Topping 10,000 -- Again
MAKERS OF TENNIS RACKETS and golf clubs constantly tout bigger and better "sweet spots." These days Wall Street's stock hawkers are echoing the sales pitch, talking of "the cyclical sweet spot" they believe the economy and market are enjoying. And investors are embracing the pitch, willing to lay money on the notion that a classic and powerful cyclical upturn is at hand.
Last week, it helped that hazardous data were in relatively short supply. The economic calendar was thin, and the earnings-preview season had yet to kick in, allowing the low-volume resilience of the market to carry through for one more week.
Enthusiasm over the trajectory of the economic cycle, and greater comfort that the Federal Reserve won't soon send the band home, were evident as the Dow Jones Industrial Average reclaimed five-figure status, rising above 10,000 for the first time in 18 months.
The Dow added 179 points, or 1.8%, to finish at 10,042. The Standard & Poor's 500, in a performance more closely observed by professionals, climbed 12 points, or 1.2%, to hit a new recovery high of 1074. The Nasdaq Composite, lagging again as some of the tech leaders came under selling pressure, rose 12 to 1949.
The Morgan Stanley Cyclical index registered a gain about twice that of the broad market, as makers of heavy things were in great demand. US Steel shares jumped 16% and the rest of the basic materials sector jumped. Then again, this is a small group that will move fast as big institutions raise their commitments to it.
Much of the excitement came as International Steel Group -- a collection of three once-failing steel makers now unburdened of onerous pension obligations -- raised $462 million in an initial public offering. The stock surged by 25% Friday in its debut.
The question hovering in little dialogue bubbles above all the action is "When will the cyclical stocks take full account of a brisker economy?" Just as with other questions about when it might be advisable to play more defense in stock selection, the market's answer, for the moment, is "Not just yet."
Media stocks also took wing, despite generally muted enthusiasm expressed by a slate of industry executives at two conferences during the week. They were measured in their forecasts for modest ad-revenue growth next year.
But, in telling fashion, the Street chose to believe the executives were playing possum. If there's a theme to this faith in the cyclical sweet spot, it is the widespread belief that lots of good news "isn't yet in the numbers." Among several uncertain bets that stock buyers are making at certain levels, one unexplored wager is on the coyness of Wall Street stock analysts.
For investors to see opportunity in a market that, by many measures, holds few great values, it is helpful -- if not compulsory -- to believe that analysts are low-balling their corporate profit forecasts for 2004.
Right now, industry analysts are collectively projecting 2004 earnings for the companies in the S&P 500 will rise about 12%, to $61.59. That's a healthy annual increase in operating profits, above the long-term trend, but a sharp deceleration from the current year's 18% expected rate.
If the analysts are right, it means the market is trading above 17 times next year's numbers. That's a valuation level investors have been willing to tolerate in periods of low inflation such as this one, but it hardly represents compelling value by historical standards.
Analysts usually begin the year by over-estimating likely profit performance. To bet that they are being overly conservative goes against most of history. However, the bulls might have some ammunition, given that the earnings forecasts of top-down strategists are rather close to those of the industry analysts. The fresher 2004 forecasts from strategists now doing their one-year outlook work are coming in well ahead of the analysts' consensus, with some in the $63 range.
Strategists, who take a big-picture approach to estimating corporate earnings, based on GDP trends and other broad factors, typically post forecasts that are far below the composite predictions of individual stock analysts. But now, the strategists' 2004 forecast is almost identical to the bottom-up number, once several outlying strategists' forecasts are removed.
Chuck Hill of Thomson First Call says it makes sense to eliminate the strategist forecasts that seem not to conform to the scrubbed "operating" earnings used by most, if only for consistency's sake. Hill says the general rule over time is that the bottom-up numbers tend to start out a good deal above the top-down forecasts. Then, reality brings true earnings right in the middle.
There are a couple of ways to interpret the current situation. Maybe strategists, taken by the giddy bulge in GDP growth last quarter, are getting a bit aggressive in predicting fundamental improvement to underpin their generally bullish market calls.
Or, it's possible that companies and, in turn, the analysts who cover them, are playing it close to the vest after having over-estimated profits through the bear market. Hill believes there's a chance the latter is closer to the truth, given the fact that profits have surprised to the upside by more than the historical degree in the last few quarters.
It could be that analysts will need to bump estimates higher, or cut them less than usual. The market, mind you, may already have taken account of this, as suggested by its ho-hum response to the most recent blockbuster earnings period.
THE IDEA OF BREADTH is in heavy rotation on the play lists of Wall Street's DJs these days. Commentators are celebrating the breadth of the manufacturing recovery, as measured by recent purchasing managers' surveys. They are talking up the breadth of -- and this is fast becoming a cliché -- an expected "synchronous global acceleration" in economic growth. Finally, the breadth of the market itself -- with more issues rising than falling -- is being offered as proof of its health.
On this last point, the recent new all-time high in the Value Line Arithmetic Index, sometimes called the most democratic of all indexes, is providing plenty of ammunition for the bulls.
It's true that this quirky index has recently scaled a new peak. But the view that this indicates "the average stock" is at a new high is badly misplaced.
Some background: The Value Line Arithmetic Index is an equal-weight gauge of about 1,675 stocks. Each stock has the same influence on the index, and every day it is rebalanced so that it is equal-weighted at the start of the next session. Each stock's one-day percentage increase or decrease is expressed as a ratio (a 5% rise is 1.05). Then all the ratios are added together and divided by the number of index stocks.
For technical reasons, the index has an upward bias. It tends to capture the upside of market moves without always reflecting as much of the downside.
True, the Value Line Index has been benefiting from good market breadth (until very recently) and it is being helped by the huge outperformance of small stocks this year. But that doesn't indicate that the so-called average stock is riding at a new high.
According to Wilshire Associates, as of Wednesday only 10.6% of the 5,258 stocks in the comprehensive Wilshire 5000 index had hit all-time highs this month. And just 26% of those stocks had hit a 52-week high in December, despite the ascendance of the major index to new highs for the year.
SINCE WALL STREET'S LONG climb began in March, the market has been unshakable and impervious to rattling as it's rolled upward. The pace of the indexes' rise has been so steady, in fact, that all measures of volatility have been scraping multiyear lows.
That's undisputed. More a matter of controversy is whether this placidity is peaking and might soon give way to greater chop in the waters.
The newly reconstituted CBOE Volatility Index, which measures the options markets' expectations for future index moves, dropped to a new low below 16 on Thursday as the indexes rallied smartly. Some traders have been saying this index was "too low" and showed "too little fear" since it began sliding into the low-20s. So the question of how low is low remains unanswered.
Richard Repetto, an analyst at Sandler O'Neill, keeps a measure of intraday stock volatility, the source of market makers' profit opportunities. This gauge has just about collapsed in recent months.
Typically, trying to game market tops by monitoring a low volatility index is a less-perfect science than handicapping market bottoms, which tend to coincide with volatility spikes. And there are defensible arguments for why the market has remained so calm.
Hugh Johnson, strategist at First Albany, points out that, while volatility is down sharply from the extraordinary wildness of the 1998-2002 period, week-to-week moves in the S&P 500 are simply back to their average level of the post-1980 period. Johnson also notes that volatility pretty much always declines in an up-trending tape, and therefore may continue to drop if the market catches another breeze and climbs some more.
The gentleness of the indexes' movement also means that the options markets' volatility gauge, which now goes under the symbol VXO, is not low relative to actual market volatility. In fact, the VXO still builds in enough of a premium to realized volatility that plenty of investors are busily selling options and hoping they expire worthless.
Another reason offered for the new, less jumpy market is the active presence of some 6,000 hedge funds, many of which trade tactically on every fathomable side of a stock or index, chasing small gains and booking them fast. Just as the academics have always said, the presence of many speculators will tend to arbitrage away anomalies and smooth the market's path.
Then there are some underappreciated structural forces that perhaps are acting to damp market moves. A lot of this falls into the category of "noise trading," computer-driven strategies directed at capturing minuscule, near-random pricing variations. Some of this sort of nondirectional trading activity goes under the moniker of statistical arbitrage, one of the hottest areas of hedge-fund growth. By some estimates, up to one quarter of Nasdaq's daily volume comes from these black-box funds.
These strategies involve sifting through databases of stocks' long-term tick-for-tick price histories, searching for noise patterns and tendencies, running them through an algorithm and then flinging out orders to step in front of a likely move of a few pennies. A tiny percentage of these orders gets executed. But the computer's feelings aren't hurt and it just keeps churning out the orders.
Consider, too, that New York Stock Exchange average daily volume is actually down slightly year to date. Meanwhile, the portion of volume represented by computer-propelled program trading now sits above 40%. That means, roughly, that the Big Board's non-program volume is down some 12% this year versus 2002.
Of course, much of what is categorized as program trading is genuine institutional investment flows, but falls under the program-trading heading based on an NYSE definition that's remained static for years. A big reason for the surge in program trading is the vogue for "VWAP" strategies, in which brokers promise to get clients into or out of stocks at their volume-weighted average price.
Still, the drop in non-program volume and the surge in activity for broad-market trading instruments such as index futures and options and exchange-traded funds raises questions about how much "real money" has been committed to stocks lately. Index-futures volume at the Chicago Mercantile Exchange was up by 33% this year through November, while straight stock volume on the NYSE has stagnated. CBOE index options volume posted a 10% rise, similar to this year's increase in ETF turnover.
Taken together, it shows the market to be increasingly populated by traders and hedgers treating the game as a monolithic stock market rather than a market of stocks, contrary to the old Wall Street dictum.
How to interpret this reality or how to incorporate it into the investment process isn't clear. Obviously there are long-term drags on volatility, but that doesn't shed much light on whether the market should be expected to get more turbulent and riskier in the coming year.
There have been plenty of gut-feeling calls by fund managers and market strategists suggesting that the market will become more volatile in the coming year. Individual stock risk, as opposed to market-wide risk, has seemingly climbed a bit, as the punishment of disappointing stocks gets more merciless. (See AutoZone, Amgen and Washington Mutual for recent examples.)
Merrill Lynch researchers produced a report recently that showed the benefits of directly "owning" volatility, calling it a near-perfect diversifier for a stock portfolio. The CBOE is working to develop tradable vehicles on the volatility index, and Merrill shows that a simulated 10% position in volatility with 90% in an S&P 500 proxy would have outperformed the S&P 500 alone by five percentage points a year since 1986.
For volatility watchers, next Monday might be an occasion to commemorate. It's the 10th anniversary of the all-time low in the VIX, which hit 9.2 on Dec. 22, 1993. That proved a nice "buying opportunity" for volatility, given that 1994 saw a surprise Fed tightening, a bond-market crash, the rise of inflation fears and massive concern about government health-care policy. By March 1994, the VIX had more than doubled.
Now, with another year closing and volatility subsiding, the markets are about to enter a year with a presidential campaign, the start of an expected Fed tightening cycle and aggressive economic-growth expectations -- not to mention the U.S. military occupation of two not-so-friendly countries and persistent terrorist threats.
The folks arguing that volatility will rise next year might have a point, even if this forecast is, uncomfortably, edging toward consensus status.
道琼斯指数重返万点大关
这些天来，华尔街的股民们都在谈论经济和股市正进入他们心目中的周期性收获期。投资者对此充满期待，他们认为强有力的周期性上升即将展开，并愿意向股市投入资金。
上周，可能危及市场的数据相对较少，这也推动了股市的上扬。经济数据不多，收益预报季节尚未到来，这都使伴以较低成交量的市场反弹得以再延续一周。
道琼斯工业股票平均价格指数重新变为5位数，在18个月来首次突破10,000点。道琼斯指数上涨179点，收于10,042点，涨幅1.8%。标准普尔500指数上涨12点，收于反弹以来的高点1074点，涨幅1.2%。受部分科技领头股面临抛压压力的影响，那斯达克综合指数涨幅较小，该指数上涨12点，收于1949点。
摩根士丹利周期股指数(Morgan Stanley Cyclical index)的涨幅约为大盘涨幅的两倍，重型设备制造商类股买盘踊跃，US Steel上涨16%，其他基础材料类股也出现上扬。
International Steel Group也给人们带来很多惊喜，该公司在首次公开募股中筹集了4.62亿美元资金。该股上周五首日上市上涨了25%。
现在面临的一个问题是，周期性股票何时能完全反映出经济改善的情况？正如有关何时能够选择更多的抗跌股这些问题一样，目前市场对此的答案依然是：现在还不行。
如果要对有关周期性收获期的信念有所概括的话，那就是许多好消息并未从数字上得到体现这一共识。
对于想从基本上没有什么重大价值观的市场中寻找机会的投资者来说，有必要加以考虑的是，分析师们降低了对2004年的公司收益预期。
目前，行业分析师普遍预计标准普尔500公司2004年的收益将增长12%，至61.59美元。这一年度运营利润增幅在正常水平之内，也高于长期趋势，但却大大低于18%的2003年公司收益预期增幅。
如果分析师的预测是对的，这意味著市场目前的交易水平为明年收益预期的17倍以上。投资者可以在当前的低通货膨胀环境下容忍这一股价水平，但就历史标准而言，这一水平则很难吸引投资者。
分析师一开始通常会高估公司的利润。与历史上的多数时期相比，这次分析师明显要保守一些。但考虑到注重宏观层面的策略师的收益预期与行业分析师的预期相当接近，看涨人士可能会有恃无恐。策略师目前对2004年度公司收益的最新预期要高于分析师的普遍预期，其中部分人士的预期值在63美元以上。
策略师主要通过国内生产总值(GDP)和其他宏观因素来预测公司收益，他们的预期一般都低于个股分析师的综合预期。但这次，在去除了几个不具代表性的预期值后，策略师们对2004年公司收益的预期却与微观分析师的预期几乎一致。
Thomson First Call的希尔(Chuck Hill)称，长期以来的普遍现象是，微观分析师最初的预期要高于宏观分析师的预期，而实际的收益数字则正好处于二者的预期之间。
对目前这种状况可从多个方面进行解释。也许策略师受上季度GDP大幅增长的影响，对基本面改善的预期要更为乐观一些，从而强化了他们普遍看好市场的观点。
另外，在熊市时期不断高估利润后，公司和跟踪这些公司的分析师也有可能希望避免不必要的风险。希尔认为，鉴于前几个季度的公司利润总是出现出乎意料的增长且增幅高于历史水平，因此高估利润可能更接近实际情况。
