|
Analysts: Slide not over?
|
 |
August 5, 1998: 8:26 a.m. ET
Michael Metz, Harvey Eisen say the worst isn't over for the market
|
NEW YORK (CNNfn) - Tuesday's stock market sell-off left the Dow Jones industrial average more than 9 percent below last month's record and the Nasdaq composite more than 11 percent below its record high.
CIBC Oppenheimer Managing Director Michael Metz thinks the market will only worsen. Harvey Eisen, chairman of Bedford Oak Partners, is also concerned but says the market will soon bottom out.
Following is a partial transcript of their conversation on "The Moneyline News Hour with Lou Dobbs."
DOBBS: Let's talk with you, Michael, first. You think there is more to go. Let's find out how much.
METZ: I don't know. But of course, my feeling is the basic underpinning of the market, which is that earnings momentum is eroding very rapidly. The real message of second-quarter corporate America is if there is no visibility for the second half and there is little visibility for 1999.
Going into the second quarter, the assumption of Wall Street, which apparently still prevails is that earnings rise 10 or 12 percent the balance of this year, another 10 or 12 percent in 1999. I don't think it's going happen.
EISEN: Of course it's not going to happen. We all know that. The market's been up over 25 percent for three years in a row. Now corporate profits are slowing and that's why the market is going down.
DOBBS: At this point, do you think this is a reasonable 10-percent correction or an unreasonable 20-percent correction? Do you have any sense of it?
EISEN: It's a reasonable 10-percent correction. The work that we keep tells me that we are within a day or two of a short-term bottom. We are at very, very oversold levels, so the last thing anybody should do is sell tomorrow in a panic. The market should bottom over the next couple a days -- rally, and probably fail to make a new high and then we have got to worry.
DOBBS: Fail to make a new high and then worry. Why?
EISEN: Because that's how tops are made. The market is going through this wall of worry. Whether it's Asia, whether it's the economy. Whether it's the political scandal. The reality is interest rates are low, inflation is low and that's why the market has been OK.
DOBBS: Is there a point in which a wall of worry, gentlemen, just becomes a wall?
METZ: I don't think there is a wall of worry. The consensus on Wall Street is that earnings are up 10 percent the balance of this year, and again next year. As [Federal Reserve Chairman Alan] Greenspan said in his testimony, Wall Street even thinks you can maintain double digit earnings gains into the year 2001 and that's not discounted, the lack of that is not discounted in the market today.
DOBBS: And Alan Greenspan's role in the sell-off? We have high real interest rates. We have low inflation. We still had reasonable economic growth through the second quarter. What caused today's sudden drama?
METZ: I think you have to look at what's happened over the last two or three months. Stocks -- the whole market is commoditized. I think the last thousand points in the market in the upside reflected people chasing the trend, pure momentum playing. And until two or three weeks ago, that was the way to go. Buy the new highs list. Don't give a damn about valuations.
What you've had in the last week is a change in psychology. I think traders and investors are worried. Every rally has been abortive. So now they're selling on rallies. This morning you had a rally attempt. When that failed, I think the momentum players got nervous. They sensed a change in direction.
DOBBS: These momentum players, how important are they, in your judgment, for this market, particularly over the last few weeks?
EISEN: They've been very important, but from my point of view, you've been in a bear market. If you look at the Russell, it's down on the year. If you look at most stocks, they're down on the year. If you look at the new low list today, it's over 500 stocks in a new low for the last 52 weeks.
What's masqueraded the decline is the big-cap names that you talked about earlier. So if you talk about the Dow and the S&P, that's a different market than the overall stock market.
METZ: That's really the issue here today. Don't big-cap stocks enter their own sort of correction euphemism for a bear market?
DOBBS: Basically, we've got 80 percent of the funds underperforming the S&P 500. Only 20 percent are either matching or exceeding it. But at the same time, 60 to 70 percent of the stocks on both the Big Board and the Nasdaq are all down 20 percent.
Those are staggering numbers. Where does the momentum come from for the second-half performance?
EISEN: It's going to be tough. The bottom line is that you have these limited number of stocks, 50 stocks are half the market value of all stocks and they have been the best performing stocks. And once they start to roll over, you have the decline and the averages.
Remember, a bear market is down 20 percent, you're down 10 already. So I think you do get a rally. Then if you break this low on the next decline wherever it's made in the next few days, then you do have a bear market.
METZ: What is the impact when the individual investor and his attitude towards mutual funds? Even more importantly, if the market continues to decline at all, you look at the second-quarter figures this year, they're fascinating. Personal consumption going double the rate of personal income. Savings plummeting to the lowest level in memory.
People have used their unrealized gains in the stock market to support consumption, the question is when those unrealized gains disappear, what happens to consumer confidence and consumer spending.
DOBBS: A lot of pressure on the consumer sector of the economy, two-thirds of the economy. But at the same time, what's happened to all that liquidity? The 401(k)s, the money rolling into this market. Money managers having to put it there in the market…
METZ: They don't have to put it in there if money flows stop. Low and behold, 4-percent cash flows are not enough, and you tend to raise cash just in case.
DOBBS: What's an investor to do?
EISEN: An investor has to protect themselves. You have got to remember that investors do not have to keep their money in equity funds. They can switch them with an 800 telephone call to a money market fund. So all this stuff that people talk about -- the investor's different this time around, he's not going to sell -- is nonsense.
DOBBS: Your advice to him or her?
EISEN: Protect yourself, you're in a very scary environment, right now.
METZ: I think you've got to remain reasonably liquid if you're going back in the market, go slowly, gradually over the next nine or 12 months. 
|
|
|
|
|
|
U.S. stock markets
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
 |
|
.
