Mid-year Market: Stuck in the Middle Again
LIKE A TEAM CONFUSED BY A LOUSY halftime pep talk, the stock market has started the third quarter with a sloppy, uninspired performance.
Knocked back on their heels by a run of subpar profit news from technology companies and unnerved by a bounce in oil prices, traders have spent the past two weeks in a pattern of anxious, tentative selling. As a result, the key indexes have sagged toward the lower part of the tight trading range that has prevailed for what seems like forever, but has really only been seven months.
The Dow Jones Industrials last week slipped 69 points, or 0.7%, to finish at 10,282. The S&P 500 dropped 12 points, or 1.1%, to 1112, placing the benchmark about 3% above the 2004 low set in May, and up less than one point on the year.
The Nasdaq Composite was thrown for a 3% loss last week, falling 60 points, to 1946, as a succession of big software companies fell short of hoped-for results and Yahoo! merely met published forecasts.
The software shortfalls -- from Veritas Software, Siebel Systems, BMC Software, Computer Associates and others -- changed tech investors' primary question from when corporate IT spending would resurge to whether it will. (See Tech Trader for more on the group.)
Similar to the man who drinks in a bar all night and never gets one on the house, investors reacted nastily to Yahoo!'s on-target earnings, clipping its shares by 11% (after the stock had risen 50% in the first half). Now, with the prime weeks of earnings reporting poised to begin, the indexes sit in a bit of a hole, with the S&P down 2.5% this quarter and the Nasdaq off 5%.
The itch to sell into earnings news was soothed a bit Friday by General Electric's report of a slight gain in its second-quarter net, which topped forecasts by a penny at 38 cents a share. More than the results themselves, GE's comment that it detects the strongest economy "in years" seemed to offset gathering concern that a broad slowdown is setting in, based on soft retail-sales and job numbers.
The slim gains Friday lent hope to those faithful investors still banking on strong profit growth to boost stocks, despite the evidence of the past two quarters that it's not always the way the story goes. The refrain is familiar: Rising earnings will carry stock prices upward, as soon as "extraneous" concerns about oil, Iraq and presidential politics abate. Earnings forecasts have climbed, even as stocks have stagnated, true believers add.
Pulling apart profit expectations can be instructive. It's true that estimates have risen over recent months, but a good chunk of the increase has come from fatter expected energy profits -- driven by those same high oil prices the bulls consider a weight around the market's neck.
S&P 500 company profits are seen growing 19.5% over year-earlier levels, according to Thomson First Call. (Most observers think they'll easily top 20%.)
Yet 2.6 percentage points of that 19.5% projected growth is attributable to the energy sector, which is seen showing 49% gains. Just two months ago, second-quarter energy earnings were expected to rise a mere 8%. So, sure, forecasts have gathered steam, but largely in a part of the market most investors don't pay up for.
The fact that the market has weakened ahead of earnings season may suggest that the upbeat scenario has a shot; in earlier quarters, stocks were firm going into the reporting period.
There are also some indications that stocks are nearing the kind of technical "oversold" condition that has recently foreshadowed a decent -- if fleeting -- bounce.
Making a buck with smart stock-picking has become tougher than usual this year, as the market trades almost as a single piece of merchandise. Piper Jaffray strategist Brian Belski notes that stocks are moving in synch to a degree not seen in five years. This has led more investors to focus on pan-market clues about short-term inflection points in the indexes. No doubt, some market commentators this week will begin comparing the latest pullback to those in May and March, which ended with tradeable rebounds.
Traders are now conditioned to buy when the indexes stretch toward the lower end of the long-standing range between S&P 1080 and 1160. It could work again. But it should also be remembered that, after they were good and conditioned, Pavlov's dogs were eventually denied their food.
THE SWIFT, HARSH JUSTICE GIVEN COMPANIES that disappoint investors has raised the stakes in that quarterly Wall Street game called, "Predicting Surprises." Getting a fix on which companies are candidates to shock or amaze the market has become a preoccupation of analysts and strategists. Anticipate the anticipators, seems to be the objective.
Vadim Zlotnikov, Sanford C. Bernstein's two-hatted equity and technology strategist, sifted for tech firms for which the Street has set a low or high hurdle.
The former group includes companies for which formal second-quarter forecasts incorporate decelerating sales and lower margins versus the prior quarter's. The idea is that these companies should have an easier time meeting or beating the expected numbers. There were 13 such "safer bets," according to Zlotnikov, including Microsoft, Motorola, Taiwan Semiconductor and Automatic Data Processing, as well as Amazon.com and Intuit.
The list of tech issues for which the market has set demanding expectations -- accelerating sales and expanding margins -- is more than twice as long, a sign of how aggressive investors have become in setting their sights. One of the stocks Zlotnikov named as vulnerable to disappointment -- Siebel Systems -- has already profoundly disappointed. Others on the list that have yet to report include Nortel Networks, Maxim Integrated Products, KLA Tencor, Microchip Technology and Novellus.
Quantitative analyst Gary Tapp of SunTrust Robinson Humphrey applied his earnings-surprise model to stocks in his firm's coverage universe. Among the large stocks that he says seem likely to deliver upside surprises are Gillette, Aflac, Colgate-Palmolive and L-3 Communications. Of those, Aflac and L-3 also score well on his valuation screen.
Tapp's potential disappointers include BB&T, Eli Lilly, Schering-Plough and King Pharmaceuticals, with Lilly and Schering more exposed to negative price reactions, owing to heftier valuations.
Watch for a scorecard on these calls later in the earnings season.
AT SOME POINT IN DECADES PAST, the daily television audience overtook national newspaper circulation. To the surprise of some, the Republic has survived. But has its character changed in a way that remains important?
This question is prompted by the seemingly inexorable, and recently accelerating, increase in computer-driven program trading as a proportion of all market activity, a phenomenon that has some observers wondering whether something fundamental has changed in the way the market operates.
The New York Stock Exchange reports weekly on program trading activity, which includes any trades comprising the simultaneous purchase or sale of at least 15 different stocks with a total value of $1 million or more. In eight of the past nine weeks, program trading has accounted for more than 50% of all NYSE trading volume. In the week ended June 25, it came to 70.5% of volume. That result was distorted by the annual rebalancing of the Russell indexes, which involves lots of mechanical maneuvering by index funds.
By comparison, this percentage often held below 40% last year and three years ago generally came to 20% to 25%.
This surge in activity is partially attributable to the fact that 15 stocks and a million bucks aren't what they used to be, so more activity falls under the program definition compared to years past.
But changes in the way institutional investors transact business is the real story. Mindful of trading costs, more professional traders are using services offered by big brokerage houses that slice buy and sell lists into agglomerated, computer-executed orders.
There has been enormous growth in certain kinds of "black box" trading strategies, too, in which machines look for minute pricing anomalies. The disproportionate influence of short-term-oriented hedge funds and sell-side trading desks also contributes to the proliferation of highly tactical, penny-skimming activity.
For most investors, the question about this trend is, "To what effect?"
That's far from clear.
Many veteran investors remember both the days when the NYSE closed on Wednesdays to catch up on paperwork and when the sinister, anti-human computer HAL from 2001: A Space Odyssey haunted first-run theaters. To them, the encroachment of disembodied trading must be an insidious force, even if they can't articulate why.
There's a superficial assumption among many that somehow program trading exacerbates market volatility. And yet program activity's recent expansion has occurred in a period of persistently declining volatility. Much program-type order flow is, in fact, arbitraging away anomalous price moves.
In a Hole: Hit by subpar profit news from tech companies and unrattled by a bounce in oil prices, traders have spent the past two weeks in a pattern of anxious, tentative selling.
A more subtle line of argument holds that the instantaneous, mechanistic trading leaves no room for human discretion, patience or nuanced thinking, possibly turning away a certain type of opportunistic trader from the market. This isn't measurable, even if it is plausible.
FIRST, THE DISCLAIMER.
Barron's wrote favorably about the prospects for Healthsouth two years ago, having mistakenly taken the company's financials at face value in order to argue the stock was unduly cheap at a price around 7. Following the article (which carried the same byline as this column), the stock promptly rallied to 11, for some handsome but ultimately fleeting profits.
Only months later, news would break that founder and then-CEO Richard Scrushy and other executives were being accused of criminal fraud for systematically inflating cash flow and asset figures. Scrushy is due to stand trial soon. The stock -- de-listed from Nasdaq and widely scorned -- sank below a dollar.
But, improbably, the physical-therapy and outpatient-surgery company survived without being forced into bankruptcy protection. The company's bonds once languished near 40 cents on the dollar, but now trade at par, a sign that creditors are comfortable with Healthsouth's finances.
Some influential equity investors, too, are beginning to warm to the company's prospects, though it should be noted that the stock remains extraordinarily speculative. The shares, which trade actively on the over-the-counter "pink sheets," have nearly quadrupled in the past year, to about 6. New management has impressed some investors as forthright and capable. CEO Jay Grinney, a former senior executive at hospital giant HCA, joined the company in May and recently gave a well-received business update to a heavily attended investor meeting.
He asserted that the company is on track to produce $650 million in earnings before interest, taxes, depreciation and amortization this year. Less than half of that will go to interest on about $3.3 billion in debt, giving the company plenty of financial wiggle room. The company also has about $400 million in available cash.
Grinney reportedly expressed an intention to prune the business judiciously and to create the kind of financial controls that never existed under Scrushy. A small sign of financial discipline came last month when he shuttered a hospital that was losing $500,000 a month. One of Grinney's next tasks is to hire a chief financial officer.
It's worth noting that Grinney left HCA -- a once-troubled but now solid company -- for Healthsouth, and was awarded one million stock options upon arrival. They carry a strike price of $5.21. His newly hired chief operating officer got 105,000 options struck at $6.
This means the new top executives have more than just their professional pride riding on the turnaround of Healthsouth.
股市再度陷入胶著状态
就像一支球队中场休息时被一番莫名其妙的鼓动性话语搞昏了头似的，第三季度伊始股市的表现就萎靡不振。
由于一系列科技类公司的收益低于预期，而油价又开始出现反弹，过去两周来忧心忡忡的交易员们一直在小心翼翼地卖出手中的股票，其结果就是，主要股指都跌向了最近7个月来窄幅波动区间的低端，不过股指的这一窄幅波动态势目前似乎还看不到结束的迹象。
道琼斯工业股票平均价格指数上周累计下跌了69点，降至10,282点，跌幅0.7%。标准普尔500指数累计下跌了12点，降至1112点，跌幅1.1%，该指数目前较其5月份创下的2004年低点高约3%，但今年迄今为止的累计上涨量还不足1点。
那斯达克综合指数上周累计下跌60点，跌幅3%，降至1946点，原因是一系列大型软件公司的业绩未能达到预期，而雅虎(Yahoo!)的业绩也只是刚刚达到它自己的预期。
由于Veritas Software、Siebel Systems、BMC Software、冠群电脑(Computer Associates)等软件公司的业绩未能达到预期，科技股投资者心头的主要疑问已经从企业的信息技术支出何时将会回升变成了这种支出是否还会回升。
就像在酒吧里畅饮了一夜后才发现，还是要自己买单一样，投资者现在蜂拥抛售业绩勉强刚达到预期的雅虎公司股票，导致该股下跌了11%(在此之前，雅虎的股价今年上半年累计上涨了50%)。在收益报告发布期的高峰即将开始之际，主要股指目前都处在不佳状态，标准普尔500指数本季度累计下跌了2.5%，而那斯达克综合指数本季度的跌幅为5%。
投资者因企业收益报告不佳而抛售股票的冲动上周五有所缓解，当时通用电气(General Electric)宣布，第二季度净利润有所上扬，该季度每股收益为38美分，较分析师的预期高1美分。除了这一业绩本身之外，由于通用电气还发表评论说目前的经济形势是数年来最好，投资者越来越担忧美国经济增长即将全面放缓的心情似乎得到了缓解。零售额的疲软和就业数据不理想使人产生了这种担忧。
对于那些坚信企业利润强劲增长将提振股价的投资者而言，股市上周五的小幅上扬又给他们带来了一线希望，尽管过去两个季度的情况表明，事情并非总是如他们所想的那样。这些人的想法是：一旦人们对油价、伊拉克局势和总统选举等事情的不必要担忧消退下去，企业不断增长的利润就将推动股价上扬。这些人还说，尽管股价近来一直萎靡不振，但真这期间企业却一直在上调利润预期。
对企业的利润预期作一番分析研究是有益的。诚然，企业的利润预期近几个月来一直在上调，但增加的利润预期值中有相当大一部分来自能源业，而这正是油价上涨造成的，但在那些看好股市前景的人眼中，油价上涨却是对市场总体不利的一个因素。
Thomson First Call预计，标准普尔500指数成份股公司的利润将较上年同期增加19.5%。(多数观察人士认为这一涨幅将轻松超过20%。)
但19.5%这一预期增幅中的2.6个百分点应归功于能源业， 该行业的利润预计将较上年同期增长49%。而仅在两个月前人们还预计，能源业第二季度的利润仅会较上年同期增长8%。显然，能源业利润增长是造成企业利润预期上调的主要原因，而这却并不能使大多数投资者受益。
在收益报告发布前股市表现一直疲弱可能意味著，股市存在著上扬的机会；在此前的几个季度，股市都是以上扬的姿态进入收益报告发布期的。
还有一些迹象显示，股市正接近技术性“超卖”状态，这预示著股市可能会出现反弹，尽管也许只是昙花一现。
今年在选股方面要想有出色的表现比往年更难了，因为各部类股票几乎是一损俱损，一荣俱荣。Piper Jaffray的策略师布赖恩?贝尔思基(Brian Belski)指出，股市表现趋同的程度为5年来所未见。这使更多的投资者将关注点放在了能显示股指近期转折点的宏观性线索上。无疑，一些市场评论人士本周将开始把股市最近的这次回调与今年3月及5月发生的回落相提并论，这两次股市回调都以反弹而告终。
现在，每当标准普尔500指数跌至1080点至1160点这一长期波动区间的低端时，交易员们就入市买进。这一策略可能会再度奏效。但也应记住的是，即使是条件反射，重复的次数多了可能也会失灵。
