http://abcnews.go.com/sections/business/DailyNews/markets_010516.html

http://abcnews.go.com/sections/business/DailyNews/markets_010516.html

Dow Tops 11,000

Investors Optimistic About Further Fed Moves

N E W Y O R K, May 16 - Stocks headed higher in mid-afternoon trading, lifting the blue-chip Dow further above the key 11,000 level, as Wall Street bet the Federal Reserve's string of five large interest-rate cuts would fuel an economic rebound this year.

The Dow Jones industrial average rose 252.19 points, or 2.32 percent, to 11,125.16, climbing above the 11,000 mark for the first time since Feb. 13. Technical analysts view that level as a major hurdle that needs to be cleared for a sustainable rally. The blue-chip measure touched its highest intraday point in about eight months. The technology-dominated Nasdaq composite index climbed 62.47 points, or 3 percent, to 2,148.05. The broad Standard & Poor's 500 Index was up 26.78 points, or 2.14 percent, at 1,276.22

Bullish comments from software maker BEA Systems Inc., chip equipment maker Applied Materials Inc. and doughnut maker Krispy Kreme Doughnuts Inc. helped boost sentiment a day after the Fed slashed rates for a fifth time this year by 50 basis points.

Investors, who pushed the market lower earlier and gave a muted response to the expected cut in the prior session, stepped back into the market and scooped up precious metals, biotechnology and software shares. The major stock indexes scored some of their biggest gains since the Fed's surprise 50-basis-point cut on April 18.

"You have had five rate cuts now and historically that has been a positive for the market," said Gary Kaltbaum, market technician at Investors' Edge Partners. "However, I would love to see several things happen: The Dow finishing above 11,000, the Nasdaq above 2,200 and the S&P above 1,275."

"Then I will get real emboldened," Kaltbaum said.

Corporate News

Gains were widespread with investors bidding up safer and riskier sectors alike. Drug maker Merck climbed $2.61 to $78.51, while Microsoft rose $1.12 to $69.39. General Electric advanced 88 cents to $51.03, and Hewlett-Packard was up 59 cents at $25.99. All four are Dow stocks.

Other stocks managed to move higher despite the latest evidence that their business has suffered as the economy has slowed down.

Applied Materials was up 59 cents at $50.48 after the world's largest manufacturer of chip-making equipment on Tuesday missed second-quarter earnings expectations by a penny a share and announced cost-cutting efforts, which include offering severance packages to up to 1,000 employees.

In other earnings news, Network Appliance Inc.,a computer storage maker, on Tuesday announced quarterly results that met lowered quarterly earnings and sales targets.

Abercrombie & Fitch Co. on Tuesday posted a 27 percent increase in quarterly profits, topping analysts' consensus estimates. In addition, the teen-oriented retailer said it was comfortable with earnings estimates for the second quarter.

QLogic Corp., which makes products that connect computer networks and storage devices, reported quarterly earnings in line with expectations on Tuesday as sales growth slowed for the third consecutive quarter.

Sycamore Networks Inc. on Tuesday reported a loss, compared with a year-ago profit, as it cut jobs and costs amid slowing orders. Sycamore Networks also warned that tough market conditions would continue in its current quarter, adding that it expected revenues to remain flat.

Wireless communications parts maker Sawtek Inc. may be active after communications chip maker TriQuint Semiconductor Inc., said on Tuesday, after markets closed, it would acquire Sawtek in a stock deal worth about $1.3 billion in a move to expand its radio frequency component offerings for cell-phone handsets and other devices.

-- (M@rket.trends), May 16, 2001

Answers

Yes, cutting 250 bp in just five months (something of a record for the Fed, I think) pumps a lot of liquidity into the system. But there are limits to what that can accomplish. Alas, the Dow already stands at twice its historical average of valuation, with a P/E of 24 (26 for the S&P 500)--more overvalued than in 1929,in fact. U.S. corporate and personal debt have surged 65% in just the past five years, and there are signs that the housing and mortgage refinancing booms, which have propped up the sagging U.S. economy, are ending, especially since mortage rates have actually risen in recent months, as has the yield on the longer Treasury bonds as bond traders expect the wanton Greenspan cuts to fuel inflation. In Europe, a broad money supply growth of 4.5% or more per year is considered inflationary; the Greenspan Fed is increasing the U.S. broad (M3) money supply at a 13% annualized rate. Furthermore, U.S. industrial utilization stands at only 78% (i.e., 22% is idle), the worst in ten years; mfg. layoffs in the first quarter set a record; corporate defaults in the first quarter set a record; home equity as a percentage of mortage is at the lowest ever recorded; ditto for the U.S. savings rate, which has gone from 10% of disposable (post-tax) income to -1% in the past ten years; and inflation, even by the outrageously fudged numbers used by the govt. (see brilliant analyses of Crudele et al.) is rising--not surprisingly, given the surges in oil, nat. gas, and electricity in the past year. (This year California will spend $70 billion for electricity, wrecking the state budget; last year it spent $7 billion.) There are few signs of recovery in the tech sector, with component prices (e.g., DRAM) still falling; Compaq and Dell are preparing for a price war to the death in the PC market. The tech sector is only 5.4% of the U.S. economy, but it has been responsible for much of the (admittedly exaggerated) increase in worker productivity in recent years. The last quarter, U.S. worker productivity actually fell 0.1%--a very ominous sign. Even the vaunted "service sector," supposedly 80% of the U.S. economy, is now contracting, according to the latest purchasing managers' index (PMI) number of 47 (anything less than 50 signals contraction); a leading service sector economist recently predicted massive layoffs coming in the service industries.

Overall, S&P 500 earnings fell, quarter over quarter, about 6% in the first quarter according to Thomson Financial/First Call, and are projected to fall a whopping 11% in this second quarter. Given that context, the recent rise in the Dow looks a bit absurd, even granting that Wall Street is supposedly looking six months ahead. Warren Buffett recently said that American investors are living in a "dream world"; John Kenneth Galbraith called the speculation on Wall Street (in an open letter to President Bush) "insane"; George Soros says it threatens the entire world financial system. We are 30% of the world economy, and I find that foreign analysts routinely refer to the great American "economic bubble" and wonder what in hell will happen when it pops. What, indeed. Overseas, Argentina and Turkey are in financial crisis; Germany, accounting for 1/3 of the EU economy, is in recession, with industrial production tumbling dramatically in recent months; and Asia is building toward another financial crisis, with the Japanese Nikkei and yen weakening, big Chinese banks with loan problems, the Hang Seng sliding, and Taiwan, Thailand, Indonesia, Singapore (whose economy is contracting at an 11% annualized rate, despite having the region's healthiest banking system), Indonesia, Malaysia, and S. Korea all in significant economic trouble.

Recently surveying the record corporate and personal debt load in the U.S., and noting that the U.S. economy is, in its overcapacity, geared toward an endless consumer buying frenzy (that's the way most of our equities are priced, too, alas), the London "Financial Times" said this can't go on much longer. That point seems obvious to the rest of the world, but not to U.S. "analysts," many of whom work for investment banks or brokerage houses and reap huge bonuses dependent on escalating stock prices. (Many companies also engage in fraud by exaggerating their earnings, according to former SEC chairman Arthur Levitt in a recent "Newsday" article.) These analysts are currently telling their clients that, with all the Fed "easy money" out there, corporations will quickly return to profitability and that S&P 500 earnings will rise 18% next year. Investors are told to buy, buy, buy; consumers are told to buy, buy, buy.

We shall see what happens.

-- Don Florence (dflorence@zianet.com), May 19, 2001.