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July 7, 2003 |
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Despite repeated calls from Wall Street that a new bull market is in flight, the markets have been coasting nowhere since mid-June. In fact, the intraday high on the Nasdaq on June 6 has yet to be firmly beaten, and the Dow and S&P remain well below their June 17 highs. With this in mind, the case could be made that investor’s are now waiting for hard evidence of an economic/earnings recovery following what was a speculators ramp-up leading into the Fed’s June 25 meeting. If no evidence of recovery soon arrives does this mean prices will plunge?
Before speculating further that a sideways market may compel investors to begin basing their investment decisions on the fundamentals (and that this could be bad news for stocks), it may be important to recognize a potentially bullish catalyst for the markets. The rumor making the rounds today is that Microsoft will increase its dividend payout, and/or that other tech giants will follow. Since Microsoft makes up more than 10% of the Nasdaq 100, and is included in both the Dow and S&P 500, speculations that the company will increase its dividend are noteworthy. Quite honestly, a dividend increase could be regarded by free wheeling investors as a sign of corporate strength, and this perception could serve to stimulate interest in stocks. Granted, it may be too early to conclude that the tech leaders are going to embrace dividends and save the markets from a terrible fall. Nevertheless, if companies like Microsoft, DELL, Intel, and Cisco begin declaring dividends, make their yields more attractive compared to bonds, the near term bearish case for tech becomes less compelling. The Downside To Dividends During the last three years DELL – which makes up 3.16% of the Nas 100 – has spent $8 Billion on buybacks, and more than $16.5 billion in new investments. Sure, an industry leading and marketshare stealing company like DELL may be overvalued based upon overly optimistic assumptions for future growth. However, if a handful of DELL’s declare dividends and begin yielding 2-3% the argument could be made that their share prices will not be prone to complete collapse. Before buying into this argument hook, line and sinker, three points are worth noting: 1) If the DELL’s are paying out dividends they will probably not be buying back as much stock. Given that stock buy back programs at many tech companies are used to combat stock options dilution this could dilute shares quickly. 2) Dividend declarations are a signal of an aging industry – tech valuations are high because of high growth expectations. 3) If tech companies begin declaring dividends this could mean that they are throwing less money around in the stock market. In sum, while increased dividend payouts could stimulate tech stocks, it could also be the case that dividends bring a sense of normalcy to tech industry that is currently not present. Dividend payouts at the expense of buy backs would bring down EPS growth targets, and dividends at the expense of new investment (in stocks, companies, or new technology) could make the tech environment less exciting. Is it excitement or a 2% dividend yield that really attracts investors to tech? Needless to say, for all of this speculation, beyond the DELL’s and MSFT’s not many tech companies are in a position to declare/increase dividends. Thus, while dividend payouts could help support certain tech stocks, for the broader markets such declarations would likely serve as little more than a near-term catalyst for the ramp-up artists. Unemployed and Loving It? Given that the post-Iraq recovery has yet to rear it head, last week’s 30K decline in June payrolls was not surprising. Moreover, May’s payroll revision - from negative 17K to negative 70K – was also not surprising. However, what was surprising about last weeks employment report was that someone tried to force an optimistic take on the data: “While the unemployment rate hit its highest level since April 1994, the increase was largely due to 611,000 people rejoining the workforce, and hence reflects optimism, said Labor Secretary Elaine Chao.” CBS MarketWatch I may be off base, but wouldn’t a more optimistic outlook be if these 611,000 people had enough money so they didn’t have to worry about finding a job? Quite frankly, someone not worried about working one week still manages to pay their bills. As such, I would speculate that a jump in the amount of people looking for work is bad news given that it could be a signal that they need a job to pay the bills. That said, there is no need to overanalyze Ms. Chao’s ridiculous remarks. To be sure, there is no cause for optimism given that none of these 611,000 new job hunters has actually found a job. In short, last week’s payrolls data was terrifically bad news. As for the uptick in the unemployment rate, the BLS estimates will – in a few years time – likely be revised higher; if you count NILF workers as unemployed the unemployment rate is around 7.4%, and if you include only ‘discouraged workers’ – workers currently looking for work specifically because they believed no jobs were available for them – the unemployment rate is at 6.7%. There were 478,000 discouraged workers in June, up from 342,000 in June 2002.
Week Ahead Given that jobless claims and producer prices are the headline reports this week, the markets may begin to pay more attention to earnings. Last week’s earnings warning from Siebel - citing customer deferrals – was noteworthy. However, this is the last week of warning season, and thus far the warnings have been isolated. Chuck Hill notes (July 7) that 2Q03 and 3Q03 are proving ‘more stable than usual’. GE and Alcoa are two Dow components slated to report this week.
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