Tired Bull

WHAT COULD BOG DOWN THE BULL


By VIKAS BAJAJ
New York Times
Published: February 1, 2007

Stocks surged yesterday afternoon, sending the Dow Jones industrial average to within a hair of a new high, after the Federal Reserve pointed to strength in the economy and a moderation in inflation.

Investors may want to enjoy it while they can.

The road ahead promises to be a long, hard slog as corporate profits are starting to slow.

And while Wall Street focused yesterday on the signs that the Fed will not raise rates anytime soon, there is also the glum realization that no rate cut — a hope that had buoyed stocks as recently as December — is likely to materialize this year. The Fed noted that “some inflation risks remain,” as it left short-term rates steady at 5.25 percent.


Shifting Rate Expectations

Earlier, the Commerce Department reported that the gross domestic product grew at a 3.5 percent annual pace in the fourth quarter, far faster than the 2 percent pace in the third quarter and the 3 percent most analysts had expected.

Yet even amid evidence that the economy remains healthy, corporate earnings, which have been growing at a double-digit pace for more than four years, are expected to slip into single digits in the coming months, if they did not already do so in the fourth quarter. As a result, investors are left with a quandary.

“Will there be an inflationary scare or will the economy get very weak?” said Marc D. Stern, the chief investment officer at Bessemer Trust, a money management firm based in New York. “At various times in the year, each side of that debate will look correct. That will lead to sharp rallies and corrections.”

Sectors like energy, utilities and financials that had led the stock market on its run-up since the summer have now turned into laggards, and few contenders have emerged to take their place.


A Different Lineup for Investors

This bull market may indeed be weary. The Standard & Poor’s 500-stock index has climbed at an average annual pace of 12.7 percent in the last four years — a run that has had no 10 percent correction, something that usually occurs at least once during most long-running bull markets.

But there was clearly life in the bull yesterday: The Standard & Poor’s 500-stock index closed up 0.66 percent, or 9.42 points, to 1,438.24, and the Nasdaq composite index closed up 0.62 percent, or 15.29 points, to 2,463.93. The Dow rose 0.79 percent, or 98.38 points, to 12,621.69 — a fraction of a point less than its record high set last week. And more bullish market watchers point to a long string of hopeful signs and developments, including the continuing wave of acquisitions and buyouts, Microsoft’s introduction of its Vista operating system and consumers who are still spending despite a slump in the housing market. Personal consumption increased 4.4 percent in the fourth quarter, the Commerce Department reported yesterday.

Many forecasters on Wall Street say these factors, along with stronger growth in sectors like health care, give them confidence that the market will move higher, albeit at a slower and more volatile pace than last year’s 13.6 percent advance.

“We are going to have an O.K. year,” said Robert C. Doll, vice chairman at Black Rock. “But its not going to be as easy as last year.”

The S.& P. 500 is up 1.41 percent for the year, with about half of that coming in yesterday’s rally. The Dow Jones industrial average is up 1.27 percent and the Nasdaq composite index is up 2.01 percent. The Russell 2000 index of smaller companies is up 1.61 percent.

Last year, virtually every sector of the market ended up, but the rally had a few strong and distinct leaders. Energy stocks led the way with a 22 percent advance, diversified financial institutions were close behind at 21 percent and utilities were up 17 percent. But as crude oil prices have fallen from a high of $77.03 a barrel and settled in a band from $50 to $60, profits at energy companies have slowed. Stocks in the sector are down about 1.9 percent so far in 2007; utilities are down 0.4 percent.

Many financial companies reported strong fourth-quarter earnings, but analysts expect them to come under increasing pressure from higher long-term rates and rising defaults. Stocks in the diversified financial sector ended January up 1.5 percent.

“The market is looking for new leadership,” said Owen B. Fitzpatrick, a managing director at Deutsche Bank’s private-wealth management division. “Everyone is watching to see what will lead the market higher.”

So far this year, real estate stocks, which did well last year as well, have led the way, with an advance of 9.7 percent largely because of the bidding war over Equity Office Properties Trust, the nation’s largest manager of office buildings. But analysts say that surge is unlikely to continue once a deal is set.

The stocks of auto and parts makers, mining and materials companies, consumer services and health care companies are also doing well, but many market specialists are skeptical about the sustainability of the lift in sectors like cars and materials. Specialists are more optimistic about consumer services and health care, but the sectors may not completely make up for the role played by last year’s leaders.

“The leadership has been shifting by fits and starts,” said John A. Carey, a portfolio manager and executive vice president at Pioneer Investments, a Boston-based mutual fund company.

Many forecasters including Mr. Carey say technology companies, which struggled for much of last year but had a good run in the second half, may finally be ready to lead the market again since the sector’s bust in 2000. The optimism is pinned in large part to new products and services including Vista, which could prove to be a catalyst that pushes businesses and consumers to purchase computers and related gear.

“The product cycle is in the process of changing,” said Jim T. Swanson, chief investment strategist with MFS Investments in Boston. “There is a lot of new software and old equipment.”

But it remains to be seen how widely the spoils will be shared across the technology sector. Bellwethers like Dell and Intel are still facing significant competitive challenges, and analysts have been disappointed by their recent earnings reports and the companies’ outlooks for the coming year.

Investors have also been forced to rethink their views on interest rates and the broader economy. As recently as the start of December, the futures markets predicted that the Federal Reserve would start lowering short-term rates by April. As of yesterday, investors were betting that the first rate cut would not come until November. The yield on the 10-year Treasury note, which moves in the opposite direction from its price, has risen from 4.39 percent in early December to 4.81 percent yesterday.

“The Fed is on hold in the near term as they watch the data,” said Dean M. Maki, chief United States economist at Barclays Bank, who expects the Fed to raise rates to 6 percent this year, beginning in June.

Until late last year, many investors appeared to have convinced themselves that the housing market would have slowed the economy enough to spur the Fed into action by the spring. Their recent shift in thinking seems to have little do with any new statements from Fed officials, who have repeatedly and consistently said they remained more worried about inflation than they were by the prospect for weaker economic growth, a clear indication that policy makers were not ready to lower rates.

Rather, investors have come around to the Fed’s view after reports on employment and manufacturing showed that the economy remained resilient in the face of the weakness in housing. Also, falling energy prices and a spell of unseasonably warmer weather early this year bolstered consumer spending and nonresidential construction.

“We could argue that perhaps the market got ahead of itself in projecting rate cuts for early 2007,” said Douglas M. Peta, a senior vice president and market strategist with J.& W. Seligman & Company.

Another force that may have restrained American stocks in the last year is investor apathy toward the shares of large domestic corporations relative to the markets for bonds, commodities and foreign stocks, all of which have risen. Investors poured $13.2 billion into funds specializing in domestic equities last year, compared with $138.9 billion in nondomestic stock funds and $75 billion in taxable bond funds, according to AMG Data Services. A far larger sum, $312.7 billion, has been parked in money market funds. Specialists note that the flows are odd given that equities in the United States are cheap on a price-to-earnings basis relative to other assets like commodities and stocks in other developed countries. It appears that at least some of the flow of investments into other areas is driven by a desire on the part of investors to ride more buoyant markets and to take advantage of the weakness in the dollar, which fell 11.4 percent against the euro in 2006. So far this year, the dollar is up 1.45 percent.

In a way, however, specialists say investors’ ambivalence toward equities is a good sign that the market has not overextended itself. “It is a good sign to the contrarian,” Mr. Peta said. “The market has room to run. It has not gotten out of hand.”

 

good post !

bgp

 

i was thinking about eop being bought out and the r.e. market being up . it reminds me when country wide sold out last year on a hi. sam zell knows his market and so did the owners of country wide.

bgp

 

Exactly.

If Sam Zell was willing to sell to me, I'd be too nervous to buy.

 

nice find.

 

eventually rallies like this do come to an end....the last selloff was nothing compared to one that might develop in due time.

 

too bad i have been so negative so early. it has been a detriment .

bgp

 

http://financial.seekingalpha.com/article/25804


Gleaning Info from Robust GDP Data

Posted on Feb 1st, 2007

Barry Ritholtz submits: Q4 GDP came in at a robust +3.5% (versus 3.0% consensus).

Let's take a look at the individual components to see what we can glean from the data:

1) Personal consumption expenditures: +4.4%

2) Gross private domestic investment: -11%

3) Exports: +10%

4) Imports: -3.2%

5) Government consumption expenditures and gross investment: +3.7%


Chart courtesy of Barron's/Econoday

A few things stood out to me in this advance run (there are 2 subsequent revisions to GDP):

1) Consumers continue to spend money at a faster rate (4.4%) than their income is growing (3.5%). That may be unsustainable, but determining when it hits home is a mere guess (obviously spending more than your income increases ain't gonna help the household savings rate none either).

2) Residential housing remains the biggest drag on GDP; non residential investment has picked up some of the slack from Housing, but it too is trending downward. The past few Qs have been 20.3% (Q2), 15.7% (Q3), 2.8% (Q4). Will office and mall construction follow housing? That certainly seems possible.

3) It is quite surprising to see consumer spending increase as imports drop, as we are , after all, an import loving nation. That suggests one number or the other is a likely revision candidate.

Now, you may not be surprised to see this sort of chatter from me or the even more bearish Nouriel Roubini. However, you should be surprised to see it from level-headed columnists like Bloomberg's Caroline Baum, and even more shocked to see it from the generally bullish Tony Crescenzi of Miller Tabak, and author of The Strategic Bond Investor. He observed:

I don't mean to discredit the fourth-quarter gain completely, and I have been upbeat about growth, but the reported gain must be watered down to some degree. Let's take a look at each of the four factors listed above and how we can interpret the data.

Crescenzi notes that business spending fell during the quarter - equipment and software dropped 1.8%, the 2nd decline in three quarters and the largest since Q4 2002. That's consistent with the contraction in the Chicago PMI, suggesting the U.S. manufacturing sector is still decelerating.

The residential spending figure was called "sobering:"

..it subtracted 1.2 points from GDP, and fell for a fifth consecutive quarter, by 19.2%. That follows decreases of 18.7% in the third quarter and 11.1% in the second quarter. The fourth-quarter decline was the highest since 1991...

Also of note: The relatively large contribution from the government sector. Spending increased 3.7%, with Uncle Sam spending 4.5% more, largely due to an 11.9% spike in defense spending. State and local spending increased 3.3%. Government added 0.7% of the Q4 GDP gains.

Where Tony really surprised me, however, was his take on personal spending:

On the surface, the figure looks solid, increasing 4.4%. The problem, however, is that it reflects a gain of just 3.6% in nominal spending because the personal consumption deflater fell 0.8%, its first decrease since 1961 and the largest decline since 1954, according to Market News.

This means that if the inflation rate for the quarter were at a normal level, say, up 2.0%, personal spending would have seen a very small gain of just 1.6% for the quarter. (I get this by subtracting 2.0% from 3.6%.)

The low level of nominal spending, which was the weakest in four years, reflects strain on the consumer. This figure represents the total amount of money that consumers spent during the quarter, a tally that looked good only because they caught a break with the decline in energy costs. Had energy costs increased, it would have produced a much different result. For context, nominal spending in the overall economy has increased at a pace of 5.6%; it increased at a pace of 5.0% in the fourth quarter.

The bottom line: A good number, but with some hair on it, likely benefiting from warmer weather, government spending, decreased energy prices, but also likely subject to further revisions.

 

THERE WILL NEVER EVER EVER EVER BE ANOTHER SELLOFF!!!!
EVER

 

HOG WASH