Oracle, here's one analysts opinion on the bottom...a couple days old, but posting FWIW. Thanks to the contributor!
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From Bear Stearns...
Just when the fully- to overvalued stock market had earnings-
related volatility to contend with, a renewed political issue
emerged to startle the bull. With foreigners holding one-third
of our outstanding Treasury instruments, their perception of U.S.
government matters is key. The nature of the Starr investigation
of President Clinton does not suggest an Administration-wide
scandal, however, so the policy instability that would cause
investors overseas to disgorge dollar assets does not appear to
be present. Therefore, despite this new development in
Washington, we still believe that the stock market is in the
throes of a "normal" 7%-10% correction. Given the poor quality
of the summer rally before this setback, we would not be
surprised to see a retracement to the June lows (to the vicinity
of 8600-8700 for the Dow Jones Industrials and 1075-1085 for the
S&P 500). The stock market is surely oversold and predisposed to
rally at this point, although sentiment indicators such as the
CBOE put/call ratio and investor sentiment polls do not yet
reflect the fear that usually characterizes good market bottoms.
The highest number of daily individual stock new lows were set on
the New York Stock Exchange since late 1994, continuing testimony
to the virtual bear market that is receiving so much discussion
lately. Perhaps some glimpses of outperformance displayed by the
mid-cap and smaller-cap measures in very recent sessions are
signs that the market is beginning to regroup during this
corrective/consolidation phase.
While we see limited downside to this selloff, thanks in no small
measure to the benign interest rate and liquidity backdrop, we do
not foresee major new highs in the stock market over the
intermediate term, as earnings difficulties are worked through.
Whether one uses I/B/E/S or First Call as a reference, second-
quarter earnings growth so far (with 80% of the S&P 500 companies
having reported) is 1.7% or 2.9%, although the SmallCap 600 has
registered a more impressive 5.3% gain. While roughly 60% of
these firms have reported upside surprises, we tend to de-
emphasize this statistic since expectations have usually be
ratcheted down sufficiently (to produce a positive surprise?)
shortly before final results are disclosed. We have commented
repeatedly about the scarcity of top-line growth, which may be a
big driver of the merger streak this year. Certainly this is
where the strong dollar's impact is most apparent. Procter &
Gamble was just the latest example of even a venerable company
stymied by negative results from Asia and the inability to follow-
through with price increases. On Friday, Kellogg reported down
earnings for the latest period, and also cited a loss of sales to
lower-priced competitors. This sounds to us like the profits
picture, not inflation, is the wrinkle in a less-than-perfect
environment. Year 2000 (Y2K) expenses will also hamper
productivity and profit margins. We expect more of the same as
far as lowered earnings projections over the next six months.
THE CONSUMER TO THE RESCUE
Economic reports last week had a firmer tone, whether the durable
goods data, existing home sales, the Chicago purchasing managers'
report, or second-quarter GDP itself. This last release once
again depicted the best of all possible macro-economic worlds, as
higher-than-expected activity was spurred by a 6.3% surge in
domestic real final sales, at the same time that prices remained
stable. The consumer sector, with a 5.8% boost in spending (5.2%
on a four-quarter basis), was surprisingly strong. We have
maintained an overweighting in the consumer services sector, and
services spending rose 3.9% (year-over-year), a 10-year momentum
high (such is the reason for earnings results that exceeded
estimates in stocks like Carnival Corp, Ruby Tuesday and Time
Warner). We believe that the consumer will remain the leader for
U.S. economic growth into 1999, and would take advantage of the
recent setback in retail stocks to add to positions in the
sector. We are lifting our allocation to a modest overweight,
and would focus on strong top-line growers like Abercrombie &
Fitch, Home Depot, Rite-Aid, and Williams-Sonoma.
Consumer confidence (Conference Board) remains at its highest
levels since the late 1960s, bolstered presumably by the stock
market wealth effect, as well as appreciation in housing. (The
12-month gain in median home prices has run in the 6% area for
approximately ten months.) The unemployment rate at 4.5%, and
help-wanted advertising at 91 in June are hovering at 28-year
lows and an expansion high, respectively. In addition to the
tight labor market, the real pay rise of 2% (year-over-year) in
the unit labor cost data, consistent with real disposable
personal income gains of 3.8% suggest that the consumer's
purchasing power is increasing, as his balance sheet is beginning
to improve. Consumer credit as a percentage of personal income
has begun a renewed decline after peaking in October, 1996, and
the fall in consumer installment credit growth to 3.5% on an
annual basis indicates the consumer is re-liquefying. Declining
interest rates have clearly worked their magic: rising housing
affordability has contributed to strong double-digit gains in
existing housing sales while new home sales hit a record high.
This should bode well for profits in the housing-related
retailers, as well as Leggett & Platt.
Our analysts expect 17% growth for retail sector earnings, on
average, this year and next. Over the very near term, we throw
out the caveat that slowing traffic in apparel stores will
probably be reflected in sales numbers due out this week,
although the price action in the retailers and apparel stocks,
themselves, may already reflect this. As back-to-school
merchandise appears on the floor in August, we anticipate that
traffic will pick up. Also, much as U.S. corporations are
feeling the negative effects of a lagged impact from Asia, the
retailers may experience modest lagged positive effects on the
cost side from Asia. As we nudge our retail weighting higher, we
have modestly reduced health services, which has been a market
performer year-to-date. Selectivity is clearly becoming more
important in this sector, with ongoing government investigation
of billing practices, a political backlash fully heating up for
the HMO group, a new reimbursement schedule for nursing homes,
and new concerns arising about the Healthcare Financing
Administration and its reimbursement ability in light of Y2K
problems.
Research assistance provided by Nari Narayanan (272-4315)
Companies mentioned:
Abercrombie & Fitch (ANF- Procter & Gamble (PG-
46) 79)
Carnival Corp. (CCL- Rite-Aid (RAD-39)
38)
Home Depot (HD-42) Ruby Tuesday (RI-15)
Kellogg Co. (K-33) Time Warner Inc. (TWX-
90)
Leggett & Platt Inc. Williams-Sonoma,
(LEG-27) Inc.*+ (WSM-33)
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Within the past three years, Bear, Stearns & Co. Inc. or one
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Bear, Stearns & Co. Inc. is associated with the specialist in
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