Week Ahead: Warnings, Data May Hit Stocks
Saturday June 14, 8:24 am ET
By Haitham Haddadin
biz.yahoo.com
NEW YORK (Reuters) - Warnings about corporate earnings may rain down on Wall Street next week, along with economic reports that could strengthen market expectations the Federal Reserve will cut interest rates soon.
To cope, stocks may meander a bit or slip.
After a string of mostly lackluster economic data, a growing chorus on Wall Street expects the Fed to reduce rates again when it meets June 24-25. There's not much room to cut after the Fed has slashed borrowing costs to 40-year lows.
That's why investors will pick apart reports on the May Consumer Price Index, a barometer of inflation at the retail level, plus housing starts and industrial production. The market will search for clues on the economy's health in the first-quarter current account deficit, June regional manufacturing and May leading U.S. economic indicators.
Earnings likely to grab attention include: chipmaker Micron Technology Inc.(NYSE:MU - News), retailer Circuit City Stores Inc.(NYSE:CC - News) and investment bank Morgan Stanley (NYSE:MWD - News).
But the Street could be swayed by major confessions that financial results will disappoint, especially after such dour news from heavy hitters like Nokia Corp. (NYSE:NOK - News), Texas Instruments Inc.(NYSE:TXN - News) and carmaker DaimlerChrysler AG (NYSE:DCX - News)
"It's been an enormous rally," said David Dreman, chairman and chief investment manager of Dreman Value Management, referring to the three-month rally that has lifted the tech-laden Nasdaq nearly 30 percent.
"We're probably out of the bear market and in a bull market, but I don't think the market will accelerate at those levels until earnings start to pick up. There's no sign of that on the horizon," added Dreman, whose firm oversees $6.8 billion.
MONEY FLOWS BACK
Paul Cherney, chief real-time market analyst at S&P MarketScope, agrees with Dreman. He sees a sideways market, but believes the downside will be limited as money flows back into the market, helping to keep a floor under stocks on pullbacks.
A recent surge in volume "tells me people are coming off the sidelines and feeling more confident we've hit bottom," Cherney said. "The greater risk is not being invested, even though we're probably not going to have a huge shot up on the upside."
Stocks are pricey, he said. The market -- to push higher -- needs absolute proof of a turnaround from either strong earnings or guidance, he added.
"It's earnings warning season, when companies fine-tune their guidance," he said. "But even if companies come out with bad news, it would only be a short term event because we've seen so much volume and new money coming into the market."
Before Tuesday's open, investors will sink their teeth into a hefty helping of May reports: CPI, housing starts, real earnings and industrial production.
Shortly after the start of trading on Thursday, the Conference Board will issue its May index of leading economic indicators. The index is expected to show a gain of 0.6 percent after a 0.1 percent rise in April, when it pointed to sluggish growth after the Iraq war.
Recent data showed few signs of real growth while Wall Street priced in a boom. That's why many now await a rate cut.
"With the 'soft spot' in the U.S. economy seemingly still well entrenched, it looks more and more like the center of gravity on the FOMC (News - Websites)may have edged over the line separating a 1.25 percent funds rate from a 0.75 percent rate," Rory Robertson, strategist at Macquarie Equities, said in a note.
TECH BUBBLE?
Stocks fell on Friday, halting a three-month rally as consumer sentiment soured in early June. Still, the indexes are up handsomely from March lows.
The Wilshire 5000 Total Market Index (AMEX:^TMW - News), which lists all U.S. stocks, rose above 9,500 this week for the first time since June 2002. Since hitting its record high in March 2000, the Wilshire 5000 is down 35 percent, translating to a loss of $6 trillion in market value. But since falling to its 2003 closing low on March 11, the Wilshire 5000 has gained 25 percent -- the equivalent of $2.2 trillion in investor wealth.
Some pundits now fear stocks got ahead of themselves.
Tech stocks like Amazon.com (NasdaqNM:AMZN - News) are at price-to-earnings ratios similar to the nosebleed levels of the technology bubble.
The Nasdaq 100 (NasdaqSC:^NDX - News) of the biggest technology stocks has a whopping P/E of over 20O, while the broad S&P 500 (CBOE:^SPX - News) is priced at 32 times earnings, based on 2002 earnings. Bear market bottoms usually see P/E ratios below 10 for the S&P.
Based on pretty optimistic projections for 2003 operating earnings, the Nasdaq 100 is priced at over 30 times earnings.
"If you run GAAP, we will be in outer space," Dreman said.
Earnings based on GAAP, or Generally Accepted Accounting Principles, are usually lower than operating earnings since GAAP numbers include one-time charges that drag down results.
"You could say the tech bubble is back," Dreman said.
"Again, the Nasdaq could be very vulnerable, in that the earnings are not there to support the P/E ratios."
Wall Street Week Ahead runs every week. Comments or questions on this column can be e-mailed to haitham.haddadin@reuters.com.
(Additional reporting by Vivian Chu) |
