Joe Battipaglia

» BumpyBrown - He's Baaaaaaaaaack

http://www.gruntal.com/research/joeb.html

-- posted by BumpyBrown

» Kirk - Monday, July 10, 2000

Weekly Perspective

The Federal Reserve’s six interest rate increases over the past twelve months have finally eased the U.S. economy toward a more moderate pace of growth. A growing collection of fresh data supports my long held view that output will moderate toward a respectable 4% annualized rate by year-end from the 7.3% rate measured in the fourth quarter of last year. The most recent addition to this series was Friday’s weaker-than-expected June employment report that showed a mere 11,000 non-farm payrolls added during the month and that hourly wages grew at a mild 3.6% year-over-year pace. Such visible signs of slowing amid an absence of any real inflation threat should provide the Federal Reserve ample room to forego additional tightening this year.

Some slowing, however, does not necessarily mean that earnings must suffer. To the contrary, expectations for growth in S&P 500 operating earnings have risen steadily throughout the year just as they had the year prior. Currently, earnings are expected to expand by 18.6% for all of 2000. With approximately 20% growth already expected for the first half of the year, and few warnings for the second quarter, this estimate may indeed prove low and prompt additional upward revisions to top-down forecasts in the coming months. Once again, the combination of strong productivity growth, high levels of capital investment in technology and equipment, consumer spending and better results from foreign company affiliates are all helping keep earnings growth on a steady keel. Recent history also demonstrates that earnings can remain robust following a period of credit tightening. During 1995, which was the last year following a significant tightening of credit, S&P 500 operating earnings rose in excess of 18%. That year was among the best years for earnings growth during the 1990’s and helped lift the S&P 500 composite index over 34% for that year.

As the months progress, therefore, I believe that concern over higher interest rates will fade further and that growth in corporate earnings will once again become the primary catalyst for lifting equity values. In this regard, I expect the higher earnings growth profile of the NASDAQ composite to deliver the best performance and provide leadership for the broader market. The summer rally, which began just after Memorial Day weekend, has seen the NASDAQ composite gain nearly 25% versus the S&P 500 and Dow Jones Industrial Average which have returned 7.3% and 3.3% during the same period.

I am maintaining my year-end targets on each of the major indices and have made no change to my asset or sector allocations at this time.

              7/10/00   12/31/2000E  Gain
 
DJIA         10,635.98    12,500      17.5%
 
S&P 500       1,478.90     1,625       9.9%
 
NASDAQ Comp   4,023.20     5,500      36.7%

-- posted by Kirk

» Mark_J - The Batman

"Some slowing, however, does not necessarily mean that earnings must suffer. To the contrary, expectations for growth in S&P 500 operating earnings have risen steadily throughout the year just as they had the year prior. Currently, earnings are expected to expand by 18.6% for all of 2000. With approximately 20% growth already expected for the first half of the year, and few warnings for the second quarter, this estimate may indeed prove low and prompt additional upward revisions to top-down forecasts in the coming months. "

Notice the use of the word "expected" throughout? This is the difference between those who think that the Fed rate hikes will affect earnings vs. those who think the Fed hikes don't have a possibility of impacting earnings going forward.

The Batman, and the bulls, continue to think that the Fed rate hikes have nothing in the world to do with corporate earnings going forward.

In addition, the Batman points out about the 2nd quarter earnings, as if what happened in the past matters to stock prices. What investors key on is company statements regarding the future of earnings growth. Should that growth rate be threatened, by a slowing economy, then the market will make the proper valuation adjustments.

Onward and upward, eh Joe? Federal Reserve - Schmederal Reserve!

-- posted by Mark_J

» Kirk - Mark

You must be one that believes there is only one way to grow earnings.

Are you aware that when business slows, but not crashes, that one can improve margins as you are not so rushed to "just ship something at any cost"?

Adoption of technology for many industries should lower their costs so their earnings might grow 20% just by being more efficient. This is JUST getting started.

Of course, this should be dismissed as "new era thinking" and you should put your money under a mattress and wait for the crash so you can buy at pennies on the dollars as it is all smoke and mirrors.

-- posted by Kirk

» Rande - Battapaglia's certainly not the only one taking a less-than dra

Double Whammy

Excerpt:

What all this adds up to is a moderation of our record economic boom, but definitely not the end of it. One is tempted to think of it as a pause that will refresh.

If so, stock prices will probably also continue to pause for a while. But there is no reason to believe that this profit squeeze is anything but temporary. So it will hardly lead to any dramatic downward movement in stock prices.

-- posted by Rande

» Mark_J - Yes, kirk, there are other ways to keep earnings growing in a sl

-- posted by Mark_J

» PLAYDATE - batman is a raging bull........the opposite of metz......

-- posted by PLAYDATE

» Kirk - Joe just gave two stocks on NBR

C closed today at $65.25 and
MSFT closed today at $79 7/16ths

I own these... 8)

-- posted by Kirk

» Rande - Latest from Joe:

http://www.gruntal.com/research/joeb.html

Monday, July 17, 2000

Weekly Perspective

This week, the second quarter reporting season hits full stride. So far, 14% of S&P 500 companies have reported an average of 23% year over year growth in earnings. While there is still a long way to go before a final score is tallied, I remain confident that earnings growth will again exceed 20% for the quarter. The strongest growth category should remain technology with year over year gains in excess of 30%. If S&P earnings growth does exceed 20%, it will mark the second consecutive quarter where actual earnings exceeded my full year, 15% baseline estimate for earnings growth for the S&P 500. Fundamental conditions are such that profits for the second half and next year have the potential to remain well above the historic trend line. Such strength in earnings solidifies my bullish outlook for equity prices to rise roughly in line with underlying earnings growth. My forecast includes no allowance for expanding multiples at this time.

Such good performance on the earnings front comes at a time when the economy is moderating from a 7.3% growth rate in GDP toward what I believe will be a sustainable 4% annualized growth rate by year-end. Not surprisingly, this more gradual growth is the result of six credit tightenings, higher energy prices and the conclusion of a cyclical recovery that began following the emerging market crisis of 1997-1998. These changes have compressed the multiples paid for growth in the most cyclical and interest rate sensitive areas (see chart) while consistent growth sectors such as technology and healthcare have benefited.

Since the inception of my sector ratings in August of 1999, two "outperform" rated sectors seemed to carry all others. Both technology and healthcare outperformed the S&P 500 with returns of 38% and 16%, respectively, through June 30, 2000. Looking forward, I expect these groups to provide additional leadership based on strong demand, rising unit volumes, and above average profitability. At this time, I expect financial service companies to turn in better performance and help lead the way as the credit tightening cycle draws to a close and the benefits of deregulation finally kick in (ie. UBS and Paine Webber). Energy companies should improve their performance now that oil prices have returned to normalized levels and strong cash generation can be applied to mergers, acquisitions and stock buybacks.

At the same time, capital goods and transportation companies should provide less robust performance now that cyclical recovery from the ‘97-’98 slowdown is complete. Unit volumes and margins should continue to come under pressure in the consumer staples sector as in the case of Proctor and Gamble and Coke.

I am making no rating changes to other sectors such as basic industries, communication services, consumer cyclicals or utilities at this time.

Lastly, Friday’s lower than expected reading of the Producer Price Index (down –0.1% on the core rate) supports my belief that there remains no upward pressure on prices in the production pipeline. The competitive landscape suggests that companies that attempt to raise prices will do so at the risk of loosing market share. The automobile industry, for example, has been unable to raise prices of new cars for the past several years despite record demand.

Looking ahead, I expect the current rally to extend further with new highs reached by year-end on all the major indices. With the Federal Reserve now out of the way, the market will focus more closely on current strong earnings growth and the potential for an extended profit cycle well into 2001. Therefore, I recommend that growth investors remain fully invested at this time. I am making no change in my year-end index targets of 12,500 on the Dow Jones Industrial Average, 1,650 on the S&P 500, and 5,500 on the NASDAQ composite index.

-- posted by Rande

» Kirk - Even Joe is surprised

He predicted "ONLY" 15% earnings growth and people were calling him too bullish at the beginning of the year. Now here we are half way through the year and with well in excess of 20% earnings growth!!!

I like how Joe talks about his past predictions, what changed to make them too low in this case and how that effects his outlook for the future. Interesting that he sees the S&P up about 8% and the NASDAQ up 30% from present levels by year end.

-- posted by Kirk