Stocks Bob Back to the Surface
TREADING WATER IS TIRING, but it sure is preferable to drowning. By the end of last week the stock market was laboring just to hold steady, having resurfaced from a mid-week plunge that briefly sent the broad market to new lows for the year to date.
The recovery included a 200-point surge in the Dow Jones Industrials Wednesday afternoon, which turned deep losses into a moderate gain. As bounces go, it was impressive, even if it simply reversed a couple of days' worth of losses. Stocks then milled about for the remainder of the week, leaving open the question of whether the rebound was a reflexive snap-back or a successful defense of the March lows in the indexes.
In the end, the week's action was inconclusive, as the Dow slid 104 points, or 1%, to 10,012. The Standard & Poor's 500, having momentarily broken below its March low of 1087 to touch 1076, eased just three points on the week, to 1095.
The Nasdaq outperformed the rest of the market early in the week, but was held in check by weakness in Dell Computer following the company's report of on-target but unspectacular earnings. The index gave up 13 points to finish at 1904.
Without trying to fix specific causes for the downswing, it came as crude oil prices marched above $40, 10-year Treasury bond yields held at their recent heights near 4.8% and Cisco's earnings disappointed the tech faithful.
What's clear is that more than two weeks of almost relentless selling had left stocks primed for a pickup. Certain measures of selling pressure and investor anxiety had reached levels high enough to permit the sudden bounce. The ratio of bearish put options to bullish calls reached extreme heights. Retail investors pulled more than $2 billion from domestic stock mutual funds in the week ended Wednesday, a sign of public jitters that often can be played as a contrary bullish signal.
The market's best shot for mustering a bit more upside might be the thinning news calendar in coming weeks, ahead of Memorial Day. Stocks have traded rather poorly in reaction to nearly all earnings and economic releases in recent weeks. So the fact that next week holds few key economic reports and only a couple of big-company earnings releases could be read as a plus.
These factors speak mainly to the short-term prospect for further recovery, particularly if bond yields stabilize and/or oil prices ease a bit.
But a couple of market-advisory services that got bullish near the start of the market's strong rally in 2003 have turned cautious. Lowry's Reports, the widely followed technical-analysis service, flipped to an intermediate-term negative signal recently, even though it sees the potential for near-term improvement.
And Schaeffer's Investment Research on Tuesday switched from a neutral long-term market posture to bearish for the first time since July 2003. This move was prompted by what Schaeffer says are several measures of investor complacency on Wall Street, along with stocks' inability to make any headway despite stellar earnings and big cash flows into equities in the first quarter.
No one has a monopoly on persuasive market calls, of course. Some bulls point out that recovery rallies typically continue for months after the indexes' first 5% pullback.
This kind of macro-market analysis is generally lost on fundamentally oriented stock analysts and portfolio managers, who see impressive financial results before their eyes and are inclined to believe they should spell higher stock prices. Of course, in the spring of 2003 no one looking at the ugly fundamentals alone would have believed that a 40% market rally was about to be launched.
Though the reported numbers continue to dazzle the conference-call crowd, the market itself seems to be evidencing some doubt that the economy is off to the races.
David Rosenberg, economist at Merrill Lynch, points out that four of the five worst-performing S&P 500 sectors this year are economically cyclical ones. "Everyone sees acceleration and overheating ahead," he says, "except the stock market."
THE CALENDAR IS INCHING TOWARD that time of year when the chirpy voices of Wall Street start singing the happy "Wait 'til next year" tune.
This happens around midyear, when analysts and strategists start to plug in the following year's forecast earnings for the purpose of valuing stocks. Given that projections a year or more ahead of time usually presume earnings will grow briskly, this has the effect of cosmetically lowering stocks' price-earnings multiples.
With the S&P 500 at 1095 and this year's earnings now expected to be around $64 a share, the market's P/E sits at 17. By steering investors' sights to 2005's expected results, stocks look a good deal cheaper. Specifically, Thomson First Call is saying that earnings should rise to $70 in 2005, placing the multiple on next year's numbers at 15.6.
Interestingly, a year ago the market's multiple of current-year and future-year earnings were quite similar. On May 1, 2003, the S&P was at 916, and at the time 2003 profits were penciled in at $53.69, for a multiple of 17. Back then, analysts were predicting 2004 earnings of $61, which put the forward-year multiple at 15.
As we now know, analysts a year ago were underestimating the earnings-growth capability of the corporate sector as the economy quickened its pace thanks to multiple sources of stimulus. Operating earnings for 2003 came in at $55.50, and right now 2004 profits are forecast at $64, both handily above the year-ago guesses.
A couple of things should be said in viewing the current market valuation based on this year's and next year's profit expectations. One is that these forward multiples remain high, if not absurdly so, by past standards. The median forward P/E multiple since the advent of published earnings estimates is around 12.
Another thing is that analysts rarely underestimate future earnings for more than a year or two at a stretch. This lessens the prospect that reported numbers will outrun forecasts through next year the way they did over the past 12 months.
This doesn't mean earnings are about to collapse. But with full valuations and reduced chances for a strong trend of positive profit surprises, the upside potential for stock prices in the coming years may be rather restrained.
Brokering Brokers
Lay out the current state of one prominent industry sector and it sounds a lot like big-cap technology: The industry leaders are world-class companies that survived a historic downturn to emerge lean and well-capitalized. The stocks have had enormous runs since the market bottomed early last year and are not demonstrably cheap, yet most sell-side analysts continue to recommend them based on cyclical earnings leverage.
Still, in the background lurks lingering industry overcapacity and challenging long-term trends that threaten the profitability of the business as it's now constructed.
The sector in question is not tech but the brokerage group, with stocks such as Merrill Lynch and Goldman Sachs down sharply from their early-March peaks. But they're still at levels indicating high expectations for 2004.
These stocks follow a fairly simple rule: When the market recovers, brokerage stocks roar. When the indexes ease, brokerage shares crumple.
From its March 2003 low to its March 5, 2004, high, the American Stock Exchange Broker-Dealer index soared 114%. Even after falling 14% once the stock market began dwelling on the bond market's vulnerability in early March, the index remains 84% above its low, compared with 51% for the Nasdaq and 37% for the S&P 500.
As the stocks pulled back, a couple of analysts stepped in last week with upgrades of Merrill and Goldman, pressing the idea that the market had delivered better entry points for their shares.
But might investors, in knocking back the broker stocks, be indicating the easy money already has accrued to these firms' bottom lines and those of their shareholders?
The standard line among analysts who cover the brokers is that 2004 will be the year of the "handoff," as lush fixed-income earnings decline, only to be offset by rising stock-underwriting and merger-advisory business. The consensus is also that investors need not fear a tighter Federal Reserve, unless the currently wide and profitable gap between short- and long-term interest rates narrows considerably.
It's not an unreasonable case, but there are good reasons to wonder whether such a transition can happen in a neat and timely way.
In a report last week on Merrill, Morgan Stanley, Lehman Brothers and Bear Stearns, Goldman analyst Jim Hoeg noted the current level of fixed-income trading revenues in the industry is 35% above the long-term trend.
Yo-Yo Dow: A mid-week tumble sent the Dow below 10,000 and to a new low for the year before a strong bounce limited the week's loss to a 1%. Another pop in oil lifted ExxonMobil.
That means the widely expected 15%-to-20% drop in bond-related revenue this year will take a bigger toll on brokers' overall income than in past cycles. And, while stock-underwriting and M&A revenues indeed are lifting off depressed levels, they might not climb fast enough to make up the difference.
It's not necessary to see a 1994-style bloodbath in bond trading -- and it's unlikely, given how well telegraphed the Fed's intentions have been -- for fixed-income revenue to drag down the firms' earnings prospects.
Broader trends in the business are also worth worrying about. Despite the difficulty of managing a securities firm through the nasty bear market, virtually no capital or capacity exited the industry. According to the Securities Industry Association, the brokerage industry's trade group, equity capital in the industry ended 2003 at $89.9 billion, 6% above 2000 year-end levels.
That has helped drive profit-margin pressure in many business lines, notably equity sales and trading. Brad Hintz of Sanford C. Bernstein has chronicled the relentless downward push on commission levels and profit opportunities in this crucial business, and it doesn't appear likely to abate any time soon.
The recent trend in stock issuance also spurs questions about competitive intensity and margin compression. Richard Strauss, an analyst at Deustche Bank, notes that in the first quarter, 25% of all follow-on stock offerings (meaning noninitial offerings) were "bought deals," up from an average of 10% in the past.
Executing a bought deal means the issuer solicits bids for the value of the whole offering from securities firms, to be done as a single trade. The winning firm agrees to "buy" the stock offered and then tries to resell it into the market. This is far less profitable than the standard underwritten deal in which the investment bank runs a road show and lines up buyers, for a larger fee.
Strauss reports than several deals of more than $1 billion were done for less than 0.5% of the offering value, a slim take when a firm's capital is also at risk. The upshot is that the revenue from follow-on offerings is running at about half the levels one would expect from the volume of issuance.
The stout capital positions of the largest brokerage firms presents investors with other concerns. For one thing, it means the firms will have a tough time achieving the 20%-plus returns on equity they managed through much of last year and early 2004, simply because the equity base is high.
Hoeg calculates that trends in ROE are the main determinant of the valuations investors are willing to pay for brokerage stocks. Given that he sees ROE more likely to decline than rise, he concludes price/book-value multiples aren't very attractive today.
What Hoeg does not and cannot mention is that the shares of his own firm, Goldman, remain the most expensive in the group, at more than twice book value and more than 2.6 times tangible book. Goldman also faces investor concern over potential selling pressure in the stock, as more than 100 million shares become eligible for sale as the firm's post-IPO lockups expire by June 23.
Lots of excess capital on the brokers' books also presents the temptation to take on more risk to boost returns. From the anecdotal-evidence file, The Wall Street Journal this month ran stories on consecutive days detailing the increased appetites of Goldman and Credit Suisse First Boston for taking on trading and credit risk.
Merrill Lynch seems the predominant (or default?) choice among the folks who follow the industry of a stock worth owning. Of the 18 analysts covering Merrill, 15 rate it a Buy. And yet, even with that crowded bullish consensus, the stock sits 15% off its high and down 5% on the year.
What the market is expressing that the analysts aren't is some doubt about whether Merrill can make the transition from a posture of aggressive and successful cost cutting to selected buildups in various businesses -- without compromising margins. Revenue was up a strong 25% in the first quarter, but expenses rose even more. Merrill's ability to drive revenue growth in the absence of a bond-trading tailwind and still-fragile retail-investor sentiment is also a concern.
On a price/book basis, around 1.75 times, Merrill shares are cheaper than they have been about 60% of the time since 1995. And, if the broad market gets another powerful lift, Merrill and its peers will fully participate.
But when a stock continues to look relatively cheap despite a sideline full of cheerleaders, it makes sense to ask what the market understands that the analysts aren't focused on.
美股止跌回升，前景是喜是忧？
踩水是很累人的，但总比沉下去要好。上周末，股市总算是勉强企稳，从上周中期一度见到年内新低的下沉状态重新浮了起来。
周三后市道琼斯工业股票平均价格指数从盘中低点一度反弹200点，由大幅下挫变为小幅上扬。即便这种反弹只是收复了前几天的失地，但仍然值得关注。之后股市在剩余几个交易日开始上下震荡，让人们不禁产生这样的疑问：这是一次报复性反弹，还是3月份低点的成功防御？
最终，上周的止跌反弹并没有任何决定性意义，道琼斯指数全周累计下跌104点，至10012点，跌幅1%。一度跌破1087点的3月份低点并下探1076点的标准普尔500指数全周累计下跌3点，至1095点。
上周初，那斯达克综合指数表现强于大盘，但在戴尔电脑(Dell Computer)的拖累下涨势受到遏制，全周下跌13点，至1904点。戴尔电脑的业绩达到预期，但并未给华尔街带来惊喜。
很难说清股市下挫的具体原因，但值得一提的是，与此同时原油价格突破了40美元，10年期美国国债收益率一直保持在4.8%左右的近期高点，此外思科(Cisco)的业绩也令那些钟爱科技类股的投资者大失所望。
很明显，两周多以来近乎无情的抛售已经令股市经历了充分调整。卖压的严重程度和投资者的焦虑心情早已达到无以复加的水平，足以使股市出现突然反弹。卖出期权与买入期权的比率也达到了极限。截至上周三的一周里，投资者从本地股市共同基金中抽回了超过20亿美元资金，表明公众投资者已是异常谨慎，而这通常会成为反弹的迹象。
市场进一步上扬的最好理由可能是未来几周消息面较为清淡。股市已经对几乎所有的收益和经济数据都作出负面反应，而下周只有为数不多的经济报告和零星几家大公司的业绩即将发布，这或许可以被视为提振股市的因素之一。
这些因素主要是针对股市的短期反弹而言，特别是如果能够伴随著债券收益率的持稳和油价的小幅回落就更加乐观了。
但是很多曾经在2003年股市强劲反弹初期看涨股市的咨询机构已经变得非常谨慎。Lowry's Reports指出，最近出现了中期行情的负面迹象，但短期内市场可能会有所反弹。
Schaeffer's Investment Research上周二也改变了看法，自2003年7月以来首次将针对长期走势的中性立场转为看跌。
Schaeffer表示，这种转变主要是缘自华尔街的各种投资者满意度指标，再加上股市在公司业绩强劲并且第一季度有大量资金流入的情况下仍然未能出现喜人涨势。
当然，任何人都无法成为市场评论的垄断者。一些看涨人士指出，在各指数最初回落5%以后，几个月来市场显然在持续反弹。
这种宏观市场分析往往会被注重基本面的股票分析师和基金经理们所忽略，他们看到了眼前出色的公司业绩，但并不认为这会给股市带来上涨动力。当然，在2003年春季疲软的基本面就摆在面前的时候，没有人相信股市随后会出现40%的壮观反弹。
尽管各公司发布的收益数据让电话会议与会者眼花缭乱，然而市场本身却似乎确信经济已经告别了高速增长。
美林(Merrill Lynch)的经济学家大卫?罗森伯格(David Rosenberg)指出：“今年标准普尔500指数表现最差的类股中有五分之四是周期性股票。所有人都预见到经济将高速增长并最终过热，除了股市。”
日历又要翻到华尔街欢欣雀跃、开始设想明年美好前景的时候了。
每年年中前后，华尔街分析师和策略师们往往要出于评估股票的目的对公司明年的业绩作出预期。而他们对一年、或更长时间的业绩常常会作出“快速增长”的预期，这无疑会令股票的本益比看上去更低一些。
按照标准普尔500指数目前1095点的水平、今年公司平均每股收益64美分的预期来计算，市场的本益比在17倍左右。如果基于2005年的收益预期，股票价格则看上去便宜得多。特别是，Thomson First Call称，明年公司平均每股收益有可能达到70美元，基于明年预期的本益比为15.6倍。
有趣的是，一年前市场基于当前和第二年收益预期而计算的本益比与眼下的结果非常类似。2003年5月1日标准普尔指数位于916点，2003年每股收益预期为53.69美元，因此本益比为17倍。当时分析师对2004年的预期为每股收益61美元，因此基于第二年预期的本益比为15倍。
正如我们现在看到的，分析师一年前低估了公司收益的增长能力。
2003年公司平均每股运营收益为55.50美元，目前的2004年预期为每股收益64美分，均高于1年前的预期水平。
基于今年和明年预期来评估当前市场估值时有一些事情是应该引起注意的。例如与过去标准相比当前本益比水平即使不是高得离谱也仍然处于相对较高的水平，自发布收益预期至今的本益比中值在12倍左右。
另外，分析师很少会连续两年以上低估公司业绩。因此明年业绩像去年那样超过预期的可能性微乎其微。
这并不是说明年业绩会破败不堪。但由于目前股票估值充分，并且公司给人们带来惊喜的可能性降低，因此未来几年股价上涨的潜力非常有限。
