenspan recognized the potential boost to first quarter growth from inventory restocking. ``With production running well below sales, the lift to income and spending from the inevitable cessation of inventory liquidation could be significant,'' he said. ( this was by far Greenspan's most favorable statement in his speech in which the rest of the speech was to negate that remark in many ways but notice these guys have seized on that one remark and spun it into BULL HEAVEN--max )
Steinberg cited gains in inventories as well as capital and consumer spending as driving the economic gains. ``If this continues, inventories could add about 4 percentage points to (gross domestic product) in the first quarter,'' Steinberg wrote.
Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.
Consumer Stocks
Merrill analysts also said they were reducing their rating on consumer discretionary stocks, which have led stock market gains since September, to ``underweight'' from ``equal-weight'' and said they will likely raise their recommendation on energy stocks.
The Standard & Poor's 500 Index has risen about 21 percent since reaching a three-year low Sept. 21. Consumer discretionary stocks in the index gained an average of 36.7 percent in the same period. Wal-Mart Stores Inc., the biggest company by sales, led shares of retailers lower today.
Some stock investors were skeptical of the advice. Economists and strategists ``tend to be great contrary indicators'' for the stock market, said James Gribbell, a manager at David L. Babson & Co., which manages about $70 billion.
``We tend to get fairly nervous when sentiment among retail investors is higher and strategists are optimistic. On the flip side, we tend to get more optimistic when retail investors and strategists are bearish or getting more conservative.''
Raising Earnings Estimates
Salomon's Wieting also raised his estimate of earnings growth for companies' in the S&P 500 Index to rise 7.5 percent in 2002, up from a previous estimate of 4.7 percent. The average estimate is for a 16.8 percent increase, according to analysts polled by Thomson Financial/First Call.
Corporate profits have to rise to ensure a strong and lasting recovery, Greenspan told Congress earlier this month. Consumer spending won't contribute as much to growth because it stayed strong through the recession, he said. That means the pace of the recovery will be driven by how rapidly business investment picks up, and that will depend on the strength of earnings, the Fed chairman said.
UBS Warburg strategist Ed Kerschner, who had the most bullish forecast for U.S. stocks, now estimates the S&P 500 Index will climb a more modest 16 percent over the next 12 months.
Kerschner had forecast that the S&P 500 would reach 1570 by the end of the year, a 35 percent gain from Friday's close. He said he now expects the index to climb to 1360.
Stocks' gains may be limited by higher interest rates as the economy recovers, Kerschner said in a note to clients. ``Relative to bonds today, stocks are modestly attractive, albeit decreasingly so,'' he said.
Kerschner declined to comment.
Fed Outlook
Even with growth rebounding, the Fed probably won't lift interest rates until the third quarter because unemployment will likely rise in coming months, Merrill's Steinberg said. Policy makers meet tomorrow to set rates, though analysts surveyed by Bloomberg expect them to leave their lending target at 1.75 percent, after 11 reductions last year.
Salomon said the Fed members will wait to see sustained economic growth for at least two quarters before raising interest rates. ``This makes a tightening by June likely, and a move by Autumn, at the latest, highly probable,'' Wieting said in his note.
Both firms expect the Fed to move to a neutral stance on the economy at this meeting, from the current slant toward weakness. >> end press release |
