Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: William H Huebl who wrote (23089)	8/3/1998 7:22:00 AM
From: Mephisto	Read Replies (1) \| Respond to of 94695

[BWDIK] William, I'm scared!!! Wall St. flight to safety may turn to insanity By Pierre Belec NEW YORK (Reuters) - Wall Street has been riding a fabulous bull market with the economic chaos in Asia bringing a flood of capital to U.S. stocks. But the market now seems to be priced out of this world and there's fear the flight to safety may prove to be a flight to insanity. Stocks have been rocketing for 3-1/2 years, thanks to double digit gains in U.S. corporate earnings. In the last six months, the market got an extra boost from the Asian crisis, which attracted boatloads of foreign money to U.S. shores. But experts say stock prices are higher than earnings will justify for the coming year and investors are overlooking too many bearish signs. Corporate earnings are disintegrating, having fallen well below a year ago in the first two quarters of the year. The big question is how long can investors continue to dismiss the disappointing results? Don R. Hays, chief investment strategist for Wheat First Union in Richmond, Va. said Wall Street will get a wake up call in the third quarter when earnings will not improve. It could send foreign money to the exit door. "As the U.S. economy starts to show a few cracks, the market will lose the one big driving force, which has been the flight to safety of money from overseas," he said. The market could be hit by the kind of nasty sell-off that knocked the Dow Jones industrial average in 1966 from a high of 1,000 points to 800. "There could be a lot of weakness with the Dow falling to 5,500 to 6,200," Hays said. "Traditionally, there is a 40 percent decline in the market every four years but we haven't had a serious correction since 1982-83." The experts say the tremendous earnings gains of 1997 had set a high-water mark for the time being, but they see few good earnings stories this year. Second-quarter earnings are expected to be up only 4 percent over the same quarter of 1997 when profits leaped 11 percent. The first quarter was also a disappointment with profits growing only 3.8 percent vs. a mouthwatering gain of 15.1 percent a year earlier. Hays, a Wall Street veteran, is not alone in seeing dark clouds on the horizon. Greg A. Smith, chief investment strategist for Prudential Securities and one of Wall Street's best market readers,told his clients to take some of their money out of stocks and put it into bonds. Morgan Stanley Dean Witter's Chief Global Strategist, Barton Biggs, cut back the portion of his U.S. stock portfolio and said a downturn in global stocks could wipe out 20 to 30 percent off Wall Street stocks. Hays expects stocks to reach a peak in August. The market is already showing signs of having run out of upward momentum. A week ago, the Dow posted its biggest weekly point loss ever as it tumbled 400 points and the sell-off spilled over to this past week. The blue-chip index is down about 4 percent from its mid-July record high of 9,337. Hays said that a handful of stocks have disguised the real market action since the start of the summer. The big-name stocks have been soaring while the smaller names are struggling. "The large-cap indices are going to try one last fake-out move in the next few weeks ... even making new highs in the process," he said. Don't be fooled. "It will be the last one and after this rally, the big caps will give up the ghost, and we'll be involved in a bear market that will be very evident in October, the month for crises on Wall Street." Short-term rallies will support the market but they will set the stage for the more serious damage, he said. The situation is risky because the market has become overloaded with bullish investors. The other problem is that the market has risen so fast that it may no longer be a safe haven for foreign money. "The U.S. is not safe enough to support a 29 price/earnings ratio, which is the average of the companies in the Standard & Poor's 500 index," Hays said. Indeed, foreign money has been pouring to U.S. stocks. In the first quarter, foreigners bought $29 billion of stocks, up 340 percent from $6.6 billion in the same 1997 quarter. The bear market could last "at least six months" or perhaps longer, he said. For Wall Street, it will not be a case of the economic story coming to an end but rather that cost pressures are creeping up on corporate earnings. "We have been the beneficiaries of an amazing trend where wages and benefit costs have been going down for the last 10 years but now that has reversed," Hays said. "The companies are facing zero pricing power because of competition with Asian countries and the earnings are being pinched because of declining profit margins," he said. What could speed the arrival of a bear market? "The Canadian currency crisis could prove to be a problem for the U.S. markets because Canada is America's biggest trading partner," Hays said. The collapse of Asian economies has cut deeply into Canadian exports of commodities such as pulp and metals, sparking a headlong slide in the Canadian dollar. Now, Canada faces the risk of a crisis of confidence in its currency, which could spread to the United States. For the week, the Dow was off 54.07 points at 8,883.29. The Nasdaq composite index was off 58.60 at 1,872.39. The Standard & Poor's 500 index lost 20.13 at 1,120.67.