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Top 182. Dec 26, 2001 4:42 PM

» wallmann - Know Your Support Levels.....

First: What is a support level? Basically it is a "price" that a falling stock will "stop" at. Suppose a stock starts falling, whether it is because of a weak sector or because it is simply out of favor and attracting short sellers who are betting that the price will fall. For the most part it will fall to it's next support level. This is an area where the sellers have for the most part been flushed out and the buying and selling is now about equal. This will halt the slide but not bring it back up. Whatever that price is at the time the falling stops now becomes a support level.

Now suppose that a stock finds a support level at $50 and then begins a strong upward move. When it reaches $58 selling hits and down it comes, but it doesn't fall all the way back to 50 (if the overall trend is up) and "flattens out" at $54. This means that most of the sellers have taken their profit's and moved on, and enough new buyers are "supporting" that $54 price. We now have a new support level. Now suppose the stock moves up again, but it doesn't have the momentum to really get going so it makes it to $56 and starts to fall again. We would expect it to stop falling at that support level of 54.

Now suppose the stock starts to run again and this time it's a powerful run. It blasts through 58 and goes all the way to 62 before fading. At this point we wouldn't expect it to fall back to it's old support level at 54; we would watch for it to create a new support level. Sure enough, we see that it only falls to 58 this time. We have a new support level!

Tip: Stocks that stabilize on heavy volume often provide low risk plays as support is very strong.

http://clix.to/wallmann

-- posted by wallmann

http://www.comstockfunds.com/index.cfm?a...

Top 183. Dec 27, 2001 2:51 PM

» mdorsey - Technology Stocks Highly Vulnerable

Technology Stocks Highly Vulnerable

Most investors seem to believe that technology stocks are on the bargain counter and that currently high price-earnings multiples are a result of severely depressed earnings that should be overlooked. As we have previously stated, that is the way to value stocks in heavy cyclical industries, not growth stocks. It seems obvious to us that if a stock is to achieve and maintain a growth stock multiple it should grow -- and should do so without the steep periodic earnings declines that typify the paper, metal and machinery stocks that, unlike technology, do not get high multiples at peak earnings.
A recent study by Steve Galbraith of Morgan Stanley confirms our views. Galbraith looked at how the technology group performed in the past after trading at a range of valuations based on forward earnings. He found that the higher the beginning price-earnings ratio, the lower the subsequent return. When the forward P/E was 25, the subsequent one-year return was 17%. When the P/E was 30, the return was 3%; at a P/E of 35 the return was minus 4%; at a P/E of 40 the return was minus 24%; at a P/E of 45 or higher the return was minus 35%. In our view this study indicates that a significant recovery has already been priced into these stocks and that they have more potential risk than reward even if a recovery takes place soon. We estimate that the recovery is actually some time off and that further disappointments are in store. Under this scenario the technology group still has major downside risk and is likely to drag the rest of the stock market down with it.

-- posted by mdorsey

Top 184. Dec 27, 2001 5:53 PM

» SteveT - Will bond funds continue beating stocks?

Paul B. Farrell had a nice piece on cbs marketwatch
http://www.marketwatch.com/news/yhoo/sto...

When Warren Buffett speaks, America listens. Well, at least they better listen, very closely...

-- posted by SteveT

http://www.msnbc.com/news/678776.asp

Top 185. Dec 28, 2001 1:08 PM

» mdorsey - R&D spending growth to slow in ’02

R&D spending growth to slow in ’02

Forecast sees increase barely topping inflation rate

By Amy Merrick
THE WALL STREET JOURNAL

Dec. 28 — U.S. companies will boost research-and-development spending by just 3.2 percent in 2002, according to a closely watched national forecast, far below increases of an estimated 5.4 percent in 2001 and 10.8 percent in 2000.

-- posted by mdorsey

Top 186. Dec 28, 2001 5:37 PM

» Rande - The Latest -- 12/28/01

One more trading day left in 2001. Let's see if the averages can hold that bull market benchmark from the previous lows of over three months ago. Happy New Year! Here's....

The Latest (as of 12/28 close):

YTD 2001:

DJIA -6.0%
S&P -12.1%
SPY -10.5%
VTSMX (W5000 Index Fund) -10.1%
Nas -19.6%
QQQ -30.9%
R2000 +2.1%
MDY (S&P 400 Midcap) +0.14%
VEURX (European Index Fund) -20.9%

Since 12/31/99:

DJIA -11.8%
S&P -20.9%
SPY -19.1%
VTSMX -19.4%
Nas -51.2%
QQQ -55.9%
R2000 -2.2%
MDY +17.5%
VEURX -27.0%
50/50 Total Stock/Total Bond +0.42%
(includes Total Bond through yesterday)

Since Previous Closing Lows:

DJIA (9/21/01) +23.1%
S&P (9/21/01) +20.2%
SPY (9/21/01) +20.0%
W5000 Fund (9/21/01) +22.3%
Nas (9/21/01) +39.6%
QQQ (9/21/01) +43.1%
R2000 (9/21/01) +30.3%
MDY (9/21/01) +26.5%
VEURX (9/21/01) +22.0%

Since Previous Closing Highs:

DJIA (1/14/00) -13.5%
S&P (3/24/00) -24.0%
SPY (3/24/00) -22.8%
VTSMX (3/24/00) -24.7%
Nas (3/10/00; ) -60.6%
QQQ (3/24/00) -65.8%
R2000 (3/9/00) -18.6%
MDY (9/7/00) -6.1%
VEURX (3/24/00) -29.5%
___________________________

Previous Closing Highs

DJIA 11722.98 (1/14/00)
S&P 1527.46 (3/24/00) [back to 1530.09 intraday on 9/1/00]
SPY 153.56 (3/24/00) [back to 153.5938 intraday on 9/1/00]
VTSMX 35.58 (3/24/00)
Nas 5048.62 (3/10/00)
QQQ 117.75 (3/24/00)
R2000 606.05 (3/09/00)
MDY 101.4525 (9/7/00)
VEURX 29.85 (3/24/00)

Benchmark Closing Lows (lows since previous all-time highs):

DJIA 8235.81 (9/21/01)
S&P 965.80 (9/21/01)
SPY 97.28 (9/21/01)
VTSMX 21.40 (9/21/01)
Nas 1423.19 (9/21/01) (intra low -- 1387.06 on 9/21/01)
QQQ 28.19 (9/21/01) (intra low -- 27.20 on 9/21/01)
R2000 378.89 (9/21/01)
MDY 74.45 (9/21/01)
VEURX 16.85 (9/21/01)

Market Cycle Peak to Trough:

DJIA (1/14/00 - 9/21/01) -29.8%
S&P (3/24/00 - 9/21/01) -36.8%
SPY (3/24/00 - 9/21/01) -35.3%
VTSMX (3/24/00 - 9/21/01) -38.2
Nas (3/10/00 - 9/21/01) -71.8%
QQQ (3/24/00 - 9/21/01) -76.1%
___________________________

Index returns are price change only, ETFs and mutual funds including divs/distributions. Returns not guaranteed as to accuracy -- relying on unaudited third-party sources (may have missed a dividend or two, which would understate returns). Returns rounded.

-- posted by Rande

Top 187. Dec 28, 2001 7:50 PM

» JenL_2 - Re: The Latest -- 12/28/01

In response to message posted by Rande:

To illustrate:

<img src="http://chart.neural.com/servlet/GIFChart..." width=500 height=350>
VTSMX, VFINX, VEXMX Comparison 5 YR Chart

<img src="http://chart.neural.com/servlet/GIFChart..." width=500 height=350>
3 YR Chart

<img src="http://chart.neural.com/servlet/GIFChart..." width=500 height=350>
1 YR Chart

<img src="http://pvcharts.quicken.com/bin/icenter...." width=470 height=250>
YTD Chart

…..Jen

-- posted by JenL_2

Top 188. Dec 29, 2001 1:17 PM

» Q_out - Money Flow for the New Year

Last year I discussed Money Flow for the New Year. Now with data in for most of 2001 its time to review that discussion and look ahead to the year 2002.

The funds selected below are examples only which may have performed better or worse than the sectors as a whole, but I haven't made an attempt to find the cream of the crop.

"Here's a value fund," one will think.
Vanguard Value Index (VIVAX) has a year to date return of -13.15% according to Morningstar.

"Look at this dividend growth fund," says another.
Fidelity Dividend Growth (FDGFX) has a year to date return of -5.34%.

"Hey, bonds aren't so bad," thinks a third.
Vanguard Long Term Bond (VBLTX) has a year to date return of 9.49%.

"Ah, midcaps! That's the ticket.
S&P Midcap 400 (MDY) has a year to date return of 4.00%.

"GNMAs, I hear they're guaranteed."
Vanguard GNMA (VFIIX) has a year to date return of 8.35%.

"Wow, look at this utility fund!
Fidelity Utilities Income (FIUIX) has a year to date return of -18.4%

Although no one needs to be reminded, for the record, QQQ is down 24.5% year to date. Just staying with the S&P 500 would have lost 9%.

Last year I wrote, "The result -- and this is as close to a guarantee as you'll get on Wall Street -- is that investors in the aggregate will not be choosing to increase their contributions to tech funds, but rather to decrease them. Retirement contributions to tech funds could drop from 80% to 50%, 30% or less."

Wow, was that optimistic! Not only did contributions to tech funds drop, contributions to all stock mutual funds dropped, and dropped precipitiously. Consider the following Net New Cash Flows tallied by the Investment Company Institute for the first 11 months of this year.

January-November 2001

Fund Type	New Cash Flow (Millions)	% Allocation
Stock Funds	29,261	5.6%
Balanced	7,037	1.3%
Taxable Bond	76,507	14.6%
Municipal Bond	12,487	2.4%
Money Market	400,067	76.2%
	525,359

Net investment in stock funds was only 10% of the levels of 2000. It seems everybody was going to the money market funds for a temporary safe haven.

To compare this with the previous 2 years, in the first 11 months of 2000, $362.687 billion went into open end mutual funds. 82% went into stock funds (almost all tech funds), 39% went into money market funds, and 21% came OUT of balanced and bond funds.

In the first 11 months of 1999, $330.293 billion went into open end mutual funds. 49% went into stock funds, 51% went into money market funds, and 4% changed hands between balanced, taxable and municipal bond funds.

Notice that while the total new cash flow into the open end mutual funds increased 10% from 1999 to 2000, it increased by 45% from 2000 to 2001. Why? My guess is that it came out of individual stocks; both individual stocks in personal accounts and self-directed IRAs and company stock in 401-K plans. I knew people who were directing all of their 401-K money into company stock at Lucent and Home Depot, but not anymore. Instead its going into a money market fund where it'll be safe.

So, what will the typical employee do with their 401-K contributions this year?

In 2000, the prevailing attitude was to buy on the dips. The first 3 months went up like a rocket. A summer rally lent hope for recovery. But each dip got lower, and with each purchase the employee got a "better" share price.

By 2001, that typical employee had given up on tech stocks. In fact before long, he had given up on all stocks and just wanted a place to park his money until things got better. "Wake me up when its over." But the nightmare didn't end.

The Federal Reserve's valuation model compares the earnings return on the S&P 500 with the return from the 10-year Treasury. According to the Fed model, a risk premium must be added to the bond yield to get a fair comparison with stocks. Through the later half of the 90's the market went to higher and higher PE ratios which indicated that investors put the risk premium to 0. Wall Street had decided that the S&P 500 companies were as safe as the US government itself.

Then September 11th, Wall Street was shaken. The S&P 500 companies sent many of their people home. Those who remained at work sat down to watch TV. The US government did the same. Some of our best people died in a senseless, sudden attack. Large scale risk re-entered the marketplace.

The markets are still deciding how to value that risk. By October of next year, it should be fully reflected in share prices. Meanwhile, the rates on money market funds aren't very attractive.

Institutions see an economic recovery on the horizon and will be putting their cash into the market this year. The typical employee will be a year behind the curve again and will find the Guaranteed Interest Contract in his 401-K (if available) a mighty attractive option.

<img src="/files/mysites/qout/bhoestarts.gif" width=53 height=34 align="left">
Q_out
DISCLAIMER: My words and observations are general in nature, and are not meant as specific investment advice. Individuals should consult with their own advisors for specific investment advice.

-- posted by Q_out

Top 189. Dec 29, 2001 8:48 PM

» JenL_2 - Stayin' Alive

Barron's cover article for 12/31:

<img src="/files/mysites/Jen9/bullbear12-31-01.gif" width=200 height=200 align="left">Stayin' Alive

An extraordinary year tests bulls and bears, but doesn't extinguish hope

By Jacqueline Doherty

Looking back on 2001 it's tough to remember anything but September 11. The day that terrorists tore down the World Trade Center and ripped a hole in the Pentagon overshadows any merger or acquisition, corporate scandal or critical earnings report. The attacks not only destroyed much of New York's financial district and snuffed out thousands of innocent lives, but also changed the way companies and citizens alike calculate risk and conduct business.

Three months later our acute fear has faded, and images of the smoldering Twin Towers no longer make the evening news. But the ripple effects linger in corporate America in the form of higher costs for necessities such as insurance and security and sharply lower sales. All the more surprising, then, that the stock market, badly bruised in the aftermath of the attacks, has bounced back in spectacular fashion. The Dow Jones Industrial Average has risen 28% and the S&P 500 has climbed 23% from post-attack lows on September 21. In fact, they're both trading 6% higher -- the Dow at 10,136.99, and the S&P at 1161.01 -- than the levels at which they closed just prior to September 11.

As for the Nasdaq Composite, repository of technology and biotech stocks, happy days are here again, or at least expertly pretending to be. The index has soared 43%, to 1987.26, since hitting a three-year low of 1387.06 on September 21.

That's the good news. The bad news is that yearend brokerage statements still will show that stock investments in general posted negative returns for the second year in a row. With just one trading session left in 2001, the Dow is down 6.02% for the year. The S&P 500 has fallen 12.06%, and the Nasdaq, its fourth-quarter fireworks notwithstanding, has tumbled 19.56%.

Dow Jones Industrial Average

1. January 3: Alan Greenspan surprises the markets with first of 11 interest-rate cuts this year.

2. February 6: The party is really over: Cisco Systems reports disappointing earnings.

3. June 7: President Bush signs a tax-cut bill that will return $300 to almost every taxpayer this year.

4. July 3: European regulators block the General Electric/Honeywell merger, just two months before GE chief Jack Welch hands the reins over to Jeffrey Immelt.

5. September 11: Terrorists destroy the World Trade Center and attack the Pentagon, pushing the U.S. into war in Afghanistan in October. The stock market closes for four days.

6. November 30: Scandal-ridden Enron, the world's largest energy trader, files for Chapter 11 bankruptcy protection.

As the year unfolded, the financial casualties multiplied, beginning with the final spasm of last year's dot.com implosion. With so many Internet upstarts out of business, fledgling telecom companies found few demands for their service but increased demands on their time in bankruptcy court. The telecoms' demise in turn spelled trouble for telecommunications-equipment suppliers such as Lucent Technologies and Nortel Networks. Tech stalwarts such as Cisco Systems and Qualcomm also saw their shares plunge -- again -- as investors learned that technology is indeed a cyclical business. Cisco, standard-bearer for the Nasdaq, the New Economy and perhaps the bull market itself, finished Friday at 18.54, down 52% for the year, and 77% from its all-time high.

Old Economy companies weren't spared either. With more businesses shrinking or disappearing, real-estate owners suddenly had vacancies to fill. A bear market in advertising dampened the fortunes of media and entertainment companies. Virtually no one was in the mood to merge, acquire or issue new stock to the public, which means that some investment bankers are getting pink slips in place of bonuses as 2001 draws to a close.

The upshot: The longest-lasting economic expansion in U.S. history officially ended in March, according to the National Bureau of Economic Research. Although the Federal Reserve cut short-term interest rates 11 times during the course of the year, in an effort to jump-start the economy, that didn't stop corporate earnings, the stuff of which expansions are made, from falling right off a cliff. Brokerage-firm analysts expect 2001 earnings for the companies in the S&P 500 to decline 16%-17% from last year's levels, according to Thomson Financial/First Call. That compares with profit growth of 17% in 2000.

Company balance sheets likewise deteriorated in 2001, and the delinquency rate among corporations with junk bonds rose to 10.6%. In happier days -- the spring of 1995 -- the delinquency rate was as low as 1.4%. But nothing quite rivaled Enron's fall from grace. The world's largest energy trader managed to destroy $67 billion in market value and default on more than $10 billion of bonds and bank debt amid an accounting scandal that ultimately revealed this emperor had few clothes. The unraveling of Enron hurt not just the meek -- unsuspecting employees and stockholders -- but the mighty; J.P. Morgan Chase and Citigroup are both Enron creditors.

Enron's demise in 2001 encapsulates much that was wrong about the glory days of the 1990s. The company relied heavily on off-balance-sheet financing and pro-forma earnings that swept some ugly things under the carpet. Like many companies, it also fooled securities analysts and employed accountants with potential conflicts of interest. Enron was snared in its own web, a fate that may yet await other stock-market hotshots and the investors who backed them.

"To me, it shows the era of unfettered belief is over. Certainly, it should be," says Steve Galbraith, chief investment officer for U.S. equity research at Morgan Stanley.

Arguably the age of unfettered belief in stock-market strategists also is past. Although many strategists correctly predicted the longevity of the 1990s' bull market, collectively they failed to foresee the unhappy course that stocks took for much of this year and last. Most of the seers profiled, along with many money managers, expected the U.S. economy to rebound in the second half of 2001 and the stock market to climb to new levels. That didn't happen, owing in part to the attacks on September 11. The bulls still believe that stocks would have rallied smartly had Osama bin Laden kept his poisonous views to himself. But the bears counter that the U.S. economy already was in recession, and that companies -- and consumers -- are struggling all across the U.S.

A small cadre of strategists expected merely muted gains in 2001, making them the least wrong of the group. Richard Bernstein, chief U.S. strategist at Merrill Lynch, and Douglas Cliggott, chief equity strategist at J.P. Morgan, both predicted the Dow would hit 11,000 at the end of 2001. Right behind -- or is it ahead? -- of them was Thomas McManus, a chief investment strategist at Banc of America Securities, with a forecast of 11,500. But Jeffrey Applegate, chief investment strategist at Lehman Brothers, and Abby Joseph Cohen, chair of the investment policy committee at Goldman Sachs, both expected the Dow to finish the year at 13,000. Edward Kerschner, chief global strategist at UBS Warburg, didn't forecast the DJIA, but pegged the S&P 500's close at 1715, some 50% above current levels.

Last year's conservative trio has subdued views of 2002. Cliggott has turned downright bearish; he expects the Dow to fall 16% to 8500, and the S&P to fall to 950. Bernstein and McManus think the Dow will continue to trade at or near current levels. Merrill's man has a yearend target of 10,000, while McManus sees 10,400 in 12 months.

In the middle of the pack is Thomas Galvin, chief investment officer at Credit Suisse First Boston, forecasting a gain of 13%, to 11,400. Ever the optimist, Kerschner projects that fair value for the S&P 500 will be 1570 by the end of next year, some 35% above the index's current price.

The bulls and the bears disagree on just about everything, prominently including the magnitude of the profit recovery that investors now anticipate. According to Cliggott, the market has priced in a 15% gain in earnings for 2002. But he argues earnings will fall 5%, or end the year flat after accounting adjustments, making stocks 15%-20% too expensive. Kerschner, on the other hand, believes stocks will rise in the second half of 2002, as investors become more convinced of an economic and profit recovery.

"The market is going through a manic period right now," Kerschner says. "On the good days it focuses on the second half of 2002, and on the bad days it focuses on the near term." The near term is likely to be dominated by more earnings disappointments, more bankruptcy filings and more bad news in general.

The optimists and their opposites also differ on the outlook for consumer spending. The bears proclaimed the death of the U.S. consumer many months ago, but were proven wrong until September 11. Only then, as unemployment spiked, did American households rein in their spending sharply. Indeed, most merchants, with the possible exception of discounters such as Wal-Mart Stores, are decrying their worst Christmas season in a decade.

"Rising unemployment has a double-negative effect on consumer spending," Cliggott explains. Directly, it slows income growth. Indirectly, he notes, it makes even those employed more cautious.

Cliggott predicts that unemployment will continue to rise as corporations struggle to boost skimpy profit margins. In the aggregate, margins have fallen to 8.5% from 13% at the end of 1997. The last time that happened, from 1978 to 1982, the unemployment rate climbed to 10.5%. Cliggott expects unemployment to rise to 7.5%-8% from a current 5.7%, although most strategists see a high in the mid-6% range in the current cycle.

Stuart Freeman, chief equity strategist at A.G. Edwards, in St. Louis, is more sanguine about consumer behavior. Consumer spending, which accounts for almost a third of gross domestic product, has slowed in recent months but still shows year-to-year growth. Meanwhile, lower interest rates are likely to bolster household balance sheets, as the drop in rates has prompted a surge in home-mortgage refinancing. A broad tax cut, enacted earlier this year, and the recent rise in stock prices also will help.

Freeman expects the national unemployment rate to climb just to 6%-6.5%, based on a recent slowdown in the volume of state unemployment claims. Energy prices, too, have declined -- crude oil now fetches $20.90 a barrel, down from the mid-$30s last winter, and gasoline prices in many regions have fallen below $1 a gallon. "The drop in energy prices is really like a tax cut," he says.

Not least, consumers have benefited from surprisingly resilient home prices. While there are pockets of weakness in cities such as Palo Alto, California, and New York, home prices nationwide have risen about 1%-2% this year, notes Lehman's Applegate.

The bulls and bears continue to tussle about the stock market's valuation, chiefly because they have differing views about the prospects for corporate profits. According to Thomson Financial/First Call, the consensus estimate among strategists for 2002 S&P 500 operating profits is $49.35 a share, which means the index, at Friday's close, was trading for 24 times expected earnings.

Merrill Lynch's Bernstein, for one, argues that prices are still too high. Based on the prediction of Merrill Lynch's economics team, the S&P 500 will generate reported earnings of $37.45 a share next year, implying a price/earnings multiple of 31. Investors never lost sufficient interest in the stock market to allow P/Es to compress, a necessary precursor for a new bull market, he says.

"My definition of capitulation is when people say the future will be worse than the present," Bernstein says, noting that attitude surfaced only briefly in the sessions following the September 11 attacks. Instead, growth-stock managers are chasing tech stocks again, and the market's P/E is climbing.

To some degree investors have spent much of 2001 unlearning the lessons of the late, great bull market. For years the public was told to "buy on dips," but buying when stocks fell this year only led to bigger losses. Even the old adage about not fighting the Fed when it's lowering interest rates didn't work. To the contrary, those who bet against the Fed's 11 rate cuts were rewarded with positive returns.

"Expectations were much too optimistic," Bernstein concludes. "People believed that [lower] interest rates cured all and earnings were irrelevant."

While that might have been true in the late 1990s, when companies without earnings, and some without businesses, soared to stratospheric heights, lower interest rates have proven no quick fix for what ails the economy now. In recent years companies high-tech and low produced goods far in excess of demand, and the resultant overcapacity is best cured by time -- to shutter plants, lay off workers and lower inventories -- not reduced borrowing costs.

That said, the Fed's aggressive rate cuts this year could pay big dividends in 2002, according to Wall Street's bulls. "Eleven cuts in the federal-funds rate is likely to be quite stimulative," says Edward Yardeni, chief investment strategist at Deutsche Banc Alex. Brown.

Too stimulative, perhaps. Yardeni thinks the central bank could be forced to reverse some of its largess later next year and raise rates as the economy recovers. If so, he fears, deflation could become a problem in 2003.

Morgan Stanley's Galbraith fears that lofty stock valuations may keep prices range-bound in 2002, even if earnings bounce back up in the second half, as he expects. "I think we may have a multi-year period where stocks don't do a lot," he warns. "The S&P 500 is a terribly uninteresting place to be invested today." Instead, Galbraith believes stock-picking and sector selection will be key to achieving positive returns.

Another poor year for the S&P could mark the end of closet-indexing, a practice whereby money managers construct portfolios that mimic the index in order to avoid underperforming it. Investors may find little value in paying higher management fees for such products, says Galbraith, and even less in the virtues of relative performance. Instead, truly active management, via hedge funds, deep-value funds or aggressive growth funds, could regain supremacy, a process that already seems underway. Oakmark Select, managed by Bill Nygren and Henry Berghoef, for example, a concentrated portfolio of about 15 stocks, generated returns of 26% this year, and the Third Avenue Small Cap Value Fund, managed by Curtis Jensen (who is profiled in "Star Power") returned 15%.

Bullish strategists have few qualms about the market's valuation, given that inflation is tame and interest rates are low. By the end of 2002 the core consumer price index, excluding food and energy, will drop to 1.8% from a current 2.8%, Lehman's Applegate predicts. "Inflation falls going into an economic recovery, because it is a lagging indicator," he says. Capacity utilization is still below normal levels, and finding workers no longer is an issue, he adds.

CSFB's Galvin argues that high-priced tech stocks with minimal earnings have bloated the P/E multiple on the S&P. Without its tech components the index would sell for 17-18 times earnings, which is also below the P/E of 20 implied in popular valuation models that compare the yield on 10-year Treasury bonds, now around 5%, with the earnings yield on the S&P. With higher earnings and lower rates -- a combination Galvin foresees in 2002 -- the market's multiple has room to climb, he says.

Bullish strategists also wrap their case around declining inventories of manufactured goods, which should speed the revival of demand. Inventories this year have been cut by about $100 billion, equal to 1% of GDP. The decline has been swifter and deeper than in past cycles, says Tobias Levkovich, senior U.S. institutional equity strategist at Salomon Smith Barney. In the 1990-1991 slowdown, for instance, inventories fell by 0.6% of GDP over a two-year span.

Next year, however, purge could lead to splurge. In 2002, says Lehman's Applegate, "inventories will start contributing to GDP."

Still, Wall Street's leading seers don't predict a surge in capital spending. Abby Cohen of Goldman studies CEO attitudes to try to detect a favorable turn. "To have a more vigorous economic recovery, you have to have CEOs feeling better," she says. In 2001 corporate chiefs struggled with declining company earnings and watched their own net worth plummet along with the stock market. As they grow more comfortable with the notion that the economy is stabilizing and eventually will revive, it's likely they'll spend more freely again on advertising, inventory and new employees, Cohen says. In her view, the mood at the top is improving, but the spending spree of 1999-2000 is unlikely to be repeated for a while.

Which industry sectors are likely to lead the stock market next year? Yardeni casts his vote with health care, which he calls the big winner for the next decade. "The Baby Boomers will be excellent customers," he says.

Too, the government may become less adversarial to the industry as it turns to pharmaceutical and other health-care concerns for help in fighting the threat of bioterrorism. Yardeni expects drug-company earnings to grow by 10% annually in the years ahead, well above the 5%-7% growth he sees from other companies in the S&P.

But Salmon Smith Barney's Levkovich offers a contrary view, at least for the near term. The cost of health care will remain an issue, he says, especially as mid-term Congressional elections approach.

Morgan Stanley's Galbraith is recommending the shares of basic-materials companies, despite the miserable returns they've offered in recent years. Their earnings represent only 2% of the S&P 500's total per-share earnings, down from roughly 10% a decade ago. Yet Galbraith believes the group will show stronger returns on capital than investors expect, because they've been in recession for several years and haven't gorged on capital spending. In addition, their shares trade at low P/Es based on full-cycle earnings.

Conversely, Morgan Stanley's market-watcher holds a dimmer view of financial shares because of the superlative performance lately -- they now contribute 24% of S&P earnings, compared with only 8% in 1990 and 1% in 1973. In the past 10 years financial-services providers enjoyed an ideal climate in which merger activity boomed, globalization and deregulation created new opportunities to rake in advisory fees, and the democratization of the equity market sent trading volume soaring. In addition, disinflation boosted the value of securities held in inventory, and until recently, improving credit quality enabled companies to lower their reserves.

"This was the single best environment ever for financials," Galbraith says. "My guess is it can't get better from here."

As for retail stocks, bears on consumer spending advise either avoidance or buying discounters such as Wal-Mart and Target. But the bulls prefer companies such as Tiffany, which offer discretionary items to a well-heeled clientele. UBS's Kerschner likes retailers that cater to the Baby Boom generation, and those that stand to benefit from the "cocooning" trend in evidence since September 11, a group that includes Home Depot, Bed Bath & Beyond and appliance chains.

Tech stocks have lost their glamour in the past two years but not their ability to galvanize investment opinion, pro and con. Steve Galbraith believes the group is "too expensive" after its rally this fall. "I was a tech bull for eight weeks and it felt great," he says. "Earnings are going to surprise people on the upside, but valuations already reflect that."

Still, an element of sanity has returned to technology investing after the go-go years. One bullish sign: Goldman's Cohen will start forecasting Nasdaq levels again. She stopped doing so in early 1999 because the companies in the index had little in the way of earnings or cash flow. Cohen currently recommends a slightly overweight position in tech shares, but remains underweight in telecommunications.

The year now drawing to its inevitable close saw unusual turnover in the normally staid world of investment strategy. Elizabeth MacKay, Bear Stearns' former strategist, left Wall Street to attend Columbia Law School. Christine Callies left Merrill Lynch, and Greg Smith resigned from Prudential Securities. Marshall Acuff, a Salmon Smith Barney veteran, retired, and Byron Wien has stepped into the new position of senior U.S. investment strategist at Morgan Stanley, where he will continue to spout his own much-admired brand of wisdom. He's still skeptical about investor complacency, however. "The market is like my Aunt Rose," says Wien. "She didn't like to worry about anything," which of course concerns him.

Stock-market analysts like to study historical trends for their supposed predictive powers. And Wall Street's reigning seers repeatedly note that the market almost never falls three years in a row. Then again, before the 1990s, the U.S. stock market never produced double-digit returns for five years in a row. Which only proves that every rule has an exception, and that 2002 will be no cinch for investors. Nonetheless, happy new year.

Subscribe to WSJ & Barron's Online @ http://www.wsj

.....Jen

-- posted by JenL_2

Top 190. Dec 30, 2001 8:31 AM

» Kirk - Reports Suggest Economic Recovery

Reports Suggest Economic Recovery
Experts See Clear Signs Recession Is Fading
http://www.siliconinvestor.com/stocktalk...

By John M. Berry
Washington Post Staff Writer
Saturday, December 29, 2001; Page A01

For the first time in many months, a series of economic indicators, released yesterday, all contained solidly positive news, suggesting to many analysts that the recession that hit the U.S. economy last spring may end soon.

The Labor Department reported that initial claims for unemployment benefits last week remained below the 400,000 level for the third week in a row. That level of claims indicates that job losses have slowed and the number of payroll jobs has stabilized, analysts said.

Meanwhile, the Conference Board, a New York-based business research group, said its consumer confidence index jumped nearly nine points, to 93.7 this month, after being depressed in October and November following the Sept. 11 terrorist attacks. The increase brought the confidence index back in line with the University of Michigan's consumer sentiment index, which began to recover last month.

"The deterioration in current economic conditions appears to be reaching a plateau, led by a stabilizing employment scenario," said Lynn Franco, director of the Conference Board's Consumer Research Center. "Consumers' short-term optimism is no longer at recession levels, and the upward trend signals that the economy may be close to bottoming out and that a rebound by mid-2002 is likely."

Analysts drew similar conclusions from two Commerce Department reports. One showed that new orders for durable goods, excluding aircraft and defense items, rose 2.4 percent in November on the heels of a 4.1 percent gain in October. Orders for new motor vehicles rose substantially, to a level not seen since last spring, and high-tech orders, which had been falling since the middle of last year, were also up for the second month in a row.

The other Commerce report showed sales of both new and existing homes rose in November, with the former reaching a level not seen since January.

These positive signs are coming at the end of a year in which the U.S. economy has been struggling to rid itself of the nasty aftermath of the 1990s boom. As with a partygoer with a hangover, the passage of time is having considerable healing effects.

Repeated interest rate reductions by the Federal Reserve -- 11 of them -- have helped lower borrowing costs for many households and businesses. Low mortgage rates have kept the housing sector almost impervious to the recession. Some analysts say only the very low cost of borrowing money allowed automakers to offer the no-interest financing that spurred record vehicle sales in October.

Moreover, even though some key short-term rates are at their lowest level in nearly half a century, Fed officials may continue cutting rates until there is unambiguous evidence the slump has ended.

But while they stress the continuing uncertainties and risks facing the economy, a number of Fed officials have no real quarrel with the government policymakers and private economists who expect the economy to begin growing again shortly. A few analysts say the turnaround is already happening.

"The U.S. economy is often a thing of beauty as it comes out of recession and renews expansion," said economist Joe Liro of Stone & McCarthy Research Associates, a financial-markets research firm. "We expect to see such a transition during 2002's first half, leading to very strong growth by year's end."

While individual economists differ on how soon the economy will turn up and how vigorously it may grow in the second half of the year, Liro's predictions are close to many others'. For instance, the composite forecast from the 24 economists on the Bond Market Association's economic advisory committee is very similar to Liro's forecast.

Nevertheless, the economy still faces significant risks. High on the list is the possibility of another terrorist attack, even on a much smaller scale than those of Sept. 11, that could do renewed damage to fragile consumer and business confidence. If that happened, consumer spending and business investment could turn down, extending and deepening the recession. A serious new crisis in the Middle East or elsewhere might have the same effect.

Some analysts, such as those at Goldman Sachs & Co., also are concerned that even if unemployment stabilizes, it still will remain high enough to limit increases in household income in the coming months and restrain gains in consumer spending. The jobless rate last month was 5.4 percent, up from 3.9 percent in the fall of 2000, and even if the recession ends immediately, the rate is likely to go higher. Even optimistic forecasters say it could hit 6 percent, or perhaps 6.5 percent.

The failure of Republicans and Democrats to agree on provisions of an economic stimulus bill this month may keep growth a bit lower than if the bill had passed, a number of analysts said. Others worry that business investment in new equipment, particularly in the high-tech sector, which has been falling for more than a year, could remain weak through much of 2002. And slow growth or outright recessions for many nations that are U.S. trading partners may limit markets for American-made goods and services.

Nevertheless, in addition to the figures out yesterday, there have been numerous other signs recently that the economy's decline has begun to flatten out as the shock of the terrorist attacks has receded. For example, factory production is down 7.6 percent from its peak in June 2000, but last month it declined just 0.2 percent, following 0.9 percent drops in both September and October.

Despite Goldman Sachs's concerns about the consumer, it revised its forecast for growth in the April-June period to an annual rate of 3 percent, from 0.5 percent, saying, "Most of the economic news point to an earlier economic recovery."

Thomas M. Hoenig, president of the Kansas City Federal Reserve Bank, has seen a shift in the tone of the information he is getting as he talks with business executives in his sprawling district. Not long ago, he was hearing little but strongly negative comments.

According to manufacturers in the district, "things continue to be generally weak but less weak" than they were right after the terrorist attacks, Hoenig said in an interview. "Inventories strike me as coming down to the point that they may not fall much more. Some retailers were very careful in ordering and ran out of goods this month. I talked to others about how things are going and got very positive responses."

Hoenig said the signals still are mixed, but they are "more positive than I expected," adding that one executive told him, "I am beginning to think we are at the bottom."

What everyone expects to lift the economy off that bottom is the same thing that always happens when manufacturers, wholesalers and retailers decide they have reduced their stocks of unsold goods to an acceptable level, given the amount of sales they expect to make.

In the boom of 1998 and 1999, many firms geared production to meet rapidly rising demand for goods and services. But demand began to falter, particularly for high-tech equipment in the spring of 2000, and the stock market bubble that had been inflated in part by those spending expectations burst. Households began to trim spending plans, too. Suddenly, companies found themselves with swelling stocks of unsold goods and weaker sales prospects.

In response, orders for new goods were cut. The resulting drop in production hammered manufacturing firms, which have shed 1.22 million jobs since mid-2000. Over that period, the slashing of inventories has reduced the U.S. economic growth rate by a full percentage point.

With sales firming since September, particularly for new cars and light trucks, stocks of unsold goods are being reduced in the last three months of this year at an annual rate of about $100 billion, the sharpest reduction in history, according to several analysts. If firms just stopped cutting inventories -- without rebuilding them -- it would add 4 percentage points to the growth rate, if that happened in a single quarter.

Economists at Macroeconomic Advisers, a St. Louis forecasting firm, expect that to happen in the first three months of the new year. That's why their optimistic forecast calls for the economy to grow at a 1.7 percent annual rate in the first quarter.

Few forecasters expect the inventory swing to occur that quickly, but it is the powerful force that most are counting on to get the economy moving upward once more.

-- posted by Kirk