Investors Too Intent on Iraq
May Miss Market Themes
By ERIN SCHULTE
THE WALL STREET JOURNAL ONLINE
Given the din of war-related news, it's easy to miss the other things happening on Wall Street.
Once Iraq is no longer on the lips of every market commentator, it's these other, more fundamental issues will drive the market and economy. Wall Street veterans say these are the issues investors need to watch, if they can tear themselves away from CNN.
We picked the brains of a group of professional investors, analysts, strategists and economists to find out what's going on -- good or bad -- besides Iraq. Here are some highlights.
State Budget Blues
Andrew Parmentier, policy analyst for Friedman Billings Ramsey in Arlington, Va., says a nonwar factor that could put a crimp in the recovery is the shortfall in state budgets.
"The economic recovery will be driven by rising wages, corporate profits and an improving set of economic data," he says. "But you still have a absolutely horrendous state budget situation."
States expect budget shortfalls of $30 billion this year and $80 billion next year, according to the National Governors Association. They're cutting back on higher education and health services -- which means residents may have to shell out their own cash to cover the difference.
Meanwhile, fifteen states are calling for tax increases of about $14 billion combined next year, in sales, personal income and property taxes. The consumer -- responsible for about two-thirds of the nation's gross domestic product and driver of the economy during this market downturn -- will feel the pain.
"These are tough times for people," says Mr. Parmentier, who notes that consumer debt as a percentage of disposable income is near record highs and unemployment is at 5.8%. "When you talk about short-term stimulus, it's about putting more dollars in the pockets of individuals so they can spend them. Now they're spending them on things like education, not discretionary items."
Treasurys: In for a Tumble
Tobias Levkovich, Salomon Smith Barney's institutional equities strategist, is concerned that too many investors are clamoring -- foolishly -- to get in on the bond rally.
"I'm certainly worried about money flows going to safe havens. Are they making yesterday's trades today?" Mr. Levkovich says. "People are so focused on safety. Three years ago, nobody understood equity risk. Now they don't understand bond risk."
With yields around 40-year lows, an uptick in inflation could wipe out gains for Treasury investors. Prices are expected to sink if and when investors shift back into equities, which continue to lag bonds. So far in 2003, the average bond fund has gained 1.93%, compared with a 6% loss for the average equity fund, according to Lipper Inc.
Even investors who hold onto individual bonds until maturity may not be safe.
"You're going to get your money back in 10 years. The question is, what is it going to be worth?" Mr. Levkovich asks. "Inflation is the bond killer, and we see some signs of it."
Though bearish on bonds, Mr. Levkovich is hopeful about equities. He says he was impressed with small improvements in capital spending in the fourth-quarter GDP report. Equipment and software spending increased 6.6% in the fourth quarter and 6.7% in the third, according to gross domestic product reports.
Look for Leaders
Lynn Yturri, an equity portfolio manager at Banc One Investment Advisors, has simple advice for investors trying to see past the clouds of war: Look for leaders.
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"Looking out a year from now, earnings comparisons are going to be awfully easy compared to this winter, we'll take advantage of the trading range to add to things that are depressed, where we like the story."
He says he's searching for companies that are gaining market share and have stronger revenue growth than competitors – the Wal-Marts of their respective sectors.
Mr. Yturri said stocks that fit that criteria that he is adding to include General Mills, Viacom, Emerson Electric, Alcoa, Ace Insurance, Marsh & McLennan and Alltel.
"It's a crazy mix," Mr. Yturri said, adding that there was no one sector that has both spectacular valuations and great prospects, and that instead he's focusing on specific companies rather than sector plays.
He does, however, see potential for retail.
"What we're building right now is pent-up demand for apparel, and consumer goods. Right now you can't get to the store, it's cold, it's expensive to buy gas, you'd rather watch TV and see what the news is," he says. "Retail will probably be a decent place to be."
October Lows Lurking
Andrew Burkly, a technical analyst for Brown Brothers Harriman, doesn't pay attention to United Nations negotiations. He's focused on market momentum, sentiment and intensity, and he thinks none points to a prolonged upturn.
"War or no war, we're not going to get bullish until we see ... a high level of bearish sentiment, very oversold momentum, a lot of new lows on the NYSE," he says.
While others were glued to CNN, Mr. Burkly spent Thursday comparing the market's latest action with recent lows -- last October and July, Sept. 21, 2001, and in March 2001 -- to see if stocks are ready to rally.
For example, the week of October's low, 788 NYSE stocks hit new lows. As of Thursday this past week, there were only 280 new lows for NYSE stock. Previous market troughs have had about 15 to 20 times the number of 52-week lows compared with highs. But currently, the number of new lows to new highs is only about three to one.
The very low prior lows signaled that "you've gotten to that washed-out, oversold level, a cheap enough level to attract buyers," Mr. Burkly says. Right now, he adds, the market's not there.
"We're definitely not buying into this one whatsoever," says Mr. Burkly. "We say sell into whatever kind of rally you see."
Write to Erin Schulte at erin.schulte@wsj.com3
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Updated March 15, 2003 12:29 p.m. |
