Stock market at crossroads

SO THE US Presidential cliffhanger only added to the ill omens that bedevil the US stock market. Then Dell announced 20 per cent revenue growth, which in the Alice in Wonderland world of technology investing, was a disappointment. Add to that the Cisco press conference and Morgan Stanley's downgrade of Intel, apart from the uncertainty created by a potential Constitutional crisis if Gore chooses to challenge the Florida vote and it only reinforced the sentiment of uncertainty and fear that plagues Wall Street. Yet more evidence of a soft landing-earnings growth slowing across the board.

It is difficult to argue against the idea that a credit squeeze seems to be strangling US economic growth. That is the message of the credit spreads in the US corporate bond market, at their widest since the global financial crisis of autumn '98. Emerging markets have taken a huge hit and the dollar is extremely strong against the euro. The fall in oil, prices, tepid gold prices and falling industrial commodities all indicate that inflation risk is just not there to trigger alarm bells in the capital markets. In this scenario, a 6.5 per cent Fed funds rate seems tight, an indicator of restrictive monetary policy that could well heighten recession risk if economic growth decelerates and the international financial markets deflate as they have done since March. However, the incremental nature of the Greenspan Fed means that the most we can expect at next week's FOMC is a "neutral" bias hint, no rate cut. If Dr Greenspan goes "neutral" next week, the stock market is going to fly. That much, at least is certain.

This was an awful week for Nasdaq - down 12 per cent. Yet the sales forecast from Dell and the collapse of two marginal dotcoms should not be sufficient reasons for the brutal bearish sentiment that overhangs the market. The stock market needs a catalyst for buyers to come in because some sectors, notably technology and financials, offer incredible value right now. Unfortunately, the catalyst the market received in the form of the Presidential drama was a pure, unmitigated disaster. Communications chip vendors have been killed in recent weeks as Cisco announced that its chip inventories quadrupled and will be drawn down in coming months, suggesting that orders will decelerate sharply with its semiconductor vendors. This was the reason why Broadcom, PMC-Sierra and Applied Micro all fell 25 - 30 per cent for the week, the ferocity of their fall not surprising since they commanded the most stratospheric valuations in the technology sectors. It is strange that investors have still not lost their Pavlovian "buy on dips" reflexes that served us all so well in their past. The reason the "buy on dips" strategy was a failure in 2000 was that fundamentals changed, not psychology alone.

I believe that large cap growth companies in the technology sector are at extremely compelling levels, even if the markets overshoot to the downside in the near term. EMC is down from 105 to 82. While not cheap at a 100 times earnings or a 3.5 per cent growth rate, this $179 billion market cap company dominates the exploding market for data storage Cisco below 50 seems a credible buy as does Nortel Networks below 45. Banks stocks will also benefit as perceptions of Fed easing becoming more mainstream in the capital markets. Here, my favourite large cap bank stock is Chase Manhattan at 42-44 as there is simply not much downside risk at these levels. Moreover, a host of market worries from merger integration risks with Flemings and J.P. Morgan, the venture capital profits at Chase are simply chimeric. Chase is a steal at a mere 10 times multiple.

This is a very difficult moment to calculate investment strategy for the months ahead. The sectors that have been hit hardest are not the sectors that will outperform in the coming rally. The shorts that made money in September have become high-risk bets now. Technology has some real macro problems in the months ahead - soft PC sales, debt burdened telecoms, massacres in dotcom finance, slowdown in microprocessors. We are in a period of transition in both the economy and the stock market. Treacherous earnings warning lie ahead. Be careful. Be selective. be nimble.

MATEIN KHALID
STRATEGIST/HEAD, CAPITAL MARKETS & RESEARCH
DAMAC INVEST CO. LLC

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

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