MARKET ACTIVITY / TRADING NOTES FOR DAY ENDING TUESDAY 070197 PAGE 1
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Wednesday, July 2, 1997 -- Wall Street powers ahead --
U.S. stocks followed bonds upward as investors doubted the Fed would boost interest rates, boosting the profit outlook for U.S. banks. Canadian markets were closed for the Canada Day holiday
In New York, the Dow Jones industrial average rose 49.54 points, or 0.65%, to 7722.33. Volume was 547.8 million shares, compared with Monday's volume of 565.4 million shares.
Stocks gained after a private manufacturing survey suggested the economy isn't growing fast enough to prompt the U.S. Federal Reserve -- which concludes a two-day policy meeting today -- to raise rates as an anti-inflation measure. Steady or falling interest rates and rising earnings have underpinned this year's 20% rally by the Dow.
"It can't get much better, but I think it can continue to be good for some time," said Lee Kopp, president of Kopp Investment Advisers.
J.P. Morgan & Co. (JPM/NYSE), the third-most heavily weighted stock in the Dow average, rose US$3 1/8 to US$107 1/2, rebounding from Monday's US$2 3/8 drop. The company's securities and investment management
businesses benefit from lower rates.
Banks helped boost the broad market as bond yields fell, brightening the outlook for their profit margins. BankAmerica Corp. (BAC/NYSE) rose US$113 1/816 to US$66 3/8, NationsBank Corp. (NB/NYSE) rose 7/8 to US$65 3/8, Citicorp (CCI/NYSE) jumped US$2 3/4 to US$1235 1/816 and Bank of New York Co. (BK/NYSE) rose US$1 1/4 to US$44 3/4.
Bond yields fell after the National Association of Purchasing Management said its factory index declined to 55.7% last month from 57.1% in May. Analysts expected 56.1%. A reading of 50% or more indicates expansion.
Coca-Cola Co. (KO/NYSE) rose US$1 1/8 to US$68 5/8. The company said it expects second-quarter worldwide case sales to rise 7% or 8%, led by growth in Latin America and Asia. Coke also said it will record a US$200-million gain on the sale of a Philippines bottling unit.
Boeing Co. (BA/NYSE), rose US$11 1/816 to US$54 1/8 after winning antitrust clearance from U.S. regulators for its US$15-billion purchase of McDonnell Douglas Corp. Also, Lehman Brothers named Boeing as one of its top 10 stock picks for the coming year.
Warnings of lower profit and apprehension about the traditional summer slowdown hurt software companies. The Nasdaq composite index, which is laden with computer-related companies, fell 3.82 points, or 0.26%, to 1438.25.
Intel Corp. (INTC/NASDAQ) fell US$2 3/4 to US$1391 1/816, Microsoft Corp. (MSFT/NASDAQ) lost US$17 1/816 to US$12415 1/816 and Oracle Systems Corp. (ORCL/NASDAQ) dropped US$113 1/816 to US$489 1/816.
Investors are looking ahead to second-quarter earnings, which will be reported in the middle of the month. Shares of automakers, drug companies and insurers have the most momentum, based on higher earnings estimates, said John Dorian, head of equity investments for Fiduciary Asset Management Co.
However, many investors are worried that U.S. stocks have risen too far in the rally this year, and say prices need to fall.
"We've had one of the most incredible rises in the market that any of us have seen, and a great deal of overvaluation has crept in," said Seth Glickenhaus, chief investment officer at Glickenhaus & Co. "Money is still pouring in and will continue to do so, but eventually there will be a comeuppance."
Investors are looking ahead to today's U.S. labor department report on the unemployment rate and new job creation in June. More signs of tightness in the labor market could prompt the central bank to raise interest rates later this year.
The major overseas markets closed mixed.
London: Britain's benchmark index soared to its biggest one-day point gain in five years in a rally that caught analysts and dealers by surprise. The FT-SE 100 closed at 4728.3, up 123.7 points, or 2.69%.
Frankfurt: Stocks ended at a new closing high as the export-dependent chemical sector stole the spotlight, drawing strength from the US$'s trading above 1.74 marks. The Dax 30 index closed at 3819.85, up 34.08 points, or 0.9%.
Tokyo: The market suffered heavy losses as a mixture of trepidation ahead of the Fed meeting and anxiety over the Nomura Securities Co. Ltd. scandal weighed on it. The Nikkei 225 average fell 429.44 points, or 2.08%, to 20,175.52.
Hong Kong: The market was closed as the former British colony marked its return to Chinese rule. It reopens tomorrow.
Sydney: Stocks ended barely changed from Monday's record close as strong underlying sentiment won over an early bout of profit-taking on the first day of the new financial year. The all ordinaries index closed 4.7 points, or 0.17%, lower, at 2721.2, below Monday's record of 2725.9.
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Wednesday, July 2, 1997 -- Inside the Market --
Bull and bear views from investing Goliath
By PATRICK BLOOMFIELD The Financial Post
I wrote last weekend about the faint wisps of what might or might not herald a market storm. As the week began, I was intrigued to see a similar theme in one or two other people's market commentaries.
In part, the new quiescence reflects investor hesitation to take positions until the federal open market committee of the U.S. Federal Reserve has confirmed the expectation it will stand pat on interest rates. (It will tell the markets its decision early this afternoon.)
The quieter tone also speaks of the inherent risks of the narrow leadership that has been driving U.S. stock prices higher. Scared of hitting a stock-price air pocket, U.S. fund managers have been converging on the more heavily traded large caps in the hope that, should stock prices take a sickening plunge, they can put on their parachutes and bail out fast.
This unseemly rush for safety has, of course, been self-fulfilling, widening the performance gap between big and small. In the first quarter of the year, for instance, the top 100 stocks in the bellwether Standard & Poor's 500-stock composite index rose 3.6%, while the index itself rose only 2.6%.
Now what happens if all those fund managers who are invested in the biggies decide to bail out together?
That is, I hope, no worse than a hypothetical question. But it does reinforce the second caution I uttered last week: if you have to buy, then for heaven's sake steer clear of the crowd and pin your hopes on finding value stocks.
The case study in my weekend column was Irwin Michael's ABC Funds Inc. mutual funds group, still something of a David in the money management world.
For something completely different, I also joined a small group of Bay Streeters for a breakfast with three executives from a Goliath -- the investment arm of the U.S. company that just happens to have the largest market capitalization in the world and bears the familiar household name of General Electric Co.
GE, of course, does a lot of other things besides manufacturing major appliances. One of those things is financial services (GE Capital), which accounts for about 35% of the parent's profits.
Another GE financial services business is GE Investments, which has been managing money since the 1930s. GE Investments now looks after US$58 billion in client and pension fund assets, of which the company's own in-house pension fund accounts for some US$34 billion.
As Keith Smith, the chartered financial analyst who is GE Investments' vice-president of Canadian marketing, stressed at the breakfast, the style is fundamentally bottom-up.
In investment terms, that means this team of 22 portfolio managers and analysts pick the stocks around the globe they believe have the best potential for growth. They do not invest by picking markets or by trying to second-guess national economies, though these are obviously among the many factors in their decision making.
Essentially, the GE team aims to ferret out names in which the stock price to cash earnings multiple is lower than the percentage rate at which they expect those cash earnings to grow.
If this sounds a little arcane, let's use the example of the French based multinational hypermarket retailer Carrefour SA. Its stock price at March 31 was 14.8 times its cash earnings (earnings per share plus depreciation and any contributions to special reserves).
The growth rate that GE Investments expects for those cash earnings is 18, which means that this company's crucial price/cash flow to growth multiple would be 0.82, readily meeting the test.
It goes without saying that this kind of quantitative analysis is backed by extensive qualitative research. And GE Investments has a superb base from which to work.
Not only can the managers and analysts research their own extensive database, they can also talk to executives around the world in any of GE's 12 global businesses, varying from aircraft engines to NBC's network and cable television. This massive outfit employs 30,000 people in Asia and has 6,000 employees in India alone.
This kind of global access has helped the GE Investments team keep its composite returns some 4 1/2 percentage points higher than the return on the Morgan Stanley Capital International Europe, Australasia and Far East (EAFE) index during the five years to March 31-- and at a lower risk profile.
My three main breakfast hosts -- Smith,Judy Studer,senior vice president and portfolio manager, and Mike Solecki, vice-president and portfolio manager with GE's global equities team -- offered both explanations and question marks for Wall Street's current heights.
On the plus side have been demographic changes; the North American swing from a manufacturing to an information base (which has also changed the character of the major market indexes); a significant increase in productivity; and a benign low-inflation, low-interest-rate environment.
Solecki also expressed confidence in Europe as the site of the next wave of productivity, which is already generating investment opportunities.
On the minus side, there is little doubt inflation will rear its ugly head sometime. More to the point, even if you accept that all the above pluses make life in the marketplace different this time, current price-earnings valuations are by far the highest recorded for any period of 3% inflation since 1926.
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Tuesday July 1 2:04 PM EDT U.S. mergers set record in first half of 1997
NEW YORK, July 1 (Reuter) - U.S. merger and acquisition activity racked up a record $363 billion in the first half of 1997, but the second quarter pace slowed from year-ago levels, according to preliminary data released late Monday by a Newark, N.J., based company that tracks corporate deals.
Second quarter domestic merger volume slipped about four percent from year-ago levels to nearly $181.1 billion, according to Securities Data Co. However, the second quarter figures still mark the ninth straight quarter that domestic volume has topped $100 billion, the firm said.
Approximately 4,636 deals were announced in the first half of 1997, down more than 10 percent from the year-ago period. Some 74 announced deals topped $1 billion each.
The hotel and casino sector dominated the first half of the year, primarily due to two blockbuster bids. CUC International Inc (CUC) and HFS Inc (HFS) agreed to merge in a $11.3 billion transaction and Hilton Hotels Corp (HLT) launched an unsolicited $6.5 billion bid for rival ITT Corp (ITT).
The financial services industry won the second spot for most active sector, followed by the oil and natural gas industry
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Earnings reports could make July even hotter
And that's good news for sweltering investors, since there should be enough positive earnings surprises to keep even this toppy market boiling
Michael Brush Money Daily
As vacationers put the final touches on their July Fourth travel plans over the next several days, the finance departments at companies across the land will be finishing up important July projects of their own -- their quarterly earnings reports.
July is earnings month, and this one promises to be a hum dinger.
"Based on recent volatility in the last few days, I expect investors will be watching the earnings reporting season this July with an even keener eye," says Steve Cusimano, a portfolio manager with the N/I Family of Funds.
"I don't expect the typical summer doldrums. People are going to be paying very close attention to earnings because the market is, at minimum, fairly valued, and maybe overvalued," notes Cusimano, whose fund group uses earnings revision analysis as a cornerstone of its investing style. "Unless earnings come through, I expect that to turn around."
Will they come through? Or will earnings fall short and tank the markets?
You can relax during this Fourth of July holiday because the news will be good, say researchers at the firms that collect and analyze earnings estimates.
Chuck Hill, director of research at First Call, predicts earnings at S&P 500 companies should be up by 12% in the second quarter. Earnings for the quarter will be reported throughout July, but start in earnest the week of the 14th. The busiest weeks will be the two that follow. For a comprehensive rundown on when specific companies are scheduled to report, see the list provided by Zacks Investment Research below.
That 12% gain (compared to the same quarter the year before) may look weak, in contrast to the 15.1% increase for the first quarter of 1997. But don't be fooled. The 15.1% first quarter gain was exceptionally large because it was compared to an unusually weak first quarter of 1996. You'll remember that was the period when gigantic snow storms virtually shut down much of the country, and GM workers went on strike. Events like those slowed first quarter 1996 production, making the first quarter of 1977 look deceptively good by comparison.
More importantly, the 12% expected gain is over twice the average earnings growth of 5.7% for S&P 500 companies over the past 20 years, points out Hill. (Last year, earnings growth was at 8.4% and the year before it was 18.8%.)
Another positive sign is that pronouncements so far this quarter are slightly better than they were in the first quarter. To date, 58% of those early announcements have been negative, compared to 62% in the first quarter.
What sectors stand out as ones that will do the best? As usual, technology tops the list. "I feel quite confident that the technology group will end up with twice as many positive surprises as negative surprises, and it will beat the pretty substantial growth forecasts that area already priced in the market," says Ed Keon, an analyst at I/B/E/S International. Another group he says will do well is steel stocks, although he reckons enthusiasm may be dimmed by the prospects of weaker steel prices. The trucking group will also stand out.
One sleeper may be the investment group. Analysts have had modest expectations for these stocks, despite the heavy trading volume in June and the recent pickup in underwriting activity. "That group is not expected to do well, but I feel pretty confident it will beat expectations," says Keon. The paper and forest products group should also produce some big surprises for analysts, who are not expecting much from them this quarter.
Over at First Call, Hill agrees that the steel sector will be one of the best performers. He also expects technology, trucking oil drillers, oil field equipment makers, and consumer service companies to stand out.
What about the negative side? N/I Family of Funds' Cusimano is cautious about the disk drive sector. "We still have some exposure but in general we are being more selective," says Cusimano. "It has recently been a very volatile group, and I think that is a precursor to what is to come. The ones that do well will be those that supply the high end of the market."
Hill expects the weakest earnings in precious metals and gold stocks, paper and forest products companies, oil producers, and long distance phone companies. Airlines will probably also show some weakness. Unless you own stock in them, however, don't be too concerned. They will still be around to get you back from your Fourth of July vacation.
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