Market Watch : Wall Streeters Find This Market a Tough Call
“Buy low, sell high.” That simple phrase has been the ticket to big profits on Wall Street since the stock market began.
The problem, however, is figuring out what exactly is high and what is low. Even the most skilled of Wall Street’s analysts acknowledge that they often can’t make that call accurately.
But with the Dow Jones industrial index plunging nearly 200 points in just a little more than two weeks, some are wondering whether the market has hit a near-term low. In other words, this just might be the ideal time to buy.
“All of the potential dangers, both domestic and international, already have been reflected in market prices,” said Geraldine Weiss, editor and publisher of Investment Quality Trends in La Jolla. “I don’t think the market will immediately retrace what it lost. There are too many things to work out first. But by the end of the year, I expect the market will at least retest the 3,000 level (on the Dow), and I think it will go significantly higher.”
Mark Green, economist at Wells Fargo Bank in San Francisco, noted that during the past week the market has absorbed a number of shocks.
First, government figures on the gross national product were revised, revealing a much weaker-than-expected economy. Then, stocks were buffeted by a series of worse-than-expected earnings reports, with companies ranging from Transamerica to Xerox reporting sliding quarterly profits.
Then on Friday, the government released unemployment figures that were shockingly weak, Green added. Most economists were expecting modest growth in employment during July, but payrolls actually shrank by 219,000 jobs during the month. Although the number was skewed by the layoff of about 160,000 temporary census workers, it still translated into the highest national unemployment rate in two years.
Worse still was Iraq’s invasion of Kuwait, which threw international oil production into question and sent prices skyward. That revived the market’s worst nightmare: “stagflation”--a stagnant economy coupled with high inflation.
Stagflation would discourage the Federal Reserve from paring interest rates, which could devastate corporate earnings and stock prices, market experts believe.
“It is a very unpleasant set of circumstances for equity prices,” lamented David Hale, chief economist for Kemper Financial Services in Chicago.
The fact that the stock market absorbed all of this negative news and still was able to hold up above the 2,800 level is actually a bullish sign, Green said.
“If what has driven the market so far is based on fundamentals, we have probably gotten through the worst of it, and there could be some real buying opportunities,” Green added.
Analysts note that the stocks of healthy companies, which only a few weeks ago carried relatively high price/earnings ratios, are now trading at much more attractive levels (see chart).
R. Earl Hadady, president of Hadady Corp. and publisher of the Bullish Consensus newsletter in Pasadena, agrees: “In general, we are looking for a positive market this week. Typically, we tend to see the pendulum swing too far one way or the other, and I think it went too far on the negative side.”
Not everyone agrees, of course.
Peter G. Eliades, publisher and editor of Stockmarket Cycles in Los Angeles, said he thinks that the market could rally over the next few weeks. But after that, he is calling for a long-term slide in stock prices.
Regardless of the week’s losses, stock prices are still high when you look at historic trends, he said. And he sees further dangers from the fact that, even when the market has rallied, only a small percentage of stocks were soaring.
“I think the probability is increasing that we are about to see a major stock market top,” he said. After that, prices are likely to continue tumbling for two or three years, Eliades predicted.
Market experts at Merrill Lynch Capital Markets also believe that the market is vulnerable to a major drop.
“Our valuation models still show a market that is 15% to 20% overvalued,” said Richard Bernstein, Merrill’s manager of quantitative analysis. “If the economic reports continue to show a weakening economy and the situation in the Middle East doesn’t clear up, it is the worst possible combination for stocks.”
Nevertheless, some remain optimistic.
“I think (last week) cleansed the market of a lot of selling that would usually take three weeks to three months to work itself out,” Weiss said. “The market has already discounted a great deal of bad news, and the market never discounts the same news twice.”
Added Green: “The data shows that the economy has already gone through a period of serious weakness--what economists have been calling the ‘soft landing.’ But the soft landing has already occurred, and we are now taxiing down the runway waiting to take off again.”
HOW STOCKS HAVE FALLEN
The market’s plunge so far has been much worse for some stocks than others. Here are 20 stocks in four industries, and where the stocks stand relative to earnings, a basic value measure. The P/E, or price-earnings ratio, is the stock price divided by the most recent 12 months’ earnings per share. A high P/E usually means investors expect the firm’s earnings to grow at a faster-than-average pace.
CONSUMER STOCKS
52-week Fri. Pct. drop Stock high/low close from high P/E Circus Circus 70 7/8-42 1/8 55 5/8 -22% 21 Walt Disney 136 1/2-101 1/2 109 1/2 -20% 19 Wal-Mart 36 3/4-18 1/2 30 3/8 -17% 30 Philip Morris 50 7/8-36 46 1/2 -9% 13 Merck 91 1/8-67 85 1/2 -6% 21
HIGH-TECH STOCKS
52-week Fri. Pct. drop Stock high/low close from high P/E Tandem Computers 30 1/8-17 3/8 17 3/8 -42% 14 Intel 52-28 1/4 39 1/4 -25% 16 Microsoft 80 3/4-26 7/8 63 1/4 -22% 28 Sun Microsystems 37 1/8-13 3/8 30 3/4 -17% 26 IBM 123 1/8-93 3/8 108 1/8 -12% 16
INDUSTRIAL STOCKS
52-week Fri. Pct. drop Stock high/low close from high P/E Ford Motor 54 5/8-39 3/4 39 7/8 -27% 6 Alcoa 79 5/8-59 3/4 65 1/2 -18% 8 Westinghouse 39 3/8-30 3/4 34 1/4 -13% 10 Deere 78 3/8-52 3/4 69 3/4 -11% 12 General Electric 75 1/2-52 3/4 69 3/4 -8% 15
FINANCIAL STOCKS
52-week Fri. Pct. drop Stock high/low close from high P/E Security Pacific 54 7/8-29 1/2 30 -45% 5 BankAmerica 36 3/8-22 3/8 22 3/8 -38% 4 NCNB 55-33 1/2 33 7/8 -38% 6 Wells Fargo 87 1/2-62 62 -29% 5 Ahmanson 25-16 1/8 18 -28% 8 S&P; 500 index 369-323 344.86 -7% 16
