Börsipäev 19. aprill
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Päeva alustuseks üks intervjuu Barronsist:
MONDAY, APRIL 19, 2004
Contrarian Jitters
A master technician sees a yellow light flashing
By SANDRA WARD
An Interview With Ned Davis -- It's at critical junctures that we want to know what the proprietor of Ned Davis Research in Venice, Fla., is thinking. We evidently called the right guy last week, because that's exactly where this master of market history and technical analysis thinks the market is at the moment. Davis'ex-tensive database of market statistics gives him an extraordinary advantage in understanding the direction the market is headed and which asset classes are likely to benefit. It is why his research is among the most respected and sought after in the investment community. But it is his long experience as a strategist that gives him the special wisdom to know when to hold and when to fold.
Barron's: How much longer does this cyclical bull have to run?
Davis: We're at a very interesting juncture. The fundamentals have gotten very bullish. Conventional wisdom says maybe there is some geopolitical risk, but based on the fundamentals, the outlook is clear-cut bullish. The thinking goes that more good earnings and a clear upturn in employment will be the trigger to get us above 1200 in the S&P 500 and remove any final doubts about the sustainability of the economic and earnings expansion.
For a contrarian, that's the worst news there can be. The problem is when there are no doubts left, everybody is pretty much invested. Our own polls of sentiment indicate 68.1% of investors are bullish, which is well in the extreme-optimism zone, and that tells me some of the demand has been used up. At the same time, we've been watching the previous-week offerings data in Barron's, a combination of initial public offerings and secondary offerings, and that is up to $64.7 billion in the past 13 weeks. I can't say there is a magic number, but it was at $55 billion based on a 13-week average at the April top in 1998, which was as high as it ever was outside the bubble years. This is a lot of supply. These are the problems: There is too much optimism. There is no doubt left about the economy, and that's a problem on the demand side. And on the supply side, the offerings bother me.
Q: What about the Federal Reserve?
A: There are questions about the Fed. I thought the Fed might sit the year out, and they still might, but there is a lot of pressure on them now. They've boxed themselves in a bit. Our research shows that the first hike the Fed institutes doesn't really mean anything. After one single hike, the market typically goes up for the next year. It is really only after a series of hikes that the Fed becomes a negative for the market. Normally, the first hike is seen as the result of stronger earnings, and that offsets any negative interpretation. But lately several Fed governors have said they thought a neutral range for the fed-funds rate [the overnight rate banks charge each other] is somewhere between 3% and 3.5%. We are not talking about a quarter-point hike. Once it looks like they have started down the road, the market is going to make the leap to the 3% to 3.5% range they are talking about. The Fed must hope the economic news is not quite as smoking as it has been so far this month.
Q: What do you make of the economic numbers?
A: My underlying view is there is too much debt and there was never any buildup of savings during the recession, so there is really no pent-up demand. The consumer isn't in a position to do much. That is what all the bears say. Then I sit and look at the money supply and I see that when mortgage refinancings are booming and tax cuts or tax refunds are hitting, the money supply explodes. If you put a lot of money in people's pockets, they are going to spend it. We saw that in the middle of last year. The second half of last year was the best half since 1984, or maybe 1981, when there were tax cuts. It's a guarantee that if you give tax cuts or refunds, there will be surging growth. Is it sustainable? I don't think it is. March is going to be strong. April is going to be strong. It is going to be May or June before we know if the economy is slowing a bit and, by that time, there will have been two Fed meetings already. We've been in a green-light situation for the market since October 2002 and now we have a yellow light. The tape has not broken down enough for me to say the bear market will resume, but it is definitely flashing a yellow light.
Q: Nasdaq certainly has acted badly.
A: Consistently, in a pre-election year -- we looked at all of them since 1979 -- the speculative growth stocks, telecoms, biotechs, Internets and techs -- sizzle and do about twice as well as the market. The last time we spoke Nasdaq was already up 50% from the low, and I thought it could double from there. It didn't double, but it did wind up about 93% from the low, so it had a big move. In election years, the best sectors totally flip. The sectors that do the worst are the telecoms, software and services, computer hardware and broadcast and media. Generally, presidents try to stimulate the economy so much in the pre-election year that people see there is no risk in taking a risk, and it results in a lot of speculative buying. As we move into the election year, the worry is that the economy may cook too much and at some point the stimulus will be taken away, so investors shift into more defensive stocks. Looking at the election years 1980, '84, '88, '92, '96 and 2000, the leading industry groups were energy, financials and health care. For the first quarter of this year, the three best sectors, in order, were energy, financials and health care. It is too much of a coincidence to be just pure luck. The normal election-year cycle is working here. Another interesting thing in election years -- I am not really sure why it happens -- is that January to May tends to be slightly down and very bumpy. Then the market takes off in May or June, and we have a good year. Election years do pretty well in general.
Q: But are most of the benefits we've seen from the presidential-election cycle over?
A: If you go from the pre-election low to the election-year high you get a gain of about 62%, historically. My target has been a 50% to 62% gain for the market. We got to 49% and there might still be a good chance we will go higher as the election year plays out. But I'm a little bothered here because I thought the economy was going to really pick up; I didn't realize it was going to quite cook like this.
Q: What didn't you factor in? China?
A: That has had a lot to do with it. The U.S. boomed in the late 1990s, but Japan, the second largest economy in the world and at one point a really powerful force, was in recession. The growth of the 'Nineties was actually not as good as the growth in the 'Eighties, but it felt pretty good. It was a boom in the U.S., and everybody else tagged along. Now, we are booming. Europe is growing, although not super fast, and the whole Far East and emerging markets are booming. There is a synchronized global boom in some countries that for the most part don't have raw materials. We've done a lot of studies on inflation and commodities and, when commodities boom like this, reflation inevitably booms. The difference with this cycle is that labor costs have stayed very low and unit labor costs have been dropping. Labor, of course, is a bigger cost than commodities or raw materials, and that has been an offset. Jobs are growing, and we might see some tick-up in labor costs temporarily.
Q: What asset classes are you most attracted to?
A: Frankly, I don't see anything that looks particularly attractive.
Q: What's your asset allocation?
A: We are 70% long stocks. Our investment position is still pretty bullish. My trading strategy is hedged. I'm hedging with long puts, just in case. We've had a lot of stimulus, and so it's prudent to ask: What are we going to do in the second half? Bush is having trouble getting his tax cuts passed by the Republicans, the Fed has very little resources left, and the dollar is strengthening. I don't really see the dollar being any help at all. The economy is going to slow in the second half.
Q: What about the profit picture?
A: It is still pretty good, but we are at a point now where earnings have risen so much that, based on our historical analysis, earnings growth should begin to slowdown. Raw materials will be a factor. Companies are paying a whole lot more for them. They can either raise prices, which is going to cause inflation and put the Fed in a bigger box, or they could just suffer profit-margin erosion and hurt earnings. Either the Fed raises rates or the bond-market vigilantes raise rates. Either way, companies are going to have higher debt-service costs. Earnings are going to be fine. But it's harder to see what the next level of growth is and how we are going to get there.
Q: You were lightening up on financials last year, but now you are more interested.
A: We found something very interesting about financials when we looked at them on a relative-strength basis, which is how they perform relative to the S&P 500. We found they tend to be relatively weak right into a rate hike, maybe for a week or two after that, and then turn around and start screaming. It is a funny thing, but once the financials see the Fed is serious about slowing things down, they start rallying again. That's what we are facing now. As long as a rate hike is in play, the financials are going to have difficulty. Then they'll come out of it and do well again.
Q: Many of the financials had been delivering pretty good earnings, and the market dismisses it.
A: That is another thing that is bothering me, although this happens almost every earnings season. People's expectations run so high that, by the time the earnings come in, the stocks are pricing them in already. When Yahoo! came in with earnings recently that were way above anybody's expectations, its stock responded, but the market didn't and the rest of the tech stocks didn't. That was the first sign the market was acting very poorly. The advance/decline line [a ratio of the number of stocks rising versus those falling] had been terrific up until two weeks ago, and then as soon as the economy started picking up, it started weakening dramatically, even on up days. That is not good.
Q: What about the bond market?
A: The bond market is in trouble. The economy was starting to take off last June and it really scared the bond market. There was one of the biggest drops in bonds ever. Then the fourth quarter had half the growth rate of the third quarter and the first quarter started out weak. In the middle of March, consumer confidence was in negative numbers. Bonds did pretty well during that period. Now, the economy is taking off again and they are getting hit again. We've done a study that shows when 10-year Treasury notes rise 50% from their cyclical low, which was 3.10%, the economy's growth rate is cut in half a year later. If we get to 4.75% on the 10-year, the economy would drop from a 4.5% growth rate to about 2%. A 2% growth rate takes care of a lot of overheating problems and the bonds would likely do well again. I don't own any bonds now and I'm leery of them, but if the 10-years got to 4.75%, I would be looking to buy them. We have $34.5 trillion of debt, and I don't think it is realistic that interest rates will go up that much. The debt service would just grind the economy to a halt. So the 10-year goes to 4.75%, maybe 5%, but at that point, I would be buying bonds and financials.
Q: You have been concerned about the debt level for a long time. Do people say you sound like Chicken Little?
A: I get that a lot. What I say is that at these interest rates, at 1% or 3.5% or 3.75% on 10-year notes, the debt bubble is completely manageable. But if the economy really starts booming, what happens? Rates go up and then the debt is not manageable.
Q: How soon before you expect them to raise rates?
A: I thought they would wait until after the election; I was very confident about that. But the economy has picked up so much and commodities have been so strong that I'm doubtful they are going to wait very long.
Q: How does the war in Iraq factor into your outlook, since it seems to be worsening?
A: Personally, it makes me sick to my stomach. From a contrarian standpoint, though, it is probably the one thing out there that has kept people from getting really manic and crazily bullish here. The uncertainty is going to weigh on the market. Every week, you say, "Oh my God, what is going to happen next?" We certainly didn't go there to fight a religious war, but somehow when you start killing Muslims, other Muslims see us as a Christian army, and that is very ugly. I don't want to overdo it because during the Vietnam War, we had plenty of bull and bear markets. Wars don't necessarily drive markets. But we don't need this extra uncertainty.
Q: If we have a Democratic president elected this fall, what should we expect from the market?
A: The stock market has actually done better under Democrats than it has under Republicans. Even better than a Democratic president has been gridlock. The explanation for that is neither party can do too much damage and it's just checks and balances. I'm not sure that a Kerry victory is really going to shock the market, especially because the polls now show he has got a chance. And it is still going to be a Republican Congress. In 1960, we had a bouncy first part of the year and then the market rallied in the middle of the year. When it looked as if Kennedy had a chance, the market went straight down until the election and then headed straight up for the next 12 months. It had totally discounted that a guy with the initials JFK from Massachusetts would win. That could be a pretty good pattern for what might happen if Kerry wins. Election years are normally bouncy early in the year and then the market takes off. From August to November there is a very dramatic difference if the incumbent wins or the incumbent loses. If the incumbent wins, it goes straight up. When the incumbent loses, the market goes down. In August, after the conventions, you can make a pretty good bet on the stock market. If it looks like Kerry is going to win, the market is going to go down after August. -
Nokia reitingut täna veel mitmes kohas alandatud, aga see on juba rusikatega vehkimine pärast kaklust ja aktsiale enam negatiivset mõju ei tohiks avaldada. Suurem osa müüjaid peaks olema lõpetanud ja seega on pigem praegu head võimalused tõusuks. Stopi võib viimaste põhjade alla panna.
08:34 NOK downgraded at Pru, UBS (14.61 )
Prudential downgrades Nokia to Underweight from Overweight based on intensifying competition and a lack of visibility in the co's core mobile handset business. There have been recent product missteps, increased competition, and increased branding competition from wireless carriers. The firm reduces its FY04 rev estimate to $28.7B from $31.7B and lowers its FY04 EPS estimate to $0.64 from $0.84... UBS downgrades Nokia to Neutral from Buy. Despite the stock likely being close to the bottom of its trading range, there is insufficient visibility to the success of anticipated product launches and the duration of margin compression in the interim. While the co has been in this position before, the recovery this time could prove more difficult.... JP Morgan believes that Nokia is not simply losing share to Samsung at the high end but is also under pressure across its range from Sony Ericsson, Siemens and Motorola. The firm lowers its Mobile Phones unit operating margins estimate to 20% in Q2 from 25% in Q1. The firm reduces its 2004 EPS estimate by 13%. -
-USA futuurid on kerges miinuses, Dow aktsiatest avaldasid oodatust paremad tulemused 3M (MMM) ja Eli Lilly.
-3M teenis esimeses kvartalis 722 miljonit dollarit kasumit ehk 90 senti aktsia kohta, mis on aastatagusega 30% rohkem. See oli prognoositust rohke ning ka kogu aasta kasumiväljavaadet tõsteti.
-Nokia (NOK) on eelturul üle 15 dollari, ehk aktsia on teinud väikese põrke. Negatiivsed tulemused ja müügireitingud on oma töö teinud ja müüjaid väga palju turul olla ei tohiks. JP Morgan andis oma klientidele mõista, et firma kannatab tootevaliku nõrkuse all ning konkurentide ebatavalise tugevuse tõttu on turuosa kaotamas. Samas leitakse, et nii juhtkonna, ressursside ning turuosa suuruse tõttu on firmal head võimalused positsiooni taastamiseks.
-McDonladsi (MCD) juht Jim Cantalupo suri esmaspäeval südamerabandusse. Firma juhil on suured teened kiirtoiduketi allakäigutrepil ümberpööramises. Aktsia on uudise peale eelturul 2.2% miinuses.
Rev Shark:
The market is struggling with how to deal with a change in the interest rate environment. What makes this especially difficult is that much of the reaction is emotional rather than logical.
Rather than money moving from the most interest rate-sensitive stocks into those that have little sensitivity to rates and are thus most likely to benefit from a strong economic environment, we have seen a muddle of action.
Yes, homebuilders and lenders of various sorts have been hit hard but groups that are not likely to suffer much from higher rates, such as chip stocks, have been selling off recently as well.
Higher interest rates are primarily a function of strong economic growth but what makes the market so difficult is that strong economic growth has several other consequences that we need to consider. Strength in the dollar is one example. Gold, which is generally considered a hedge against inflationary pressures, has sold off recently primarily because of the stronger dollar. If you focused solely on interest rates and ignored the dollar you would find yourself poorly positioned.
The main problem that the market is having at present is that it simply is uncertain of the effect of interest rates. If it was simply a matter of a booming economy that hasn't been fully priced in by the market, it is a very different matter than a market already up huge in anticipation of greater profits.
So what do we do? How do we position ourselves as the market undergoes a major transition? First we need to respect the technical patterns. The Nasdaq is struggling technically. It has breached its 50-day simple moving average and momentum has gone into reverse as we sell off on increased volume. There is support at the 1900 level and overhead in the 2080 range. This is not the time to buy aggressively.
The conventional wisdom is that at this point in the economic cycle small-caps are likely to start to underperform their big brothers and sisters. The thinking is that increased prospects are more fully priced into the small fries early and therefore they tend to slow down as economic improvement becomes a reality.
The Russell 2000 (RUT) index of small stocks has stalled out at the 600 level four times so far this year. This group badly needs to break and hold above that level if the small-caps are going to continue to shine.
The best thing we can do at this point is stick with a slightly bearish bias as we wait for clearer trends to develop. This market is struggling and we can't be too quick to anticipate that it will right itself and head on its merry way.
In addition to interest rate worries, the mess in Iraq continues, the political wars heat up and bears continue to warn about absurd valuations. We definitely have some fear and worry out there but as we learned over the past year we can't be too quick to fight the prevailing sentiment.
We have some pressure to start the week. Futures just ticked down on news that McDonald's (MCD:NYSE) chairman and CEO, Jim Cantalupo, has died "suddenly and unexpectedly of an apparent heart attack." Overseas markets are weak. Europe couldn't mount a rally even though the dollar weakened against the euro. Asian markets were pressured as financial stocks weighed on the market.
It's a tough environment out there and if we hope to make money we are going to put forth more effort than usual.
Gary B. Smith
