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Dow may dip below 10,000 by yearend - JPMorgan

*I personally feel a breach of 10,000 will be more then just any ol' dip... but what do I know...?

Dow may dip below 10,000 by yearend - JPMorgan
Mon Oct 17, 2005 04:18 PM ET
By Vivianne Rodrigues

NEW YORK, Oct 17 (Reuters) - The Dow Jones industrial average may end 2005 below 10,000 as lower margins and higher interest rates are likely to hurt corporate profits, pushing stock prices down, JPMorgan's global equity analyst Abhijit Chakrabortti said.

"The margin squeeze story is beginning to catch up, and many investors who are betting on a fourth-quarter rally in stocks may be bound for disappointment," he said in an interview.

Chakrabortti said companies in sectors including consumer discretionary, industrials, materials and pulp & paper are among the most vulnerable as "they have no pricing power."

The analyst predicts the current quarter, more than most others in the past two years, has the potential to miss consensus expectations for earnings growth.

"Energy costs are still very high and borrowing costs are also rising, and that is not a supportive combination for companies and of course, their stocks," the analyst said. "We are in a situation where the return on cash investments is increasing, and that is appealing for many investors given the volatility and risks traditionally involved in the equity market."

Federal Reserve policy makers raised the benchmark lending rate 11 times since June 2004 to 3.75 percent in attempt to ward off mounting inflationary pressures as crude oil prices reached record highs.

Higher interest rates may also hurt capital spending and pave the way for further declines in benchmark stock indexes at the start of 2006, Chakrabortti added. The three most widely-watched stock indexes in the U.S. are down for the year. The Dow Jones lost 4.2 percent, while the Standard & Poor's 500 index slid 1.9 percent. The technology-laced Nasdaq Composite is down 4.9 percent.

"The start of 2006 is not looking good for the U.S. equity market," said Chakrabortti. "Still, there are some bright spots."

Chakrabortti said investors should favor stocks in the aerospace, defense, consumer staples and food and beverage sectors. Investors should also favor shares in oil equipment and refineries, as well as foreign stocks in countries including Japan, he said.

"The largest companies in those sectors are very well managed and are in good position to absorb higher rates," he said. "As for international stocks, I would simply just buy Japanese stocks and wait a while - it will pay off."


LINK: http://yahoo.reuters.com/financeQuoteCompanyNewsArticle.jhtml?duid=mtfh94104_2005-10-17_20-18-48_n17....