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Conference nyoss1::market_investing

Title:Market Investing
Moderator:2155::michaud
Created:Thu Jan 23 1992
Last Modified:Thu Jun 05 1997
Last Successful Update:Fri Jun 06 1997
Number of topics:1060
Total number of notes:10477

690.0. "MARKET BEAT by Tom Petruno (petruno@netcom.com)" by CPDW::ROSCH () Thu Feb 24 1994 12:58

Article: 65703
Newsgroups: misc.invest
From: akst@netcom.com (Daniel Akst)
Subject: 2/23 LA Times Column
Organization: NETCOM On-line Communication Services (408 241-9760 guest)
Date: Wed, 23 Feb 1994 20:32:15 GMT
 
 
MARKET BEAT by Tom Petruno (petruno@netcom.com)
for Wed., Feb. 23, 1994
copyright Los Angeles Times
 
(This column, written for the do-it-yourself investor in individual 
securities and mutual funds, is posted by the Times as part of an 
experiment in electronic distribution. It will shortly be available for a 
limited time by free e-mail subscription. To get on the list, mail 
petruno@netcom.com, with SUBSCRIBE in the subject field. And by all means 
let us know what you think, at the same address.)
 
What to Sell, What to Keep
If You're Becoming Antsy
About the Stock Market
   Wall Street has been unable to find its feet for the last two weeks, 
in the wake of the Federal Reserve's high-stakes decision to tighten 
credit for the first time since 1989.
   With every wobbly session, market pros and novices alike are forced to 
face the questions they most despise: When do I sell? And what do I sell?
   The agony may be most acute for small investors who have owned 
individual stocks or funds for years and are sitting on large paper 
profits. Few investors want to believe that a bear market could be in the 
wings, after all.
   And even those who have convinced telves that they're in stocks for 
the long haul--and so believe they don't need to ponder the sell 
question--still feel pressure at times like this.
   Let's assume you have that antsy feeling that it is indeed time to tae 
some money off the table, now that short-term interest rates are on the 
rise. If the broad market goes down from here, in a classic "correction" 
of 10% or so or perhaps a deeper drop, which stocks are most, and least, 
vulnerable?
   Perhaps surprisingly, many veteran money managers say they wouldn't 
sell the industrial stocks that have been the market's leaders over the 
past year. Although a large number of these issues, including Chrysler, 
Caterpillar, Deere and General Electric, have racked up hefty price 
gains, institutional investors seem particularly reluctant to take those 
profits and exit the stocks.
   There's good reason for that attitude: These companies continue to 
surprise Wall Street with their earnings recoveries as the economy 
expands. Take farm equipment giant Deere. On Tuesday, it reported 
earnings of $87 million in its first quarter ended Jan. 31. Analysts had 
expected Deere to earn about half that. Stunned, investors pushed the 
stock up $5.25 to $82.50 on Tuesday. It's now almost double its '93 low 
of $42.375.
   "I think that's the trend longer-term for these [industrials]; people 
don't understand the earnings leverage in these companies" as the economy 
grows, argues Charles Mayer, manager of the Invesco Industrial Income 
stock fund in Denver.
   Kelly Kelly, principal at Spectrum Asset Management in Newport Beach, 
agrees with Mayer. People are nervous because the industrial stocks' 
prices have zoomed, he says. But as Kelly calculates the companies' 
earnings potential in a recovery, their rate of return on capital and 
their stock prices relative to interest rates, he finds many still are 
good values.
   GE, at $108 a share, hassen 34% from its 1993 low. But Kelly 
calculates that a bear market low price for GE wold be $70, while its 
bull market peak should be arou$190. With that much potential upside 
left, Kelly sees no reason to sell.
   Of course, there could be a lot of wishful groupthink going on here. 
It's hard to say ""goodby'' to a winner, after all. And while fundamental 
investors may not sell the industrials if trouble hits, the short-term 
traders in these stocks could cause plenty of damage if they bail. 
Already, the autos have been clipped from their highs. Chrysler, at 
$57.875 now, is down 9% from its recent peak of $63.50.
   Still, the central point of the industrial stocks' fans is logical: If 
the economy continues to grow, these companies will sell more, and years 
of cost-cutting will send added revenue directly to the bottom line. Even 
if interest rates rise, investors should find the industrials' big 
earnings gains hard to ignore in '94 and perhaps '95. So any slide in 
these stocks shouldn't last; they're keepers until further notice.
   Then what do you sell at this stage of the bull market? Some ideas:
   * FINANCIAL STOCKS. Technically, the banks, the brokerages and the 
mortgage lenders are cheap stocks, after their '93 selloffs. And it's 
true that a gradual rise in interest rates shouldn't do extreme damage to 
financial companies' earnings. But psychologically, every notch up in 
rates is likely to slam these stocks, some pros say. If you have a 
profit, take it and find a better idea, they suggest.
   Mike Wolf, executive vice president at IDS Advisory Corp. in 
Minneapolis, has sold out his stakes in Merrill Lynch and insurer General 
Re. At Wedge Capital Management in Charlotte, N.C., research chief 
Michael Kucera says his firm recently let go of Federal National Mortgage 
after owning it for nearly four years.
   * ELECTRIC AND PHONE UTILITIES. Like the financials, utilities have 
been badly battered by the turn in interest rates. The Dow utility stock 
index is down 17% from its 1993 peak.
   Is it too late to sell? No, says Invesco's Mayer. Especially in the 
case of the electric utilities, he says, "I just don't see the growth 
potential" longer-term to justify holding on to most of these stocks.
   The interest-rate picture aside, Mayer notes that regulation and 
competition are squeezing many utilities' earnings. Without decent 
earnings growth, there won't be decent dividend growth, which is the only 
good reason to own utilities. So he has been culling Niagara Mohawk 
(N.Y.) and Illinois Power, among others, from his fund.
   Michael Mahoney, manager of the GT Global Telecommunications stock 
fund in San Francisco, has been dumping phone utilities US West and 
Pacific Telesis. PacTel, by recently spinning off its fastest-growing 
businesses (such as cellular), has left itself with meager growth 
prospects, Mahoney says. "My feeling is that it's not a terrible dog but 
that we can do better," he says.
   * CONSUMER STOCKS. Drug, food and tobacco stocks have been slumping 
for two years. They rally periodically, but IDS' Wolf believes any rally 
is a good opportunity to sell these stars of the '80s if you haven't yet.
   Why? Wolf sees no sign that the brand-name companies' profit margins 
are improving; if anything, they're likely to get worse, he says, 
pressured on one end by rising commodity prices (especially for food 
companies) and on the other by heated competition for consumers' dollars 
from generic and other lower-cost products.
   For example, it's folly to believe that the failure of the Clinton 
Administration's health-care reform package in Congress will lead to a 
resurgence in medical stocks, many pros say. Even if the federal 
government does nothing from this point to pressure drug makers and other 
health-care providers on pricing, private enterprise has already taken up 
the fight on its own. The squeezing has just begun.
 
   Time to Trim?
   Here are stocks that some money managers believe are ripe for 
continued profit taking if the market weakens further.
 
                    approx. 2-year range   Tuesday
Stock                   Low     High       close
Amer. Intl. Group      54     100        88 7/8
Chase Manhattan        17      38        33 3/4
Federal National Mtg.  55      89        85 1/8
General Re             77     133       108 7/8
Hong Kong Telecom      30      68        58
Illinois Power         19      25        21 1/8
Merrill Lynch          22      51        41 3/8
Natl. Health Investors 21      29        27 5/8
Pacific Telesis        36      59        55 3/8
US West                32      50        40 1/8
 
 
-- 
                                             akst@netcom.com
T.RTitleUserPersonal
Name
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690.14/8 - Market-Indexed Bank CDs RDVAX::LJOLIB::LIBRARYTue Apr 12 1994 13:07145



MARKET BEAT/by Tom Petruno (petruno@netcom.com)
for Friday, April 8, 1994
copyright Los Angeles Times

(This column, written for the do-it-yourself investor in
individual securities and mutual funds, is available for a
limited time by free e-mail subscription as part of an
experiment by the Times in electronic distribution. To get
on the list, mail petruno@netcom.com, with SUBSCRIBE in the
subject field. Send comments to akst@netcom.com.)

Market-Indexed Bank CDs
May Be Too Good to Be True;
''Derivatives'' for Mom-and-Pop?

With some investors fleeing the stock market in the wake of
its recent wild swings, a few banks think they have created
an attractive alternative: So-called stock market-indexed
CDs.

The idea is that you sign up for a normal CD, say of one-
year or three-year term. Instead of earning interest,
however, you get a percentage of any stock market gain
during the CD's term. If the market falls, you get no
return--but your principal is 100% guaranteed (and federally
insured, up to the usual limits).

If this sounds too good to be true, it may be. Despite their
market link, these CDs aren't necessarily pure proxies for
stock ownership. Your return, even in a strong bull market,
may not be even close to what you'd earn owning real stocks.

But conserative savers who find current CD yields still too
abysmally low, and who think the stock market has more life
left in it, might consider stock CDs for a small portion of
their short-term savings. Just don't rely on them for
income, because they may produce none.

And if you're interested in these hybrids you might want to
act fast, because as stock market volatility increases the
banks may be forced to reduce the payout on future stock
CDs.

In Los Angeles, Glendale Federal Bank and Great Western Bank
have been heavily promoting stock CDs, with mixed results.
Nationwide, these hybrid CDs are being offered by
NationsBank, Mellon Bank and Citibank, among others,
according to Bank Rate Monitor newsletter in North Palm
Beach, Fla.

Here's how stock CDs work: You give the bank, say, $10,000
for three years. The bank agrees that at the end of each
year, it will pay you a share of any gain in the stock
market, most likely as measured by the Standard & Poor's
index of 500 blue chip stocks.

Your money isn't invested in stocks, however. It stays with
the bank, probably to make real estate loans. With the
interest that the bank would otherwise have paid you, it
plays the stock market via option contracts--or it pays a
Wall Street brokerage to do the same.

With a ''call'' option on the S&P 500 index, the bank can
essentially own the right to buy a large basket of stocks in
the future, at a set price, for relatively little money down
right now. If the stock market goes up, so does the value of
the call. If the market goes down, the call expires
worthless.

Hence, the bank can make a pact to pay you a rising return
in a rising market, or no return at all if the market drops.
Your principal, meanwhile, isn't at risk.

So let's say the S&P 500 index, which closed Thursday at
about 451, rises 10% over the next year, to 496. You'd earn
10% on a stock CD, right?

Not necessarily. The formula most banks use to calculate
your return is based on the average monthly performance of
the S&P index for each 12-month period. For the sake of
illustration, say the S&P goes nowhere for 11 months, then
suddenly jumps to 496 in the last month. Multiply 451 times
11, add 496, and you get 5,457. Divide by 12. The average
S&P index for the period would be 455.

Your stock CD return for the year thus would be about 0.9%--
less than one-tenth the actual market gain, and well below
the 2.5% to 3.5% you might have earned in interest on a
normal CD.

If the S&P were to rise steadily over the 12 month period--
say, five points a month--your CD return in this example
would be about 6.1%, versus the market's actual 12.2%
return. But this bull market is now 42 months old, so the
odds of a steady upward trend from here are low indeed.

More likely, many Wall Streeters say, the market's recent
volatility is a taste of what's to come. And if that's true,
these stock CDs may soon become less appealing even for
savers who think the risk-reward equation is fair.

Why? As market volatility increases, so does the cost of
option contracts on the S&P 500 and other stock indexes.
That makes it more expensive for the banks to play the
market.

If their costs go up, they will most likely reduce the
guaranteed ''participation rate,'' meaning the percentage of
any market rise that they'll share with you, on future stock
CDs they agree to initiate. (Terms on existing such CDs
wouldn't change, of course.)

And if volatility increases too significantly, chances are
these CDs will fade away, as they did for a long time after
the 1987 stock market crash (yes, this is their second
incarnation). A volatile market costs the banks too much to
hedge, and probably would cause many investors to shun
market-related investments anyway.

A few additional considerations to keep in mind, if you're
shopping for a stock market-indexed CD:

*TAXES. Any return on your CD will be taxed as ordinary
income. In contrast, long-term capital gains on actual
stocks or stock funds are taxed at a lower rate.

*EARLY WITHDRAWAL PENALTIES. They're steep--up to 20% of
your principal in the first year. Ask the bank to compare
the penalty on stock CDs with the penalty on a normal CD, so
you can see the difference.

*RISK. Banks play the options market to produce the return,
if any, on your stock CD, which means you're a party to a
''derivatives'' transaction--those hybrid securities that
have been so much in the news lately for their alleged risky
nature.

However, it's the bank's money at risk, not yours: Your
principal is 100% federally insured. But if the bank should
fail, it isn't clear that federal insurance would cover any
stock market-linked gain you're entitled to.

690.24/11 - The Silence of the Optimists? RDVAX::LJOLIB::LIBRARYTue Apr 12 1994 13:08168

MARKET BEAT/by Tom Petruno (petruno@netcom.com)
 for Monday, April 11, 1994
 copyright Los Angeles Times

 (This column, written for the do-it-yourself investor in
individual securities and mutual  funds, is available for a
limited time by free e-mail subscription as part of an
experiment by  the Times in electronic distribution. To get
on the list, mail petruno@netcom.com, with  SUBSCRIBE in the
subject field. Send comments to akst@netcom.com.)

Subscribers please note: Tom Petruno will be on vacation the
rest of this week. His column will resume April 20.



 The Silence of the Optimists?
 A Lack of Negative Earnings
 ''Pre-Announcements'' Raises
 Hopes for Strong Profits


    That noise you don't hear is the sound of corporate
America warning about disappointing  first-quarter profits.
    Typically at this time each quarter, Wall Street is hit
by a barrage of earnings ''pre-announcements,'' whereby
companies swallow hard and admit that their profits in the
just-ended quarter won't meet expectations.
    But this time around, ''there's been a definite falloff
in the number of [negative] pre-announcements,'' says Ben
Zacks, head of earnings-tracker Zacks Investment Research in
Chicago.
    More prominent, instead, have been the positive earnings
pre-announcements: General  Electric, brokerage Charles
Schwab & Co. and truck engine maker Cummins Engine, for
example, all issued upbeat first-quarter earnings forecasts
last week.
    And computer workstation giant Sun Microsystems, which
last Monday warned that  first-quarter sales would be below
expectations, surprised Wall Street on Wednesday by
reporting that earnings came in above expectations despite
the sales shortfall.
    If the good news so far foreshadows the general tone of
first-quarter earnings, the end result could be much-needed
support for the stumbling stock market.
    Stung by rising interest rates, investors have been
struggling to find a reason to hold on to stocks, let alone
to buy more. Wall Street's optimists have been arguing
vociferously that  the bull market isn't dying, but is
merely in transition--from being driven by low interest
rates to being driven by rising corporate earnings.
    If that's true, the best thing for stocks would be for
the bond market to remain relatively  calm this month while
strong quarterly profit reports grab the business headlines
day after day.
    In theory, earnings ought to be pretty good. The economy
surprised nearly everyone with the  strength of its advance
in the first quarter, even in the face of the Northridge
earthquake,  and lousy weather in much of the country.
    Booming sales of homes, cars, computers, machinery and
other big-ticket items should  translate into higher profits
not only for the companies that produce them but for the
myriad  supplier businesses.
    Yet Wall Street analysts, apparently choosing to play it
cautious on the economy despite  evidence to the contrary,
continually chipped away at their earnings estimates as the
quarter  progressed, Zacks says.
    That has been the pattern of the last five quarters, he
says: ''The analysts lower their  estimates going into the
reporting period. Then the numbers come in slightly better
than  expectations, and [the analysts] start raising their
numbers again'' for the next quarter--at  least for a month
or so.
    Tallying up analysts' estimates for the blue-chip
companies in the Standard & Poor's 500  index, Zacks says
the average S&P company is expected to report first-quarter
operating  earnings (i.e., results before any one-time gains
or losses) up 11.7% from a year earlier.
    At the end of January, the analysts had expected S&P
operating earnings to rise 15.7% for  the quarter, Zacks
says.
    ''Expectations are fairly moderate'' now, agrees Melissa
Brown, who tracks corporate  earnings trends for Prudential
Securities in New York. ''So it's seems unlikely that we'll
have a lot of negative surprises'' as the numbers are
reported, she says.
    And if analysts have again been too cautious, the stock
market could benefit as  higher-than-expected profits force
investors to reconsider stocks' prices relative to
potential earnings power in an expanding economy.
    Abby Cohen, investment strategist at Goldman, Sachs &
Co. in New York, is one of the  earnings optimists. She
expects S&P 500 operating earnings, which jumped 16% last
year, to  rise 12% this year and another 10% in 1995 as the
economy continues to grow.
    While Wall Street's bears believe the stock market will
be strangled by rising interest  rates, Cohen notes that
rates don't rise nonstop, even in a healthy economy. Once
the bond  market settles down from the selling frenzy of
recent weeks, she expects investors to focus  again on
stocks' individual fundamentals.
    And on that count, she says, there are still plenty of
reasons to feel good about the  market.
    ''It would be extremely unusual to see the market peak
when we have a couple years of  earnings growth still
ahead,'' she says.
    Unless, of course, stocks have become overvalued. That's
the bear case: Even though  earnings are going up, the 42-
month-old bull market has already factored higher earnings--
even  into 1995--into stocks' prices, the bears say.
    Therefore, there is nothing for Wall Street to look
forward to except the next recession  and the next cycle of
lower earnings. Add rising interest rates to the equation,
and you get  falling stock prices even as earnings surge in
1994, the bears contend.
    In Wall Street jargon, the term for that is multiple
compression: Stocks' price-to-earnings  multiples, or P-Es,
slowly shrink because stock prices (the numerator in the
equation) go down  while earnings (the denominator) go up,
at least in the near term.
    Or to put it another way, investors lower their
valuation of stocks, or what they consider  a fair price to
pay relative to longer-term earnings expectations and to the
returns on  competing investments, such as bonds and money
market accounts.
    ''People are worrying that what we get in earnings
[growth] will be lost in valuation as  interest rates go
up,'' says Prudential's Brown.
    But Cohen and other bulls didn't consider stocks to be
overvalued before the recent dive in  prices. Thus, they
argue, today's lower prices are an invitation to buy, not a
warning of  worse to come.
    Based on Goldman Sachs' earnings estimates, the average
S&P 500 stock sells for 14 times  1994 operating earnings.
Historically, the market's P-E has averaged 16.4 in periods
when  inflation ran at 3.5% or less annually, Cohen says.
    So if you believe, as she does, that inflation (and, by
proxy, interest rates) will remain  subdued, the stock
market could advance 17% from current levels and still not
exceed historic  ''fair'' valuation levels.
    Of course, it's easy to talk about fair valuation for
the market as a whole. But most  portfolio managers aren't
buying the market--they're buying individual stocks.
    That's why so much may ride on the first-quarter
earnings reports that will swamp Wall  Street starting this
week: If the individual numbers aren't good enough to make
shareholders  want to hold on--after the turmoil of the past
few weeks--the market's slide may resume, and  what had been
a long-overdue ''correction'' in prices could rapidly become
something far worse.
    The lack of downbeat pre-announcements so far is
certainly encouraging. But earnings-tracker Zacks adds a
caveat: There's a chance that many companies with bad news
to  release didn't do so early because they feared they
would accelerate the recent stock selloff.
    Overall, Zacks looks for strong quarterly earnings gains
from auto, semiconductor, bank and industrial companies,
while results from energy, airline, drug and food companies
are expected  to be weak.
    And watch out for restaurant companies, he says: They
may have been hit hardest by weather- and earthquake-related
problems in the quarter.


 at their earnings estimates as t