Live From Baghdad, Subdued on the Street
A YEAR AGO, THE LIVE FOOTAGE from Iraq that commanded traders' attention was a buy signal, as the globally televised fall of Baghdad helped embolden investors and obscure troubling economic realities.
Last week, the news feed from Iraq helped to hold stocks in check, as the messy Iraqi backlash against the American-led occupation drew the focus away from some generally encouraging financial news.
Certainly, there was no profound sense of alarm or notable selling pressure related to the heightened hostilities in Iraq. The market was just about flat on the week, with the Passover and Easter holidays leaving many investors idle. Markets were closed for Good Friday, and even before that the pace of trading was notably slow.
After its lurch higher in the previous weeks, the market might have been left searching for a second wind in any case. And, as ever, isolating the root causes of any market behavior is a dubious exercise, especially when the indexes sit still.
The weekly score sheet proved indecisive. The Standard & Poor's 500 index absorbed a minimal two-point loss, finishing at 1139. The Dow Jones Industrial Average spent Monday adding to the gains posted after the strong April 2 employment report. But a late-week retreat left the index down by 28 points on the week at 10,442.
The Dow was slowed by disappointed reactions to Alcoa's strong-but-not-strong-enough earnings report and by Wal-Mart's sales, which tracked at the lower end of its promised range. These were the unwelcome counterpoints to a week of generally solid financial news. General Electric, for instance, hit the upper end of its target for first-quarter earnings, though its shares benefited only marginally.
Weekly unemployment claims dropped more than economists expected, lending a bit more support to the notion that the job market is in recovery mode.
And technology companies did their part, with Yahoo! surpassing even bullish forecasts for increased profits and Dell boosting its outlook for customer demand across its product lineup. Genentech briefly lent a bid to the peripatetic biotech sector, before that group, too, slumped on flagging investor conviction.
Positive tech news aside, the Nasdaq joined the broader indexes in going nowhere, slipping four points to settle at 2052. It is plausible that this amounts to a simple rest after an 8% rebound from the March pullback and before the busiest phase of earnings season begins.
Corporate earnings, viewed broadly, are being awaited without much sense of suspense on Wall Street. The 17% year-over-year profit increase now forecast for the S&P 500 companies in the first quarter is widely viewed as being a lay-up. More likely, say analysts, investors will express some disappointment if the ultimate tally doesn't end up closer to 20%.
The mixed response to the early-arriving earnings news offers no guarantees about how stocks may respond even to admirable profit performances.
With the market bouncing hard since March 24, investor sentiment has again turned placid, with more concern about whether the market can take out its recent highs (around 1163 on the S&P 500) than about the danger of another downside test.
In this context, the renewed attention on Iraq and the continued volleying of blame for the 9/11 attacks could hardly have a positive influence on Wall Street's mood, even if it ultimately proves just a brief distraction.
The market on some days has appeared to trade based on the ebb and flow of the Bush administration's political prospects. In fact, several observers interpreted the rally following the recent employment data as a cheer for the president's economic record improving, at least on paper.
By that logic, the negative bias late last week might have represented some incremental market concern about Bush's electability.
Leaving aside the fact that neither Bush nor his Democratic opponent can be proven better or worse for stocks before the fact, Wall Street has shown a clear preference for a second Bush term. Where once there was a lazy consensus that the president would waltz to re-election, the market now senses a closer race, by most accounts.
None of this may matter much in the coming weeks, as corporate pronouncements and CEO conference calls command investors' every free moment. But in later months the to-and-fro of election year politics should be expected to impose itself on Wall Street's consciousness. At times, in other words, traders may be following the political programs as closely as the financial networks.
IT'S AS TRUE IN THE MARKETS as it is in roulette: You can't predict where the ball will land, but it behooves each player to know where the biggest bets lie.
It appears that among the sunny strategists who think the market has another 15% to 20% of upside ahead of it, the favored place to lay their chips is on the number 20. That is, to get to year-end or 12-month targets of 1300 to 1380 on the S&P 500, they pencil in 20 as the just and proper multiple of earnings that stocks should achieve and maintain.
Morgan Stanley's Byron Wien informs clients that by year end he thinks the S&P can trade at 20 times 2004 operating profits, which with some additional upward revisions could reach $64 a share. That produces a target of 1280, within the margin of error of Wien's prediction of 1300 made at the start of the year.
Over at Prudential, Ed Yardeni is more aggressive, contending that the market's multiple of forward, not trailing, earnings should rise to 20 throughout the remainder of the year. If, as he believes, forecast 2005 earnings are at $67 late this year, the tidy math produces an index target of 1340.
As a further exercise in happy extrapolation, Yardeni poses the prospect that, through 2010, earnings could continue to rise at the 7% annualized rate in place since 1960. "If the [forward] P/E multiple remains unchanged" around 17, he writes in his latest client dispatch, "then the S&P 500 should rise to 1900, a 70% increase over that period."
If lucky number 20 is hit on the P/E wheel, the S&P would double by 2010.
A third strategist, Tony Dwyer at FTN Midwest Research, simply uses the market's current 20-times multiple in the latest twelve months' of operating profits and posits that this trailing P/E can be applied to projected earnings for 2005.
While that may sound like a prediction that earnings growth alone will drive stocks higher, it is really a forecast of multiple expansion, with today's trailing P/E equaling tomorrow's forward P/E, on a higher number. Dwyer's resulting target is 1384 in a year, up more than 20%.
All three of these market handicappers concede that they appear to be painting an aggressively upbeat market landscape. Wien refers to an associate in his strategy group who is uneasy with the idea that stocks can march higher and maintain such a multiple when the annual rate of earnings growth has peaked and will decline through the year.
Yardeni admits he engages in long-term market projections "with some trepidation," then goes on to note his impressive record of bullishness in advance of the great '90s market ascent.
Dwyer couches his analysis as a mock interview with a skeptical questioner who attempts to knock him from his positive take on things.
In each case, the strategists defend their assumptions that P/E multiples can stay at 20 by noting that inflation and interest rates are low. Wien remarks that with inflation running at 2%, "a P/E ratio of 20 is historically supportable." Yardeni gets specific, noting that multiples were similarly high during the early '60s, when inflation and interest rates were at comparable levels.
These statements are true, but deeper inquiry into the interplay of inflation and stock valuations shows simply that while low inflation rates do tend to coincide with periods of high P/Es, they don't "justify" them or change the unforgiving math that says high multiples indicate low future returns. People will pay more for stocks when inflation is low, but that doesn't mean investors are well rewarded for doing so.
To be specific, the average multiple of trailing reported earnings (not merely operating profits) has been 16. The median multiple on forecast earnings since the advent of published profit estimates is just over 12. At the start of the year, the 17.7-times forward multiple on the S&P was higher than 80% of all past readings, says Cliff Asness of AQR Capital.
So a forward multiple of 20 come this December would really price the market for a state of Platonic perfection. Valuation work doesn't much help in handicapping the following year's market path. But valuations near or above 20 have invariably led to subpar multiyear returns.
It is common for bulls to scoff at comparing multiples in today's low-rate, low-inflation, purportedly high-performance economy with those of the dark, stagflated past. But isn't describing the heavenly conditions of the current environment just another way of saying this is as good as it gets?
The Fed has made clear that it won't tolerate lower inflation levels, as measured by the CPI, than the recent trend. No further tailwind there. Another thing about inflation is that it has played a large role in helping profits grow at that 7% long-term rate cited by the bulls. So penciling in 7% profit growth, then applauding the low inflation rates that help explain away high multiples, doesn't hold up over time.
All this harping aside, there certainly are other respectable ways to express a tactically bullish case for the market. One can discuss the pattern of past post-bubble revivals, which often last more than a year and go farther than most skeptics think possible.
Speak of free money finding its way into financial assets. Say we're in a nearly perfect -- if ephemeral -- market moment when high profit growth, low inflation and elevated risk appetites can float stocks. Or simply point to the upward-sloping charts and note the meager number of stocks hitting new lows.
But none of this suggests that stocks truly deserve or can long sustain the generous valuations plugged into Wall Street's spreadsheets.
IT ALSO HELPS TO KNOW WHERE the concentrated betting interest sits when playing individual stocks during earnings season.
Stocks selling off on what look to be "good" or "as expected" profit reports -- or rising despite mediocre earnings -- have become common and confounding experiences. Much talk of "whisper numbers," "disappointing guidance" and "selling on the news" invariably ensues.
A stock's reaction, even in the expected direction, can be made more severe depending on which way sell-side analysts and investors have been leaning before the fact.
The 14% one-day tumble in Nokia shares Wednesday following a warning on slower sales was, no doubt, made worse by the positive posture of the Street beforehand. There were 24 Buy ratings and no Sells, and the stock had run up by 9% in the prior two weeks. (For more on Nokia, see Plugged In.)
Then there was the voracious buying response to Yahoo's overachieving profit report late Wednesday, which pushed the stock up 16% to a new 52-week high. Yahoo! is hardly an unloved orphan stock. But it sustained an analyst's downgrade the day before it reported results and was under pressure ahead of the news.
Buyer's Holiday: The Dow eased lower in a holiday-clipped week, losing 28 points to reach 10,442. Alcoa slid on a shortfall in profit growth, and Wal-Mart fell on disappointing sales.
The point isn't that analysts' opinions are reliably wrong, or that stock action is never predictive. But to get ahead of these types of moves before the quarterly numbers hit the tape, it can help to sift for stocks where Street opinion has become lopsided and the stock is hinting at excessive enthusiasm or pessimism. This can isolate stocks that are vulnerable to either upside or downside surprises.
Using data from Thomson Financial and Zacks Investment Research, a quick screen for stocks on which at least 75% of all analysts carry Buy ratings turns up several companies that are due to report earnings in the coming week.
The analysts who follow Intel, for instance, have remained loyal to the stock through its entire 20% three-month slide. There are 29 Buys out of 35 total ratings, with no Sells to be found. That could serve as a yellow flag. Still, the stock itself has trailed the market during the latest rebound and it isn't clear that market chatter is particularly bullish on the company's results due Tuesday, the way it was preceding Intel's mid-quarter update.
Homebuilder MDC Holdings and financial bellwether Citigroup are also touted by a supermajority of sell-siders. But, again, the stocks haven't rushed higher leading up to their reporting dates, indicating the stakes may not yet be too high.
PepsiCo, on the other hand, has become the choice of today's trading generation, creating greater urgency for the company to please its fans come Thursday. Nearly 80% of all ratings are Buys and the shares have climbed about 10% since the recent market low of March 24, versus 4.4% for the S&P 500.
More dramatic is the love-in that has engulfed SanDisk, the maker of flash memory products used in hot new cellphones and digital cameras. Seven out of nine firms that cover it are recommending the stock, which has soared 28.5% in the six weeks since Barron's Bill Alpert highlighted SanDisk's bright prospects (Tech Trader, "Flashy Prospects for SanDisk," March 1).
Earnings forecasts have been inching higher. But, by the looks of the stock chart, the market may now expect to see a bit more than the 32 cents a share median estimate when the company delivers its report Wednesday.
After a thumping one-year rally and an earnings renaissance, it isn't quite as easy to turn up stocks toward which the Street sentiment has turned hostile.
But a handful of large companies are less favored heading into reporting season. Johnson & Johnson, State Street and Fifth Third Bancorp are three names reporting this week on which fewer than 40% of all ratings are Buys. Each stock has also improved the chances for bullish contrarians to score by underperforming the market in the last couple of weeks.
华尔街对巴格达现场报导反应渐淡
一年以前，从巴格达发回的吸引交易员高度关注的现场画面也向他们发出了买入信号，当时在全球各地电视屏幕上播出的巴格达陷落的镜头让投资者们信心倍增，经济上的困境也变得不那么引人注意了。
上周，有关巴格达的消息再次控制了股市，伊拉克人对以美国为首的驻伊占领军频频发动的袭击让投资者的视线不得不从总体向好的财务消息上再次转向那片是非之地。
当然，对于伊拉克日益升级的对抗活动，市场尚未表现出极度恐慌或明显的抛压。上周股市总体持平，许多投资者因逾越节和即将到来的复活节假期而离场度假。上周五股市又因耶稣受难日休市，而此前市场已开始清淡起来。
在此前几周的动荡之后，市场或许已开始再次积聚动力。而且，跟以往一样，将市场表现的基本原因割裂开来的做法是不可靠的，特别是在指数基本平稳的情况下更是如此。
上周市场交出的成绩单并不能说明什么问题。标普500指数微跌了两点，收于1139点；道琼斯指数在4月2日受强劲就业数据推动大幅上涨后，上周一乘胜追击，但因后两天有所下挫，至周四收盘时，全周累计跌28点，收于10,442点。
导致道指走低的主要原因是，市场对美国铝业(Alcoa)收益增长不够强劲及沃尔玛(Wal-Mart)同店销售处于其预期低端感到失望。上周公司财务消息大都比较积极，比如通用电气(General Electric)第一季度收益就达到了目标区间的高端（虽然其股价涨幅很有限），在这种情况下，两家公司的成绩显然不太受欢迎。
每周首次申请失业救济人数低于经济学家的预期，这使市场更加相信，就业市场的确在复苏。
科技类公司也没让市场失望，其中雅虎(Yahoo!)的利润增长比本来就不低的预期还要强劲，而戴尔电脑(Dell)上调了其各类产品的市场需求预期。
在一向频繁起伏的生物技术类股中，Genentech曾推动整个类股短暂上扬，但因投资者对它们信心不足，该类股后来又再度回落。 但虽然科技股方面有这些积极的消息，那斯达克综合指数全周却和大盘指数一样无所作为，收盘时累计下跌4点，收于2052点。当然，你也可以将其视为该指数从3月份的低点反弹8%之后、在忙碌的收益季节即将开始之前的短暂休整。
总体而言，华尔街认为即将发布的公司收益没有多大悬念。市场普遍预计，标普500公司第一季度收益总体平均较上年同期增长17%没什么问题，分析师还说，如果最后增幅达不到接近20%，投资者甚至可能会失望。
虽然投资者对较早发布收益的公司反应不一，但这还不能说明，即使是对那些盈利表现值得赞美的公司，投资者会作何反响。
自3月24日以来股市大幅反弹之后，目前投资者的人气已趋于平静。相比之下，投资者更关心的是股市能否回到近期高点（具体对标普500指数而言，也就是1163点），而不是是否会试探再次下行。
在这种情况下，公众对伊拉克局势的再次关注及对政府在"911"事件中责任问题的轮番质问恐怕不会对华尔街人气有何正面影响，即使事实上这些问题可能只是暂时转移了投资者的注意力。
有几天，市场的交易行为似乎是围绕布什政府的政治前途
展开的。有一些观察人士就将前不久发布就业数据后股市的上扬解释为是投资者对布什总统的经济成绩有所改善（至少纸面上有所改善）作出的肯定。 如果按照这种逻辑，上周后两天的负面走势或许表明，人们对布什获得连任的可能性越发感到担心。
且不说在大选结束前没人能证明布什和竞选对手谁当选对股市更有利或更不利，但华尔街显然更喜欢布什连任。虽然曾有调查显示布什将顺利地再次当选，但市场从许多方面判断，竞选双方目前旗鼓相当。
不过这不会对未来几周的市场走势有多大影响，各公司的财务声明和首席执行长们主持的电话会议将占据投资者每分钟的空闲时间。但在随后几个月时间里，可以预计，大选年的政治变幻将影响华尔街的意识。换句话说，就像平时大多根据财务消息买卖股票一样，在这个非常时期，交易员们也会时不时地根据政治舞台上的表现决定他们的交易。
