Advanced Micro Devices Inc (AMD)

[rupert]

Barron's Market Analysis with some reference to semiconductors and Intel's Thursday report and Smith Barney's semiconductor meeting at which Rivet( AMD) will be presenting. (Scroll down for my bold type).
http://online.wsj.com/barrons/article/0,,SB108578485350324324,00.html?mod=b_this_weeks_magazine_mark...



Drop in Rates, Oil Quotes Spurs Rebound in Stocks

Vital Signs

AN EQUITY TRADER COULD'VE FINISHED in the money last week without keeping a single stock quote on the screen, just by watching the pulsating ticks in crude-oil futures and Treasury-note yields.

Buying when those numbers were falling was a profitable reflex, which indicates Wall Street's present absorption with the essential macroeconomic factors of monetary liquidity and liquid gold.

The ebbing of oil prices following vows of new supply from the Organization of Petroleum Exporting Countries and the downtick in bond yields after some tame inflation and economic data left clear the upside path for stocks, which have now bounced more than 3% in the last eight trading days.

Or, at least, that was the proximate excuse for the latest bout of buying. Others who think economic numbers are only for government bureaucrats and lazy journalists will say that stocks had sold off too steeply, important index levels held, transport stocks never sank to meet the broad market and investor sentiment had gotten too negative for stocks not to rebound.

The buying was done before a largely inconsequential, lightly traded Friday session ahead of the three-day weekend. But four days' work was enough to boost the Dow Industrials by 221 points, or 2.2%, to 10,188.

The Standard & Poor's 500 gained 27, or 2.5%, to land at 1120. The S&P has essentially rebounded to the halfway point from the low end of the compressed range it's occupied all year, spanning from 1080 and 1160. For all the to-and-fro, high hopes and grand pronouncements swirling about the market in 2004, neither the S&P nor the Nasdaq has strayed even 1% from year-end 2003 levels. The Dow is down less than 3%.

It's an easy call to say that, to most, it has felt more eventful than that. For one thing, the low-volatility environment that has prevailed for months has caused small moves to seem significant, like a 10-degree drop in temperature in Miami that has locals donning parkas.

Below the calm surface of the indexes, there has been a strong enough undertow for investors to lose plenty in individual stocks.

Going into last week, Smith Barney strategists had calculated that the average decline from their 2004 high of stocks in the S&P 1500 (encompassing large and small stocks) was 16%. The average drop from their 52-week high was 18%, so there's a good chance that plenty of investors are looking at a flat market year to date and feeling neither lucky nor smart. This also shows how a market with slim index losses can qualify for an oversold bounce.


For professional investors, the market hasn't been particularly accommodating, either. Through Thursday, every category of large-cap stock funds was trailing the return of S&P 500 index funds this year. The large-cap core funds average -- the one most comparable to the S&P 500 and the group with the most assets, at almost a half-trillion dollars -- had returned 0.4%, less than a third of the index funds' total return.

This helps explain why the most commonly uttered remark on Wall Street these days might be: "Tough market."

Worsening the confusion is the broad perception that the market sits at multiple inflection points -- poised to shift from monetary easing to tightening, from economic acceleration to deceleration and perhaps from disinflation to rising inflation. Reasonable men, and even black-box trading systems, can disagree on how the scenarios might play out; thus the lack of conviction and constant looking over one's shoulder.

Until Friday, four of the latest five big economic data releases arrived slightly weaker than expected, including the revision to first-quarter gross domestic product that showed less inflation and damper final demand than before.

This moderation in the numbers and the resulting firmer bond market apparently sent investors dreaming lustily of Goldilocks, that temptress of the temperate 'Nineties economy who made things "just right" for equity owners.

Such dreams are the stuff that bullish market forecasts are made of. They animate the consensus view that the economy will cool, but to a comfy pace, and that rates and inflation can rise gently without compromising this year's bonus.

The mini-streak of softer economic figures was interrupted Friday by a hefty rise in the Chicago Purchasing Managers Index, a gauge of Midwestern manufacturing, which defied forecasts of a decline by jumping to a 16-year high. This indicator is significant mostly as a foreshadowing of the national ISM manufacturing numbers, due Tuesday.

The ISM is probably the most important timely measure of economic momentum and breadth (though not the magnitude of improvement). It correlates almost flawlessly with the quickening of corporate profits, the outperformance of economically cyclical stocks and the amplitude of stock-market returns. The ISM is still expected to tick lower. Even if it doesn't, it's at levels that have always meant that a peak is near.

Those investors with aggressive expectations for further upside in stocks might wish for another burst of acceleration in economic growth, rather than a bond-friendly slowdown. And it may take a hotter-running economy to drive big upside profit surprises in late 2004 and early '05.

Many market observers compare today's investment backdrop with that of 1994-95, during which interest rates jumped. But, remember, S&P 500 earnings for all of 1995 came in 20% higher than had been forecast as late as September 1994. That helped power stocks higher in the teeth of sharply higher rates.

Yet it hardly seems that Wall Street is deeply underestimating the profit outlook today. The rate of upward revisions to one-year forward profit forecasts versus downward changes has spiked to levels that have usually represented a peak. Pretax corporate profit margins are also at historic highs, just as hiring has picked up and wage pressures are building.

The broad measure of business profits in last week's GDP data showed a sequential decline in earnings from the fourth quarter, on a seasonally adjusted basis, while the annual rate of increase slowed rapidly. Even if earnings merely match current forecasts, they'll show solid double-digit percentage growth in the second half and next year and could provide support for stock prices.

But at some point, analysts will probably overestimate how good the good times can get. If that happens soon, in a market addicted to robust earnings gains, the heady forecasts of 20% upside for equities won't have much of a chance.

Leaders of the Pack

Some inspectors of the indexes' latest upward blip have been going down their checklists and nodding approvingly.

Several elements that market handicappers like to see have been present, including broad upside participation. The sectors that have taken the lead also are prompting some analysts to give this advance the benefit of the doubt and propose that it could carry on for another few percent.

Semiconductor stocks are the EKG of the market's speculative metabolism, and they have shot ahead by 7.5% since May 20, as measured by the Philadelphia Semiconductor Index.

Retail shares, barometers of economic conviction, have also been standouts, helped last week by solid profit reports from Home Depot, Lowe's and Costco.

Less remarked upon are the regional-bank stocks. The Regional Bank HOLDRs, a traded basket of the stocks, is up 7% since May 10, the day the 10-year Treasury yield first hit 4.8%. The yield began receding toward the current 4.65% a couple of days later. The participation of bank shares is widely understood to be crucial to the health of any rally, and so far they are holding up their end.

Each of these groups will need to run through a steeplechase of obstacles to hold or build on their recent winnings, even before the earnings-warning season begins in earnest later in June.

The semis stretched their two-week gains Friday after Novellus offered a cheery outlook for chip-equipment demand. For the moment, that good news has been taken as good, and not as a worrying sign of future capacity growth and supply pressures on the chip business.

The sector index, though, remains nearly 13% below its January peak. And, notably, the Semiconductor HOLDRs, the exchange-traded fund tracking the chips, saw one of the largest decreases in short interest in the month ending May 10. That implies the recent gains have been more than short-covering. But it also suggests that one chunk of latent buying demand is gone.

Thursday afternoon brings Intel's mid-quarter update, always hotly anticipated even by Wall Streeters who try to conjure riches from estimates of Intel's gross margins and its CFO's verbal inflections. If strong share prices persist ahead of the news, it will raise the threshold of satisfaction for Intel partisans.

Also note that Smith Barney is hosting its semi industry conference Wednesday and Thursday, where every stray utterance by a chino-clad executive will be conveyed via cell phone to trading desks.

As for retail, the stocks are suggesting that the cooling of consumer spending lately is a mere stutter-step before another pickup and not the start of trend.

Yet veteran trader and financial author Michael Panzner points out a close relationship between consumers' preference for adjustable-rate mortgages and retail-sales growth. The most recent Mortgage Bankers Association data showed 32% of all mortgage volume in April were ARMs. The past two times ARMs hit the 30% level -- November 1999, and before that in late 1994 -- it coincided with the peak in year-over-year percentage gains in retail sales.

The relationship seems to be that when consumers are eager to minimize their monthly payment (and shoulder interest-rate risk) by taking out floating-rate debt, they're a bit strapped and need to slow their spending. If nothing else, it offers one other reason to watch the mortgage data.

As for regional banks, the calming of the bond market has helped, to say the least. And the rising volume of takeover chatter has also excited some buying while no doubt dissuading some would-be sellers and short players.

Last week, BB&T, the North Carolina bank, was caught up in takeover gossip that went unconfirmed and uncommented upon by the company. The stock jumped 2.55, to 37.68, on heavy volume, even as some analysts downgraded the stock saying it's fully valued barring a buyout.

Perhaps the stocks' recent sneaky move higher means the market is betting that violence in the bond pits will subside for some time to come. Friday's employment report will help settle the wager.

A Quality Product

When a new investment product debuts, it's usually safe to guess that the launch is meant to seize on a hot market trend -- one that's bound to cool before long. That's just the nature of marketing in a business where a product's "time to market" is often longer than the duration of investment themes.


Crude Response: A dip in oil prices and bond yields helped boost the Dow 221 points. Home Depot ran higher on strong earnings, helping the index overcome losses in Altria.


A refreshing exception to this rule showed up last week, an exchange-listed fund that will employ a strategy boasting a fine long-term record but that's been out of favor for most of the rally off the March 2003 low. It hits the scene just as the winds seem to be shifting back in favor of this quality-based strategy.

The closed-end fund goes by the clanging name, S&P Quality Rankings Global Equity Managed Trust, and its shares trade on the American Stock Exchange under symbol BQY. It is an actively managed fund that uses S&P's quality ratings of stocks, a tool that has produced excellent risk-adjusted returns since it was created in the 1950s.

These ratings run from A-plus to D grades, and are based on a simple but durable evaluation of 10 years' earnings growth and stability, dividend growth and stability and total sales. As noted here in February of last year, from 1986 through 2002, all A-rated stocks beat all B's by 2.4 percentage points a year, and A-plus stocks handily beat the S&P.

As if on cue, once these results were made public, one of the great low-quality feeding frenzies in history was touched off. Cheaper credit and a shift from losses to profits among financially strapped companies meant that companies rated C and below gained 62.3% in 2003. B-rated stocks returned 31.9% and A's delivered 24.6%, underperforming the S&P 500's 28.7% total return. Higher-quality stocks, though, still retain their strong advantage over the past three, five, 10 and 15 years.

This outperformance by financially shakier companies is most closely reminiscent of the 1992-1993 period, when accommodative debt markets and a strong acceleration in the economy also swung investor attention on the most cyclically and financially leveraged stocks.

Add S&P researchers to the list of those who believe a distinct rotation toward higher-quality, lower-risk stocks is at hand. These stocks fare better when corporate earnings growth is decelerating. And high-quality shares now trade at a discount to lower-rated ones, contrary to the historical premiums they were afforded due to their stability.

There are quality ratings for some 3,400 stocks, essentially every one with 10 years' worth of data. Of those, about 2,400 are rated B-plus or higher, making for a big and cumbersome list to digest for any stock picker. The closed-end fund, managed by BlackRock Advisors, will run those 2,400 stocks through a quantitative model to focus more tightly on the most solid and highest-yielding issues.

The idea is to own 60 to 90 names, using real-estate-investment trusts to gain dividend income and allocating around 30% of assets to non-U.S. stocks in S&P's international quality rankings.

Investors who buy the fund now that it's already trading will have avoided the 4.5% sales charge from the initial offering but will pay 1.12% a year in fund expenses. That's not insignificant, but if the active managers don't squander the inherent advantages of buying quality, it would be well worth it.


--------------------------------------------------------------------------------

E-mail: [e-mail]













Return To Top

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved

Copyright Information.