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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jerry Olson who wrote (12820)	5/4/1999 3:01:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

FNM is sitting at 66, previous support when interest rates have rallied in last four months. The Dow Utilities haven't been responding as normal lately. There've been several mergers. Wall St seen overvalued but too strong to ignore By James Saft LONDON, May 4 (Reuters) - Wall Street's relentless bull charge is driven more by liquidity than fundamentals and has left U.S. shares overvalued compared with those traded on other major markets, leading fund managers said on Tuesday. But jumping ship now might represent the biggest risk of all, some managers said. The Dow Jones Industrial Average surged 225 points on Monday to vault over the 11,000 mark with ease, taking its 1999 gains to 20 percent. The Dow was 19 points higher in early trade Tuesday, at 11,034, while European shares were up 0.80 percent overall. U.S. stocks surged as investment bank Goldman Sachs (GS - news), a symbol of U.S. financial might, pulled off a stock market flotation valuing it at $29 billion but also as investment guru Warren Buffett warned that company earnings could not keep pace with stock market gains. ''Investors around the world are pretty much following the lead of the U.S. -- they have caught the tiger by the tail and are just holding on,'' said Peter Knapton, managing director at Legal & General, which has a share portfolio of more than $100 billion. ''I don't think anybody would regard themselves as comfortable with U.S. valuations, but there is so much liquidity it is probably rather dangerous to anticipate it all coming to an end.'' That is the dilemma for investment managers in Europe, which have taken a more sceptical view of U.S. shares. The average British flagship pooled pension fund had under five percent of its assets in U.S. shares at the end of March. Fund managers said the U.S. rally was driven by surges in liquidity as Americans funneled their retirement savings into shares and from new hosts of active small investors with no experience of a down market. ''You have a pretty good macroeconomic background in the U.S.,'' said Michael Hughes, managing director at Baring Asset Management. ''However if you were to use any valuation technique known to an investor you would find it difficult to justify Wall Street at present.'' To be sure, the U.S. economy is in good shape, with recent data showing continued growth but without the immanent risk of inflation and interest rate rises. But, according to Hughes, given his expected U.S. trend economic growth rate of three percent, investors in the S&P 500 are being paid only 0.75 percent to compensate them for the risk of holding equities rather than U.S. Treasuries. ''That is low historically and it is low in comparison to other markets,'' he said. The equivalent equity risk premium in Britain is three percent while German shares offer a 1.5 percent premium, he said. ''If you want to be rational the UK should outperform the U.S. for a while,'' Hughes said. His comments echo those of vaunted value investor Warren Buffett, who warned at his company Berkshire Hathaway's annual meeting on Monday that U.S. returns on equity of 18-29 percent would be hard to sustain with long-term rates at above 5.50 percent. ''A lot of companies are implicitly promising you those returns but I am very dubious about those claims,'' Buffett said. However, fund managers said they find it hard to take the risk of missing any market gains from here. ''We're in a world where valuations are stretched and liquidity is driving markets,'' said Knapton ''All investors are a bit worried but nonetheless it does not stop markets from going up.''