The Merrill Counter-Indicator
By James B. Stewart
SmartMoney.com - Common Sense
Tuesday May 28, 12:04 pm Eastern Time
I HAD TO LAUGH the other day when I read that Merrill Lynch (NYSE:MER - News) was urging clients to sell technology shares into "strength" and to redeploy the profits into other opportunities. I have two questions: What strength? What profits?
I realize that Merrill Lynch is eager to restore its public credibility after the emails that have recently been made public by New York Attorney General Eliot Spitzer amply documenting the conflicts of interest between its research and investment-banking arms. But does this advice make sense?
The last time I looked the Nasdaq was below 1700. True, it's up considerably since it dipped below 1600 two weeks ago, but it remains down over 66% from its all-time high, and is down 13% this year alone. I don't call that "strength." To his credit, Merrill's chief U.S. strategist, Richard Bernstein, has been negative on the technology sector for some time, but Merrill (along with most firms) was quite comfortable recommending tech shares when the averages were at much loftier levels and there were plenty of IPOs to be underwritten. Call me cynical, but I can't fail to notice that Wall Street's downgrading of the tech sector has coincided with a dearth of investment-banking deals, which means that the firms aren't putting any revenues at risk.
And what about those "profits"? Most of the tech profits in my account date to the last time the Nasdaq was at 1700, which, apart from last fall's crisis, was January 1998. Fortunately, I do have some profits. But most people I know bought their tech stocks much more recently. Except for some of the chip-equipment makers, like Applied Materials (NASDAQ:AMAT - News), there are precious few profits to be had in the sector from more recent purchases.
Moreover, Bernstein's prescription for the sector is for more "consolidation," i.e., mergers, along the lines of Hewlett-Packard's (NYSE:HPQ - News) link-up with Compaq. This, of course, is another recipe for more investment-banking fees for firms like Merrill Lynch. I will be more convinced by Wall Street research when it says something that isn't so blatantly self-serving.
This, of course, still leaves the question of what investors should do with their tech stocks. In my view, this isn't the time to be selling anything, tech or otherwise. With the Nasdaq below 1700 and the Dow bobbing around 10000, the market has lacked direction, and two weeks ago hit one of my buying targets. One of my fundamental precepts is to buy when stocks are low and sell when they are high. Despite the Nasdaq's 100-point "rally," stocks are still low.
True, you could stay market-neutral by selling tech shares and putting the proceeds into other sectors. But this would likely decrease your asset allocation to tech just when it may be nearing a bottom. The time for this strategy was a year or more ago, though it looks good only with the benefit of hindsight. Certainly I wouldn't sell depressed tech shares and plow the proceeds into consumer growth stocks, which have been the market darlings of the past year. Following the herd by dumping your losers and buying the winners is an almost sure-fire strategy for losses.
I counsel patience. Investors who followed my advice to ride out the Hewlett-Packard proxy fight and hold their shares have done surprisingly well this month, with H-P shares up nearly 20%. Yet I predict they will do even better if they hold on until the Nasdaq reaches my next selling threshold, which is about 1950, or 25% above its recent low.
And there have recently been some mildly encouraging comments from chief executives at Cisco (NASDAQ:CSCO - News), Applied Materials, Sun Microsystems (NASDAQ:SUNW - News) and Intel (NASDAQ:INTC - News). True, overoptimistic tech executives have been about as unreliable as Wall Street analysts, but having been burned a year ago, they have recently been much more cautious.
I'm not predicting any sudden rapid surge in the tech sector, but in today's cautious business climate, I'd be surprised by sudden surges in any sector. And I'm enough of a contrarian to think that when Wall Street brokerage firms tell their clients to bail out of tech, the bottom must be near.
Terror and the Markets
A few words on terrorism fears, which depressed the market this week: Yes, there may be more terrorist attacks and there may well be suicide bombers in the U.S. However tragic the consequences, the question for investors must be whether such attacks would disrupt the economy. We have learned that not even a strike of the magnitude and success of the World Trade Center attack could disrupt the U.S. economy for long. I suppose terrorists could come up with something even more diabolical, but I doubt it. We could also be hit by a meteor. But rational investors simply can't function as though doom were just around the corner; there would be no point. And I note that consumer confidence and optimism have stayed astonishingly strong, even in the face of recent dire warnings.
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