Goodbye, You Lousy Losing Streak!
AS THE FINAL DAYS OF 2003 DRAW NEAR, I know what stock-market investors would like Santa to bring: another year just like this one. We're in the home stretch now, with just a handful of trading days left in 2003, and all of the major averages are sitting at or near highs for the year, poised to break the market's three-year losing streak.
We'll even settle for another week like the last one. It kicked off, of course, with the U.S. military pulling Saddam from his hidey-hole (though we still can't seem to find the hole Osama crawled into). That was good news, sure, but less important to the markets than fresh evidence the economy continues to grow apace without inflation.
For instance, industrial production in November rose at the fastest pace in four years. Capacity utilization hit the highest level in over a year. New-home construction in November reached levels not seen since the 1980s. The core consumer price index -- that's the one that excludes food and energy -- fell 0.1% in November, dropping for the first time since 1982. The Philly Fed report on regional business activity was stronger than anticipated. And the average number of people collecting unemployment insurance dropped to levels not seen since 2001. Good tidings everywhere you look.
There were scary moments, though. About noon Friday, for instance, ABC News reported there was a credible threat of a terrorist attack on New York City, possibly from a female suicide bomber, a reminder that Saddam's capture doesn't necessarily mean the arrival of peace on Earth and goodwill towards men. Earlier in the week, some unfortunate soul in Taiwan tested positive for the SARS virus, triggering a brief selloff in Taipei and hand-wringing by tech analysts about what a full-fledged outbreak might mean. "If the SARS virus begins to spread again," semiconductor analyst Mark Edelstone of Morgan Stanley wrote in a note last week, chip stocks could suffer "as valuations remain high" and the "event risk" of a new outbreak hasn't been discounted.
Despite Friday's uncertainty, which was warped by the quadruple-witching expiration of options and futures contracts, the Dow last week ventured into territory not seen since May 2002, gaining 236 points, or 2.4%, to 10,278.22. It was the fourth straight winning week for the Dow, which is now up 23% for the year. The S&P 500, despite a fractional dip on Friday, last week gained 15 points, or 1.4%, to 1089, boosting its gain for the year to 24%. The Nasdaq lagged this week, as investors continued to take profits in technology shares. The index gained just 2 points, to 1951.
GARY GORDON, U.S. STOCK STRATEGIST for UBS, last week shifted to an "overweight" position on the energy sector from a "neutral" position, based in part on a revised forecast on crude-oil prices from Paul Ting, the UBS energy analyst. Ting raised his projection on the average price for West Texas Intermediate crude to $26 a barrel for 2004, from a previous forecast of $23. While that's still below current levels north of $33 a barrel, it suggests a stickier price than has been the conventional wisdom.
Gordon, who recommends Exxon Mobil and Schlumberger in particular, says his newfound affection for oils reflects a belief that "it will make a lot of sense to phase into more defensive stocks" as the market continues to rise. Gordon has a 12-month forecast on the S&P of 1150, less than 6% above the current level. One reason for his caution: he sees quickly dissipating earnings growth, with a 20% rise in the first half of next year, 10% in the second half, and just 3% in 2005.
Gordon fears the recovery won't be as robust as those in the 1980s and the 1990s. Among other things, he says, there is a link between GDP growth and credit growth -- about a third of economic growth results from increasing credit, he says.
In previous downturns, credit growth has tended to weaken. But not this time. "We've had tremendous growth in debt over the last two years, which is unprecedented in that it came during a recession and the period of economic weakness that followed it," he says. "Typically, debt growth is weak in a recession, and at the end, consumers and corporations are in a better position to borrow and spend. But this time, we've front-end-loaded the debt growth," with rapid gains in mortgage borrowing and government debt, he says. And that, he concludes, will make for a more modest rebound.
HUMBUG! RETAIL STOCKS HAVE STUMBLED as the Christmas selling season has failed to match expectations at a number of key retailers. Playing the Grinch, Wal-Mart last week said December sales would reach only the lower end of its previous 3%-5% sales-growth projection. The company cited a tendency of holiday shoppers to wait for end-of-season sales, and growing consumer enthusiasm for gift cards, which aren't recorded as revenue until they're used. Target, which has been projecting 5%-7% same-store sales growth for the month, said sales were running below plan. And Pier One warned that results for its February quarter will miss forecasts, with same-store sales down 4%-8% this month.
Emme Kozloff, retail analyst at Sanford C. Bernstein, is less concerned about Christmas than about the prospects for 2004. "We're headed for a much more challenging year," she says. "There won't be the same easy earnings comparisons, you could have the Fed working against you" in the form of higher interest rates "and the stocks are not screamingly cheap."
Kozloff notes that consensus estimates have retail-sector earnings growing 15% next year, versus 12% for the S&P 500 -- a much smaller differential than the eight-percentage-point advantage retail stocks have averaged over the past five years. But the group's valuation relative to the S&P 500 recently hit a five-year high. Not a good recipe for higher retail stock prices.
PERHAPS EVERYONE IS SHOPPING ONLINE: Web-traffic tracker ComScore Networks said online retail sales grew 28% in the week ended Dec. 14 from the comparable period a year earlier, reaching a one-week record of $2.11 billion. This topped the $2 billion level for the second week in a row -- and for the second time ever.
Maybe that helps explain investor enthusiasm for Overstock.com, a Salt Lake City company that specializes in selling discontinued merchandise, refurbished items and other less-than-perfect goods. Overstock shares, which bottomed in May at $7.60, last week were trading at about $19, only 10% below a 52-week high. This even though Overstock has made a habit of missing Street earnings forecasts -- it has a streak of three quarters in place.
CEO Patrick Byrne has been using the company's quarterly earnings announcement as a kind of public confessional. "Clearly, I executed poorly in some areas," he wrote in the Oct. 29 release announcing third-quarter results. Two quarters earlier, Byrne said of the first- quarter numbers: "I am disappointed with these results. While we started off the quarter briskly, in the middle of the quarter we hit a patch of black ice. Following a record holiday season and profitable fourth quarter, the sizable net loss this quarter is unsatisfactory and I apologize."
That's refreshing candor -- you have to like a CEO who apologizes in press releases. But Derek Brown, an analyst with Pacific Growth Equities in San Francisco contends the stock is too high. "While we continue to be enamored of the market opportunity they are addressing, we're suggesting investors wait for...clear signs toward sustained profitability," he says.
For the fourth quarter, Brown expects Overstock to lose $3.8 million on gross merchandise sales of $104.2 million. He sees no profits before next year's fourth quarter.
While Overstock is growing, growth is slowing. Brown says sales in 2004 should reach $269 million, up 40% from this year, with 2005 sales increasing 27% to $476 million. Brown figures revenues rose 74% this year, following 123% growth in 2002. Despite the slowing growth, the market has rewarded the stock with a P/E of more than 100 times Brown's 2005 GAAP earnings forecast of 17 cents a share. The company has a market value of about $320 million.
Meanwhile, Overstock is ratcheting up its marketing budget: It recently unveiled a racy print, radio and TV campaign asking if people have discovered "the secret of the Big O." In a bid to lure last-minute holiday shoppers, Overstock last week announced a free shipping offer for many products. Overstock also has been trying to hook customers on its overstock merchandise with extremely low prices for mainstream books, videos and music, vowing to undercut Amazon's prices.
All these things generate additional traffic, but Brown fears they could delay profitability. "Yes, they have increased awareness," he says. "But will it mean similar increases in revenues? I'm not convinced."
WELL, NOW, HERE'S SOMETHING YOU don't see very often: a feeding frenzy in steel stocks. The steel rally began to come into focus in early December with the initial public offering for International Steel Group, a Richmond, Ohio, company created from the ashes of Bethlehem Steel, LTV and Acme Steel. The stock, which went public on Dec. 11 at $28 a share, now stands at $40.20. U.S. Steel, recommended in Barron's Q&As in each of the past two weeks (two weeks ago by Tontine Financial Partners' Jeff Gendell and last week by Arnie Schneider of Schneider Capital Management) last week gained 2.83, or 9.3%, to 33.25. The stock has tripled since April.
Wheeling-Pittsburgh Steel, which emerged from bankruptcy in August, last week rocketed 3.57, or 27.8%, to 16.38, and is up from 6 one month ago. Iron-ore producer Cleveland Cliffs, which owns 7% of ISG, has more than doubled this year. Last week it rose 3.44, or 7.2%, to 51.
James Bradley, CEO of Wheeling-Pittsburgh, says the industry is seeing a "perfect storm" drive prices higher. The Chinese appetite for steel appears nearly insatiable, he says, and U.S. demand is picking up as the economic recovery kicks into high gear. Meanwhile, the weak dollar makes the U.S. market less appealing to foreign steelmakers. There's a current shortage of ocean-shipping capacity, which has driven up freight rates. Also in short supply are raw materials for steel-making, including iron ore, coke and scrap steel.
Steel inventories, Bradley noted in an interview on Friday, are "at or below desired levels." Remember, too, that the near-collapse of the U.S. steel industry in the 1980s and 1990s has resulted in reduced capacity here. Bradley says there's no reason to think all of these things can be quickly resolved.
Holiday cheer: The Dow Industrials gained 236 points last week, hitting a new high for the year. Investors celebrated the capture of Saddam Hussein and a strong economic recovery.
"There are long-term issues on constraints of raw materials and capacity," he says. "You don't build steel mills overnight. People are sensing the situation and saying, steel is going to come into some reasonably decent times. And this time it might last more than just a couple of quarters."
Mark Parr, an analyst at McDonald & Co. in Cleveland, notes that China's steel consumption is growing at 15%-20% a year. China has passed the U.S. as the world's largest steel consumer, Parr says, and will reach twice the size of the U.S. market in a few years. "Even at that point," he says, "per capita consumption will be dramatically less than what it is in the U.S."
Parr says there is a shortage of flat-rolled steel for the first half of 2004 and a concurrent thin supply of scrap, the raw stock for "mini-mills." He notes that scrap prices, typically weak late in the year, have risen 20% over the past two months. As the scrap market heads for the seasonally stronger months of January and February, Parr adds, many major scrap buyers don't have adequate supply for the first quarter.
Inventories for finished steel are low, as well. Rolled steel, selling for $255 a ton in June, is being quoted at $380-$400 a ton for second-quarter delivery, Parr says.
Chris Olin, an analyst with Longbow Research in Cleveland, thinks both U.S. Steel and International Steel could generate $5 a share in earnings next year if prices hold up at $400 a ton. That would make both look cheap even after the recent rally. On the other hand, he'd sell Nucor, which relies heavily on scrap. In 2002, he says, Nucor was able to produce steel for $70 a ton less than the integrated steel makers; with higher scrap prices, Nucor is now at a $20-$30-a-ton disadvantage, he says.
Companies with a stake in the scrap business are flying: Metals Management last week rose 4, to 35.59, while Schnitzer Steel gained 3.33, to 59.28 and Commercial Metals jumped 2.92, to 30.30. On the other hand, worries are cropping up about the impact of higher prices: Maverick Tube, which makes piping and tubing for the energy business, warned Thursday of "unprecedented rising raw-materials costs." On Friday Maverick fell 2.34, to 18.65, while rival Lone Star Technologies slumped 73 cents to 15.75.
'TIS THE SEASON! THERE'S BEEN SOME wild trading in shares of Thomas Nelson, a Nashville, Tenn.-based publisher of religious and inspirational books. The company's shares surged 2.50, or 12.5% last week, to $22.50, trading up to $25.50 Thursday before a $1.63 retreat on Friday. For the year, the stock has more than doubled.
Thomas Nelson has a few things going for it right now, including a book on the New York Times list of best-selling advice titles called Body by God: The Owner's Manual for Maximized Living, by a Florida chiropractor named Ben Lerner. (He calls himself "America's Maximized-Living Mentor," whatever that means.) The real best-seller at Thomas Nelson, though, is the Good Book: Bibles account for 30% of sales, and other faith-related goods much of the rest, including a conference series called Women of Faith.
One thing that has investors enthused is that Thomas Nelson has gotten religion about cost controls. The company has trimmed the number of new titles it produces and unwound several bad acquisitions into adjacent markets like candles and gift items. The result has been slower revenue growth but better profits. Mark Hughes, an analyst with SunTrust Robinson Humphrey, says the company should earn $1.05 a share in its fiscal year ending March 2004, growing to $1.26 a share in fiscal 2005.
Still, that doesn't quite explain the mammoth rise in the company's shares. Andrew Rittenberry, an analyst at Gabelli & Co. in Rye, N.Y., began recommending the stock last spring, at $8.65 a share. In an interview last week, he described the company as a "slow and steadier grower, a nice publishing company with lots of free cash flow, which has been speculated in the past to be a takeover candidate."
Rittenberry's original report on the stock noted that the company was underfollowed and undervalued, a possible acquisition target, given the age of its CEO and controlling shareholder, 74-year-old Sam Moore. Rittenberry concluded at the time that the stock could be worth as much as $17 a share based on projected fiscal 2005 results. The Gabelli portfolio managers liked Rittenberry's call: Various Gabelli entities own nearly 17% of Thomas Nelson's shares.
But here's the thing: Rittenberry says the stock now trades more than 30% above the $17 private market value he places on company, based on projected 2005 financial performance. He advises "lightening up." Meanwhile, neither Rittenberry nor Hughes has any explanation for the surge last week -- at one point on Thursday the stock was up nearly 20% -- and a spokesman for the company said it has no explanation for the rise. Even on the Street, apparently, the Lord works in mysterious ways.
向讨厌的持续下跌走势说再见
随著2003年最后时刻的临近，我知道股市投资者希望圣诞老人给他们带来什么样的礼物：和今年一样的又一个年份。所有主要股票指数目前都处于或接近今年高点，即将打破市场3年来的下跌走势。
即使像上周一样的又一周也是可以接受的。上周从美军自隐藏地点抓获萨达姆?侯赛因(Saddam)开始，这是一个好消息，但对市场来说比不上有关美国经济继续在没有通货膨胀的情况下快速增长的最新迹象那样重要。
例如，11月份工业产值增长速度为4年来最高水平，开工率达到1年多来的最高水平，新屋开工数达到自20世纪80年代以来的最高水平，核心消费者价格指数下降0.1%，为1982年以来的首次下降。费城联邦储备银行(Philly Fed)的地区性商业活动报告强于预期。领取失业保险的平均人数下降至自2001年的最低水平。各个领域好消息层出不穷。
但也有恐慌时刻。例如上周五ABC News报导称，可靠消息显示纽约可能发生一起女性自杀性爆炸的恐怖袭击事件。上周早些时候，台湾一研究人员不幸被检测出非典型肺炎(SARS)病毒呈阳性，引发台北股市一度大幅下跌以及科技股分析师对SARS全面爆发的担忧。摩根士丹利(Morgan Stanley)半导体分析师马克?埃德尔斯顿(Mark Edelstone)在上周的研究报告中说，因为股价保持高位，晶片类股可能受到影响，再次爆发SARS的事件风险还没有消除。
虽然上周五出现了不确定因素，而且受到期权和期货合同到期的歪曲，上周道琼斯工业股票平均价格指数仍然达到自2002年5月份以来的新高。上周道琼斯指数上涨236点，至10,278.22点，涨幅2.4%，为连续第四周上涨。目前道琼斯指数今年已经累计上涨23%。标准普尔500指数虽然上周五小幅下滑，但整周上涨15点，至1089点，涨幅1.4%，使今年该指数的涨幅达到24%。那斯达克综合指数上周表现滞后，因投资者继续对科技股进行获利回吐，该指数上周仅上涨2点，至1951点。
