How Stock Investors Chant 'Deee-fense!'; For Protection From Every Rumor, They Shun Steel, Buy Cosmetics; Surprisingly, Tech Stocks Hold Up

How Stock Investors Chant 'Deee-fense!'; For Protection From Every Rumor, They Shun Steel, Buy Cosmetics; Surprisingly, Tech Stocks Hold Up


E.S. Browning. Wall Street Journal. (Eastern edition). New York, N.Y.: May 16, 2005. pg. C.1



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Abstract (Document Summary)
"The big parlor game on Wall Street these days is to guess" where the crunch will come, says Jason Trennert, chief investment strategist at New York research and brokerage firm International Strategy & Investment. People fear an investment bubble bursting in China or in the U.S. housing market. They worry about a corporate disaster in the auto or airline business. They fear a blowup at some big hedge fund, perhaps caused by a big bet on some kind of risky corporate bond. "Generally, in the past, it has been something no one was talking about," Mr. Trennert says.

In that kind of climate, the specific news of the day can matter less than the general fear of looming trouble. In the past few days, the big news wasn't the strength of retail sales or the jobs report. It was the news that credit-ratings companies were downgrading the debt of General Motors and Ford Motor, and that some arcane derivative products involving corporate loans were gyrating. It was a rumor, which hasn't proved true, that huge hedge funds had gotten caught up in those market swings and had blown up.

Mr. Trennert of ISI says that often, the Fed doesn't stop raising rates until there is some kind of painful blowup in financial markets, as happened in 1987, 1998 and 2000. "If history is any guide, what gets the Fed to stop tightening is not any epiphany on their part, but some kind of financial crisis," he says. Even so, he thinks further stock-index declines could amount to no more than a 5% drop from here, after which he suspects the Fed will stop raising rates and the market will rebound.

Full Text (989 words)


Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.
FOR A LONG TIME, the stock market had a simple mantra: Buy what China buys.

With the world economy soaring, steel stocks, oil stocks, mining stocks, stocks of just about anything that fed a booming economy, led the U.S. market.

But around the start of March, as signs cropped up of a slowing economy, the stock market hit its high for the current bull market and things changed. Today, steel and oil are leading the market down. The new mainstays are the stocks investors once scorned: so-called defensive stocks such as drug makers, personal-products companies and some food makers, whose history of relatively steady performance makes them sought-after in times of uncertainty.

"There has been a shift going on that has picked up steam since mid- March," says Michael Panzner, head of sales trading at Rabo Securities in New York. "The Ides of March seem to have been the turning point."

Since the government issued a surprisingly soft jobs report on March 4, the strongest sectors have included drug and other health-related stocks, food distributors, liquor companies and utilities, he says. The weakest have been groups such as employment services, car makers, steelmakers and mining companies. The government issued a robust jobs report earlier this month, but the market's jitters have continued.

Investors have gone from marveling at the economy's strength to wringing their hands over the risk that the Federal Reserve will raise interest rates too far, stifling growth and causing a blowup that sends stocks into a bear market.

"The big parlor game on Wall Street these days is to guess" where the crunch will come, says Jason Trennert, chief investment strategist at New York research and brokerage firm International Strategy & Investment. People fear an investment bubble bursting in China or in the U.S. housing market. They worry about a corporate disaster in the auto or airline business. They fear a blowup at some big hedge fund, perhaps caused by a big bet on some kind of risky corporate bond. "Generally, in the past, it has been something no one was talking about," Mr. Trennert says.

In that kind of climate, the specific news of the day can matter less than the general fear of looming trouble. In the past few days, the big news wasn't the strength of retail sales or the jobs report. It was the news that credit-ratings companies were downgrading the debt of General Motors and Ford Motor, and that some arcane derivative products involving corporate loans were gyrating. It was a rumor, which hasn't proved true, that huge hedge funds had gotten caught up in those market swings and had blown up.

After three straight weeks of gains, the Dow Jones Industrial Average last week declined 205.28 points, or 1.98%, to 10140.12, including a drop of 49.36 points, or 0.48%, on Friday.

The broader result has been a clear shift in where investors were willing to put their money.

Even during the period since April 20, when the market has rebounded after the Dow industrials almost fell back below 10000, investors have been unwilling to shift back toward riskier, more aggressive investments.

Utility stocks have benefited from the situation. For most of the bull market, they joined oil, steel and transportation stocks in soaring, benefiting from rising energy prices and rising demand for power. And they have continued to rise since March, because they are classic defensive stocks, whose high dividends are sought-after in uncertain times.

Two exceptions to the rule have been technology and financial stocks, which suffered for most of the year but began a rebound in April. Some investors hope the market is beginning to anticipate an end to Fed rate increases. An end to rate increases would help stimulate business investment in things like tech gear. It would help financial companies, whose costs go up faster than their income when rates are rising. Because financial stocks are the biggest group in the S&P 500, representing more than 20% of the index, their fortunes have a big impact on the index's performance.

"We are through the soft spot. It is beginning to turn around this month," says Jeffrey Kleintop, chief investment strategist at PNC Advisors, the investment advisory unit of PNC Bank in Pittsburgh.

But other economically sensitive stocks continue to languish. Some analysts fear that the rebound in financial and tech stocks is little more than a bargaining-hunting bounce.

Mr. Trennert of ISI says that often, the Fed doesn't stop raising rates until there is some kind of painful blowup in financial markets, as happened in 1987, 1998 and 2000. "If history is any guide, what gets the Fed to stop tightening is not any epiphany on their part, but some kind of financial crisis," he says. Even so, he thinks further stock-index declines could amount to no more than a 5% drop from here, after which he suspects the Fed will stop raising rates and the market will rebound.

Increasingly, investors are waiting for some sign from the Fed before they start betting heavily again on cyclical stocks.

Robert Morris, chief investment officer at Jersey City, N.J., fund- management group Lord Abbett, says he thinks interest-rate increases will be mild enough that they won't kill the economic recovery, and that the S&P 500 will bottom out some time in the summer or fall, rising as much as 15% between now and the end of the year.

Until then, however, "it looks like people have thrown in the towel on all things cyclical and are running for cover," he says.

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Friday's Market Activity

The Standard & Poor's 500-stock index finished down 5.31, or 0.46%, at 1154.05. The Nasdaq Composite Index rose 12.9, or 0.66%, to 1976.78.

The financial sector suffered after analysts at Smith Barney lowered their second-quarter earnings estimates for several brokerage firms. Shares of J.P. Morgan were off 1.1%.

A stronger dollar weighed on Alcoa, which fell 3.1%, and Exxon Mobil, which slipped 2%.
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