ABBY SAYS BUY 'EM, BUT THE MARKET YAWNS
By Peter D. Henig
Red Herring Online
August 24, 1998
If a stock falls in the market, and no one's there to buy it, is it really undervalued?
That's the question Goldman Sachs analyst and market guru Abby Joseph Cohen posed today in a short research note that urged investors to go out and buy.
Ms. Cohen, a noted bull even in this wildly gyrating market, said that global investor attention has recently focused on three nations -- Russia, Brazil, and Venezuela -- whose economies are weak and whose currencies have likely sunk as far as they're going to.
Yet, Ms. Cohen claims that the direct economic consequences for the United States are "quite small."
So small, in fact, that Ms. Cohen told investors in a research note that U.S. stocks are 5 to 8 percent undervalued, and repeated her year-end targets of 9,300 for the Dow and 1,150 for the S&P 500 index.
"Even when combined, total exports to these three countries are less than 4 percent of U.S. exports and there is little banking exposure," said the analyst, arguing that "the real issue in global markets appears to be the widening of risk [premiums]."
And what about Asia? "Problems in Japan, the world's second-largest economy, have been factored into our work for almost two years," the analyst countered. "We see no recent evidence that the Japanese impact on U.S. trade or bank credit has worsened."
Close, but no cigar
But was the market buying what Ms. Cohen was trying to sell?
Not really. In the current tug of war between bottom-fishers and doom-and-gloom bears, the market is trading on a thin line following its recent free fall.
While the Dow Jones Industrial Average made some headway after Friday's 300-point selloff, up 32.96 points, or 0.39 percent, at 8,566.61, declining issues beat advances 1,639 to 1,377 on moderate volume of 557 million shares. The technology-heavy Nasdaq composite index fell 6.79 points, or 0.38 percent, at 1,790.82.
But analysts remain worried not only about Russia's stability, but how it might impact countries such as Germany, which have large investments there. Critics charge that Ms. Cohen did not factor fear of such spillovers in her forecasts.
Even if U.S. financial institutions have reduced their direct exposure to emerging market economies like Russia, German banks still have $30 billion in outstanding loans to that country, and the potential ripple effect through international markets of a significant default on such loans keeps the market on edge.
And the emotional tone of the market right now favors a flight to quality in treasuries, where market analysts are more comfortable with how the Federal Reserve Bank has handled interest rates.
Where does that leave technology stocks?
On the large-cap side, investors are holding firm, believing that the long-term fundamentals of quality companies like Cisco (CSCO), Lucent (LU), IBM (IBM), Dell (DELL) and others will pan out.
But on the small-cap side, where investors become exposed to a much greater level of risk, investors continue to stay away, putting pressure on the Russell 2000 small-cap index as they watch tiny companies like CyberGuard (CYBG) blow up in their faces.
While Ms. Cohen's bullish call to arms sounds loudly over Wall Street, it's not clear that investors can hear it.
Do you believe that U.S. stocks are undervalued? Give us your opinion.
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