Evaluation of 1998 and prognosis for 1999 by Stein Roe. I highly recommend it not because it is particularly bullish but because it makes sense. Of course, I also think it sounds a lot like what Bob has been saying on his show. I usually don't like to predict the future in postings but I am trying to add to my cash reserves now because if we get a buying opportunity in 1999 I think it will occur in the first quarter of the year. Just my opinion. Jeff
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1999 Should Bring Moderate Year-to-Year Earnings Gains; Upswing for Asian Economies, Says Stein Roe Investment Strategist
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Story Filed: Monday, December 28, 1998 11:11 AM EST
CHICAGO (Dec. 28) BUSINESS WIRE -Dec. 28, 1998--As 1998 closes and we approach 1999, Al Kugel, a 45-year veteran of Stein Roe & Farnham and a member of the firm's senior investment committee, issued the following comments.
Please feel free to quote Al from the following market outlook:
"Practically all the of S&P 500 companies have now reported, and it appears that third quarter year/year operating earnings on the S&P 500 were 3.2 percent below a year ago. This market decline can be compared to modest gains of 3.8 and 3.5 percent, respectively, in the first two quarters. Thus, even if the fourth quarter comparison comes in down 4 percent--as could happen because of the latest plunge in energy prices--the year as a whole would come in flat with 1997 at about $45.50 per share. However, because revenues will probably show a gain in the mid-single digits, there would have been a decline in profit margins.
"Is this a cause for concern? Aside from the macro number, it is important to realize that earnings results this year are all over the map, largely based on industry groups. For example, the profits of energy companies were down by a whopping 40 percent in the third quarter, and those of several other groups--including industrial materials producers, exporters of capital goods and many financial companies--also declined noticeably.* In particular, those firms for which both volumes and pricing power were weak obviously suffered a decline in revenues and a severe shrinkage in margins.
"However, on the 'good news' side, investors need to bear in mind that the median earnings comparison for all of the 500 companies came out as a gain of around 10 percent.(1) Such a number was well above revenue growth so that there was actually some expansion in profit margins on average. In a few cases, this was quite significant. As an example, Wal-Mart Stores can be cited. Its overall revenue growth for the first eleven months of 1998 was +17 percent but profits were up approximately 25 percent. Since WMT's average price realizations on comparable merchandise likely declined modestly, it means that its cost-of-goods-sold declined faster than its selling price.
"Even for other companies, margins were not all that bad. The latest (third quarter) numbers for U.S. productivity show a gain of 3 percent. Thus, relative to employment costs rising at something above 3.5 percent, unit labor costs rose by less than 1 percent, which is roughly in line with the overall rate of inflation in the economy as measured by both the GDP price index and the consumption deflator.
"This may be well and good so far, but what is the prognosis? The most important factor in the investment outlook, in my opinion, is that the central banks of the world have now swung around to fighting recession as compared to fighting inflation as recently as this summer. In just the past three months, official short-term interest rates have been reduced by 75 basis points in the U.S., by an average of 100 basis points in Euroland and by 125 basis points in Britain. Moreover, if the authorities think that more should be done, they are in the enviable position of being able to vote for additional cuts without running any real risk of inflationary consequences in the foreseeable future.
"This view suggests that whatever slowdown occurs in America and Europe in the first half of 1999 will be short lived once the more stimulative monetary policy starts to take effect six to nine months out. In addition, I believe that the Asian economies will be bottoming out in the months ahead and starting their upturns before the end of the next year. Indeed, it can be argued that some of them--particularly Korea and Thailand--are making the turn already. To the extent that the drag on the U.S. economy from weak exports to Asia can be ameliorated next year, it would certainly enhance the outlook for our beleaguered industrial sector, which has been stagnant throughout 1998 as the decline in foreign sales offset the growth in domestic volume.
"While such a sequence of events would only produce a moderate year-to-year gain in 1999 earnings, it would be back-end loaded. This means that there would not be much of an increase in the first half, but that double-digit gains could be achieved by the fourth quarter. From a market perception standpoint (Y2K problems aside), investors could well come to view the momentum that would be building up during next year under the scenario outlined previously as being an especially positive portent for 2000."
Founded in 1932, Stein Roe & Farnham is a Chicago-based investment management firm. It provides professional investment management for individuals and institutions and serves as investment adviser to the Stein Roe family of 19 no-load mutual funds and 6 funds offered in the advisor and financial services channels. Stein Roe & Farnham serves a national client base through its Chicago headquarters and offices in Cleveland, New York City, San Francisco and San Juan, Puerto Rico. Stein Roe & Farnham is a subsidiary of Liberty Financial Companies, Inc. (NYSE:L), a diversified asset accumulation and management organization with more than $57 billion in assets under management for more than 1.7 million investors
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