Financial Stocks Whisper a Warning for the Market
IN THE LATE-SUMMER LANGUOR, the market delivers its message in a whisper. With the broad stock gauges almost exactly where they started the week, the market might seem to be speaking of stability and resilience -- the attributes that have allowed stocks to hover near the top of their long-standing range in defiance of some predictions of August angst.
With the most economically sensitive industrial stocks and the computer-chip makers (the basic-materials segment of the wired economy) surging, plenty of ears will gather that the market is echoing the economy's shift from canter to gallop, prodded by Alan Greenspan's riding crop.
It doesn't make sense to turn a deaf ear to these encouraging signs, given the market's impressive ability, so far, to digest the potent springtime rally without any scary downside purges.
But last week these upbeat noises couldn't quite drown out the market's murmured warnings coming from financial stocks, which underwent steady and determined selling all week, action that began to raise alarm among stock watchers by Friday.
The Dow Jones Industrial Average shuffled higher by 27 points to 9348, at one point reaching a 14-month high, helped by cyclicals such as Caterpillar and by Intel's happy report Friday that business this quarter is ahead of plan. The Nasdaq, a keener reflection of semiconductor strength, tacked on 63 points, or nearly 4%, to reach 1765. The Standard & Poor's 500 Index, after making another foray above the stubborn 1000 level, finished at 993, up less than three points for the week.
The straggling pace of the S&P 500 has an awful lot to do with the softening financial stocks, particularly banks and mortgage lenders. Banks as a group fell 2%, despite a generally steady bond market, although investors are continuing to question whether all banks have successfully weathered the ferocious rise in market interest rates and the tumult in the mortgage-backed securities market of the last couple of months.
Very little specific news hit these stocks, although Freddie Mac's chief executive, as rumored, did step down after the close Friday due to the inquiry into Freddie's accounting. Still, Bank of America -- a huge institution closely linked to the mortgage and consumer-loan markets -- dropped 3.8% on the week to 78.38, with most of the decline coming Friday on heavy volume. Citigroup, the largest financial name, also sank 4%.
With financial stocks comprising 21% of the S&P, it's hard for the rest of the market to overcome their weakness. More salient than their sheer heft is the reality that financials, the intermediaries of the economy and the market, must participate in if not lead any market advance in order for it to be sustainable. The history of enduring bull moves with the financials lagging is thin.
The backers of financial stocks have pointed out that the spread between short- and long-term rates remains rather wide, giving banks plenty of profit opportunity, and the important corporate-bond market remains firm.
True enough, but last week indicated that not everyone is so sure. Whatever the motivation for the selling, it probably means the broad market could have a tough time taking advantage of recently improved economic sentiment to forge another up leg. Last week, unemployment claims dipped again, leading economic indicators rose and the Philadelphia Fed's manufacturing survey sprang higher. This lent resolve to those buying deep cyclical stocks, but wasn't reflected in the top-line indexes.
John Roque, technical strategist at Natexis Bleichroeder, says that with Citigroup sagging and financials generally weaker, investors shouldn't feel there's much need to hurry into buying at this point. The idea of "upside risk" -- of being left behind by the market -- has animated professional investor behavior this year, as seen by brisk buying at the lower reaches of the recent trading range. That risk, seemingly, is diminished for the moment.
If all this activity ends up being is simple rotation of investors' funds from one group that has held up well for a long time into other areas more poised to prosper now, it will go down as a healthy process. The trouble is that rotation out of a sector that represents 21% of the large-cap market, and an even higher percentage of corporate profits, isn't conducive to market-wide upside.
THE MARKET'S LEADERSHIP now embraces both clean rooms and smokestacks.
The beginning phase of the market rally that ignited in March was dominated by those technology sectors promoted as the economic drivers of the 21st century, like the semiconductor makers who are digitizing the world. But more recently, some 19th-century industries have joined the fun as investors eager to play a cyclical manufacturing surge bid up the big iron.
Makers of machinery and other loud, heavy things have all had their stocks flashing John Deere green. Caterpillar stretched to a new 52-week high last week. Deere itself has gained around 24% and Danaher is up 15% in the last month, even as the broad market has held still. Since mid-June, when the S&P 500 hit the 1000 level at which it still sits, the Morgan Stanley Cyclical Index has risen 10%, thanks to the newly avid interest in traditional, Old Economy recovery names.
This rotation toward industrials has been helped along by the notion, now being aired by more sell-side strategists, that this highly atypical economic cycle has entered a period when it's following the old rules: easy monetary policy is spurring economic activity, companies are lean, and the stocks can run.
One chart making frequent appearances in investment managers' e-mail boxes shows corporate earnings moving in tight linkage with industrial production for the past few decades. In July, industrial production showed its largest increase in six months. Investors are not waiting to see whether this improvement turns into a trend.
Nor are they apparently concerned about low levels of capacity utilization or weak pricing power. Merrill Lynch global strategist David Bowers notes that cyclical earnings recoveries are normally accompanied by improved industrial-pricing power, which hasn't been evident in the recent manufacturing data or the crude producer-price index.
One non-fundamental reason that the cyclical outperformance could continue is the relatively small market capitalization of the basic industries' sector. Strip out General Electric and 3M -- more conglomerates than pure industrials -- and finding a company with even a $25 billion market value is rare. A little investor conviction and a splash of cash can go a long way with such modest-sized stocks.
That, of course, would have the effect of extending their valuations stocks even further away from cheap. As it is now, Caterpillar , Illinois Tool Works and Danaher, three Wall Street favorites, trade at close to 20 times forecast earnings for 2004, versus 16 times for the S&P 500. That's 2004 -- after the cyclical rebound and earnings leverage are supposed to have kicked in.
The reflexive bullish retort is that those earnings forecasts are now too low and understate the likely improvement. Which very well could be true -- and buyers of these names at current levels must necessarily believe (and hope) it is.
IT'S NATURAL, UNDER SUCH CONDITIONS, for value-oriented investors to be looking for less popular ways to play the industrial-stock renaissance, in the form of under-owned stocks or hidden-value situations.
Cleveland Cliffs, a smallish supplier of iron ore to the steel industry, qualifies on both counts, with a market capitalization of about $225 million and a little-recognized dollop of obscured value within it.
Michael Prober, a hedge-fund manager with Clovis Capital in New York, admits no great fondness for the core business itself, although it should earn around $2 a share next year after breaking even in 2003 owing to some operational difficulties relating to mine flooding. He pegs the business' value around $15 to $20 a share, just below the recent share price near 22.
But what's interesting about Cleveland Cliffs is its good fortune in having invested a little money in a venture called International Steel Group, which distressed-company financier Wilbur Ross has assembled by acquiring three bankrupt steel makers: LTV, Bethlehem Steel and Acme Steel. ISG filed plans to go public on July 31, which could mean a nice windfall for Cleveland Cliffs.
Using fairly conservative assumptions, Prober figures Cleveland Cliffs' stake in ISG -- which will total about 7% after the IPO -- could be worth as much Cleveland Cliffs' entire market value today.
Here's the math: ISG should have an annual run rate of earnings before interest, taxes, depreciation and amortization near $800 million, based on the current $400 million pace and $400 million of in-progress cost savings detailed in the IPO prospectus. US Steel, the closest comparable company, trades for five times Ebitda.
But ISG, thanks to the astringent called bankruptcy court, has been cleansed of US Steel's burdensome pension liabilities. Assume that means ISG, also the lower-cost producer, could be worth six times Ebitda. That comes to $4.8 billion. Then subtract its $1 billion in debt for a potential equity-market value of $3.8 billion.
Cleveland Cliffs' 7.1% share of that amount would be $270 million, for which the company paid just $17 million. Subtract taxes and the ISG stake could be worth somewhere around $200 million, or $21 per share. Even at five times Ebitda for ISG, the take would be $18 a share. Prober says the company has indicated it would likely find a way of delivering that value to shareholders, perhaps by distributing the ISG shares.
There are no guarantees here, of course. ISG and its bankers, Goldman Sachs and UBS, haven't yet set a valuation range. And other risks facing Cleveland Cliffs include two significant customers now in bankruptcy.
But if the IPO market cooperates, Cleveland Cliffs' shares could be a tidy way to profit from a messy business.
STICKING WITH INDUSTRIES where employees end the day with dirt under their fingernails: The tree-felling, pulp-making company Rayonier last week pleased its investors by electing to convert to a real-estate investment trust. The REIT would house its timberland assets and would also hold the pulp business as a so-called taxable REIT subsidiary.
Barron's had handicapped this possibility in late 2001 in a feature on Rayonier and the reward has finally come, as Rayonier's shares jumped 15% on the week, to 40. Yet by some lights, the stock could still have a fair amount of upside even from here.
Some investors are saying that if Rayonier simply trades with a 5% dividend yield like Plumb Creek Timber -- the only existing timber REIT -- then Rayonier could be worth 48. Investors will receive 54 cents in regular dividends through the end of the year and a $1.15-per-share special "disgorgement" of accumulated profits, as per REIT rules. Then the indicated annual payout becomes $2.40. (See related article.)
Some analysts think Rayonier should merit a lower valuation than Plumb Creek because of Rayonier's less-liquid shares and differences in the taxability of each company's dividends.
Either way, Rayonier will join Plumb Creek as intriguing income and diversification plays. Timber is seen as an asset class all to itself, and isn't well correlated to equities or straight real estate.
There's some chance that other wood-products companies could join in carving out REITs for their timberlands. UBS analyst Richard Schneider sees some difficulties in more diversified companies pursuing this tactic, although he suggests there's a chance that Bowater, International Paper, MeadWestvaco, Potlach and others might at least consider it.
WHEN THE NORTHEAST'S BLACKOUT struck, Wall Street opportunists made leaps of logic as they scrambled for stocks that could benefit from the eventual fix. Some, no doubt, will prove overzealous or simply misconceived.
Stephen Goldfield runs a hedge fund, Imperium Capital Management, which focuses only on utility and energy-related stocks, giving him an advantage in detecting other investors' rookie mistakes in these sectors.
Shares of engineering and construction firm Fluor have rallied more than 10% since before the blackout to approach 38, after already having climbed from the 20s on hopes for Iraq-rebuilding contracts that have yet to materialize. The idea is that Fluor will play a lucrative role in reinforcing the North American electrical grid.
Goldfield scoffs at this idea. Yes, Fluor's most profitable business has been building generating plants. But more generating capacity isn't needed -- a beefier and better transmission network is, and Fluor hasn't a presence in this area.
The larger challenge for Fluor is that much of that power-plant work is coming to an end, as projects left over from the great power binge of a few years ago are completed. Power projects should kick in 25% of an expected $250 million or so in operating profits this year. The way Goldfield sees it, power earnings could sink by 75% next year, and Fluor will have a tough time replacing that $45 million of lost earnings. Its order backlog slipped at last report. As yet, hopes for major oil and gas projects to take up the slack haven't been realized.
Current earnings expectations don't reflect the prospect of profit slippage. Fluor is projecting $2.15 to $2.25 a share in earnings this year, but hasn't provided 2004 guidance. The Street is looking for $2.18 next year, but Goldfield thinks Fluor has "plenty of room to disappoint investors."
金融类股轻声发出警告
市场在夏末的倦怠中喃喃细语，传出讯息。鉴于上周收盘时大盘几乎持平，市场人士可能都在谈论稳定性和弹性，正是这些特性使股市得以在长久以来的波动区间的高端附近徘徊，并使得一些关于8月份市场严重受挫的预期不攻自破。
随著对经济最为敏感的工业和电脑晶片生产业的股票大幅上扬，人们都将会倾听到市场对格林斯潘(Alan Greenspan)驾驭下的经济快马加鞭作出回应。
由于市场自春季有力反弹以来从未出现大幅下跌的可怕场景，人们没有理由对上述令人鼓舞的迹象充耳不闻。
但上周这些乐观的声音并未能完全淹没金融类股票低声发出的警告。投资者上周始终稳定而坚决地抛售这类股票，到上周五时，这一现象开始引起股市观察家的警觉。
上周，道琼斯工业股票平均价格指数受卡特彼勒( Caterpillar)这类周期性股票和英特尔(Intel)的乐观报告推动上涨了27点，其间一度创下14个月新高。那斯达克综合指数上涨近4%。标准普尔500指数虽然曾再度超越1000点大关，但收于993点，全周累计上涨不足3点。
标准普尔500指数表现相对不佳，这与金融类股，尤其是银行和按揭贷款发放机构的股票表现疲弱密切相关。虽然债券市场总体走势平稳，但银行类股下跌了2%，投资者还在继续追问，在最近几个月市场利率大幅上涨、按揭证券市场震荡的情况下，是否所有银行都已成功抵御了由此造成的冲击。
尽管联邦住房贷款抵押公司(Freddie Mac)的首席执行长正像先前所传闻的那样，由于监管机构对该公司的会计操作展开调查，于上周五市场收盘之后下台，但实际上金融公司具体的负面消息非常之少。但作为一家与按揭和消费者贷款市场紧密相关的大型机构，美国银行(Bank of America)上周下跌3.8%，至78.38美元，股价下跌主要发生在上周五，并伴随有巨额成交量。最大的金融机构花旗集团(Citigroup)也下挫4%。
由于金融类股占标准普尔500指数权重的21%，其他成份股很难抵消这类股票下跌造成的影响。更为重要的是，作为经济生活和市场的中间环节，金融类股即使不起领涨作用也需起到助涨作用，否则就无法实现股市的持续上涨。从历史上看，股市持续牛市而金融类股却表现滞后的情形十分少见。
金融类股的支持者已指出，长短期利率之间的差距仍然很大，这给银行提供了大量的获利机会，而且公司债券这一重要市场依然稳健。
此言虽然不谬，但上周并未人人都对此信以为真，很多人就选择了抛售。不管抛售的原因何在，抛售本身可能意味著市场可能难以借助最近改善的经济形势继续上涨。
如果这仅仅属于资金轮动所致，即投资者将资金从长期保持强势的一类股票转向目前前景可能更好的其他股票中，则这将是良性回调。但资金却是从占大型股市值21%、公司利润所占比例甚至更高的金融类股流出，这显然无助于整个市场的上行。
目前科技股和工业股票颇受欢迎。
科技股于3月份揭开本轮上涨行情的序幕，而由于投资者急切希望推动那些周期性明显的制造行业股票上涨，一些传统工业类股最近也加入到上涨的行列中。
机械和其他重型产品生产商股票最近大幅上扬。卡特彼勒上周创下52周新高。过去一个月内，迪尔(Deere)和Danaher在大盘持平的情况下分别上涨了24%和15%。
资金的上述流向受到如下观念的推动，即目前呈现高度非典型性的经济周期终于开始遵循古老的法则：随著经济活动在宽松货币政策的刺激下活跃起来，以及随著企业效率的提高，公司股价开始上涨。目前，更多的经纪公司策略师都在传播这种观点。
技术图形显示，过去几十年中，公司利润的变动趋势与工业生产状况紧密相关。7月份工业产值出现6个月以来的最大增幅。但投资者目前却并不等著看这样的增长情形能否形成趋势。
显然，他们对开工率较低和定价能力疲弱等也不担心。
美林(Merrill Lynch)的全球策略师大卫?鲍尔斯(David Bowers)指出，公司利润呈现周期性回升通常都会与工业产品定价能力的提高相伴出现，而最近的制造业数据和原材料生产者价格指数还未表明定价能力已得到提高。
周期性股票表现可能继续强于大盘的一个非基本面原因在于，基本工业的市值相对较小。除通用电气(General Electric)和3M公司(实际是企业集团而非纯粹的工业公司)外，连市值在250亿美元的工业股票都很难找到。一名小型投资者的买盘或小笔现金的涌入都会推动这类中型股票上涨。
对于那些希望通过非常规方式来从工业类股的回升中获益的价值型投资者而言，选择市场持有不足或价值尚未被发现的股票也就是自然而然的事了。
Cleveland Cliffs同时符合这两个条件。这家小型铁矿石供应商的市值约为2.25亿美元，其蕴藏的价值中仅有一小部分被发现。
Cleveland Cliffs已将一小笔资金投入名为International Steel Group的企业，后者已申请于明年7月31日上市，这可能将为Cleveland Cliffs带来意外收获。
Clovis Capital的对冲基金经理Michael Prober通过相当保守的估计认为，这部分持股的价值日后可能为Cleveland Cliffs目前总市值的两倍。
伐木及纸浆生产商Rayonier上周决定转型为房地产投资信托基金(REIT)，投资者感到欣喜，部分原因是企业转型后派息可能大幅增加。
该股上周飙升15%，但从某些方面来看，仍有进一步上涨的潜力。
