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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: High-Tech East who wrote (83541)	12/9/2002 2:35:20 PM
From: StormRider	Respond to of 99985

Weekly Market Perspective December 9, 2002 All relevant disclosures appear at the end of this report. Upside Surprise Brewing? Last Friday's unemployment report and the abrupt resignation of President Bush's economic team would not seem to be the type of news to rally stock prices. Investors were expecting that payrolls would expand rather than contract and that the jobless figure would be below the cyclical high of 6%. The news also broke after four consecutive days of lower stock prices, making thoughts of yet another bear market down leg heavy on the mind of investors. The rally response goes further than the muddled view of current economic conditions. That the economy is moving grudgingly forward is generally accepted. Consensus expectations are that U.S. GDP is growing around 2.5%. Expectations are for a slight uptick next year in the 2.5-3.0% range, which is still below its long-term trend average. Given the economic outlook, earnings growth for corporate America is similarly sluggish. But against this backdrop is the likelihood that there are now two powerful catalysts directed at stimulating the U.S. economy. First, the Federal Reserve is pursing an all-out policy of low interest rates and expanding money supply. And now with the cabinet shakeup, the second catalyst becomes more urgent. While it remains to be seen who will front White House strategy for crafting a stimulus package, there is less doubt that it will be aggressive and with political alignment, that legislation can be enacted. With strong monetary and fiscal measures in place, prospects for above-trend growth in GDP improve. And with GDP growth above 3%, corporate earnings, as currently projected, have the makings of an upside surprise. The table below is the results of a survey of over 1,100 stocks from our recently introduced Shareholder Value Index (SVI), which measures revenue growth and operating profit margins for 2001 versus projections for 2003. The data were broken into quartiles, with the median for each quartile and total universe of stocks shown. There are several ways of interpreting the information in the table. First, the three-year revenue growth is anemic and below consensus expectations of nominal GDP growth. The estimates are reflecting the understandable caution that comes with a 31-month bear market. Second, the economic recession and sluggish recovery, along with low inflation and high productivity, has caused corporate America to focus intensely on cutting costs in order to maintain profitability. The improvement in operating margins is startling. The upside surprise is the earnings leverage created from increasing revenue while maintaining the same or better operating margins. GDP growth above 3% significantly increases the probability of higher revenue growth. Intermediate S&P 500 Target of 1050-1100 The prospect of a military conflict with Iraq is a sobering and cautionary reality, as is the darker side of the economic muddle. In the main, however, the evidence leads us to an expectation of higher stock prices in the intermediate term. Our target is approximately 20x the consensus 2003 EPS estimate for the S&P 500. We believe this estimate will look increasingly conservative as the economy moves forward. Richard E. Cripps, CFA Chief Equity Market Strategist leggmason.com