May 12, 2003
The Mania Capacity
The best performing S&P 500 industry since March 12 has been diverse utilities, and 5 of the top 10 performing stocks have been energy stocks. The best performer, Mirant, is your basic turnaround story: if the company can refinance more than $5 billion in debt it lives, if not it probably files for protection. Other S&P 500 high flyers during the current rally began seek not life, but profits. These companies include Avaya and PMC Sierra, or two companies that are expected to remain unprofitable until next year.
In short, junk rated utilities begging to renegotiate burgeoning debt loads and unprofitable tech stocks are not the only stocks to rally since March, but they are the leaders.
The Story of Mania Leadership
Much has been said about internet stocks catching fire during the latest rally. Rather than belabor the point – that the Ebay’s and Yahoo’s are trading at mania level multiples – it is worthwhile to consider another story in Intel.
After providing a less than spectacular outlook on April 15 INTC shares drifted higher with the market, and following last weeks Cisco outlook (for flat revenues), INTC shares began to drift lower with the market. However, just when it seemed like the tech correction had began, Intel offered some optimistic words last Friday:
“The Chinese are only buying the latest technology, that is spectacular. For us, China is the most important market in Asia and it will remain that way. The past year has been so bad that the semiconductor sector can only improve this year.” Otellini, Handelsblatt
Given that Intel reiterated its financial outlook last Wednesday, it uncertain why the above statement was construed as being a market positive. Nevertheless, INTC shares closed last Friday at $19.58 (+3.7%), or their highest close this year, and the ‘optimistic’ words from Otellini were credited in large part for the tech turnaround. In fact, Otellini’s words were still impacting trade early this week, as Reuters notes Tokyo stocks up as Intel sparks buying in techs.
Analyst estimates on Intel call for 80 cents earnings in 2004, or up 31% from 2003 estimates of 61 cents a share. At last weeks close, this represents a forward 2004 multiple of 24, which doesn’t include any expense (only the tax benefits), for Intel’s massive stock options program. In sum, the mania may not be in full bloom, but it is certainly back.
This Week
A flood of earnings reports. A flood of economic reports. It should be an interesting week.
On the tech front, releases from DELL, Applied, Intuit, and Computer Associates will be in the spotlight, while Wal-Mart will provide a litmus test for retailers when it reports on Tuesday. Story hungry investors may eat up DELL’s release, while retailers – regardless of WMT’s outlook - may track the economic stats more closely.
|
Given last weeks FOMC Statement - wherein the Fed for the first time ever openly warned of deflation – producer and consumer price reports will warrant attention this week. However, more important than these reports is the weekly jobless claims, which has become the key report to watch every week as it comments on the health of the labor market. Suffice it to say, the U.S. labor market is not healthy, and no report has suggested that things are improving following the defeat of Iraq.
After jobless claims the nod goes to the Philadelphia Fed and Mich Sentiment, which could provide some clues to the manufacturing and sentiment trends leading into May.
However, the blockbuster report could be the dated Industrial Production/Capacity Utilization reading from the Fed. Quite frankly, the capacity figure – expected to post a slight drop for April - needs to creep higher before anyone can even begin to forecast a sustainable uptick in capital spending.
Can the markets make it 5 in a row?
The last time the markets (S&P 500) rallied for 5-weeks in a row was following the viscous July 2002 sell off. As you may recall, this powerful rally fizzled in September and new lows were hit in October. If the markets pull out another miracle this week the odds will be stacked even higher for next week.
As for the last time the markets rallied for 4-weeks in a row (before the current streak the S&P 500 and Nasdaq are on), this happened following the viscous October 2002 sell off.
Suffice it to say, the bears have mauled every stock market rally since March 2000, and the end result of the current rally will be no different. Yet there remains the question of when the rally will end; how many more stories will be told and lapped up by momentum investors seeking to rekindle the 1990s?…
Rather than tell a story why not look at the facts? During the 1990s Capacity Utilization averaged 82.17, and it never dipped below 78.7.
All data and information within these pages is thought to be taken from reliable sources but there is no guarantee as such. All opinions expressed on this site are opinions and should not be regarded as investment advice.
Copyright © 2000-2003. FallStreet.com