The Wall Street Journal-20080123-Stocks Survive a Bear Sighting- Down by 464 To Start Day- Dow Industrials Get Fed-s Help
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Stocks Survive a Bear Sighting; Down by 464 To Start Day, Dow Industrials Get Fed's Help
Stock markets around the globe staggered, led lower by energy and technology shares even as retailers and financial companies managed to rise.
Whether or not the economy tumbles into recession, some sectors that have been viewed as relatively safe during a downturn are getting expensive. Bargains are emerging elsewhere, however. The Dow Jones Industrial Average fell 128.11 points, or 1.1%, to 11971.19; the Standard & Poor's 500-stock index shed 14.69 points, or 1.1%, to 1310.50; and the Nasdaq Composite Index dropped 47.75 points, or 2%, to 2292.27.
The Dow is down 9.8% this year, while the S&P 500 is 11% lower and Nasdaq is off 14%.
It was one of Wall Street's busiest days. Trading in New York Stock Exchange-listed shares was 6.42 billion shares, the second-highest on record behind only the nearly 6.68 billion on Aug. 16.
With the U.S. economic malaise seemingly spreading to foreign economies, Asian shares recovered in Wednesday morning trading following big losses yesterday. European shares ended mostly higher yesterday after steep losses Monday, thanks to the Federal Reserve's rate cut.
The Dow industrials were down 464 points soon after the opening bell. But investors began to warm to beaten-down shares, buoyed by the Fed's pretrading interest-rate cut of 0.75 percentage point in the federal-funds target rate.
Investors have been piling into companies that sell products whose demand should stay strong no matter what happens to the global economy. Consumer staples and health-care companies have done best in past periods following surprise rate cuts, according to Merrill Lynch.
Those with global reach remain attractive. Chocolate and beverage purveyor Nestle, for instance, "continues to trade at an undeserved discount to its peers," wrote Andrew Wood, an analyst at Bernstein Research. The stock trades at just 15 times estimated per-share earnings for 2008. Beverage maker Cadbury Schweppes trades at about 17 times this year's projected earnings and Unilever trades at less than 15 times estimated earnings.
But food-and-beverage stocks lost 2% yesterday, and some consumer- staple companies are looking pricey. Colgate-Palmolive, which has seen its shares jump 15% in the past year, trades at more than 22 times 2008 estimated earnings.
Retail stocks rose more than 2% yesterday, but the gains could be fleeting. Companies that cater to discretionary consumer spending may do poorly until it is clear how deep the global economic slowdown is, said analysts.
Even though Sears Holdings climbed 12%, one hedge-fund manager eager to bet against the stock said she couldn't get a brokerage firm to lend her the shares so she could sell them short, because so many investors were making the same move.
Companies weighed down with heavy debt also look dangerous because they will find it hard to take on more borrowing or refinance existing debt, given the troubled credit markets, analysts said, and could have problems meeting existing interest payments as the economy slows. And the housing downturn is likely to last through this year, making home builders a risky proposition.
But the outlook is improving for some financial shares, which rose 2.5%. Dinakar Singh, who runs the $13 billion hedge fund TPG-Axon Capital, argues that firms with strong global franchises have become attractive. "We have been, and continue to be, pessimistic about the prospects for credit- and consumer-related companies in the U.S.," he said. But he has been buying Merrill Lynch and "select companies that have had specific balance-sheet issues, yet still have strong, diversified and global business franchises."
European technology and bank stocks are oversold, said Roger Hirst, European equities strategist at Bear Stearns. His team initiated coverage of Bank of Ireland with a "buy" rating, citing its limited exposure to U.S. subprime and liquidity problems.
The key to financials: Focus on companies that boast franchises that won't be crippled by the aftermath of the credit bubble. Wachovia sports a dividend of more than 7% and trades at less than 10 times last year's earnings after falling more than 40% in the past year.
The bank has taken write-downs and has seen nonperforming losses surge, but the bank recently reassured investors about the stability of its dividend. Christopher Zook, chairman of Houston's CAZ Investments LP, has been buying shares of Bank of America, thanks in part to a dividend that tops 6%.
Alan Fournier, who runs Pennant Capital Management, a $2.4 billion hedge fund in Chatham, N.J., is a fan of Fidelity National Financial. The title-insurance giant has tumbled 37% in the past year but mortgage rates are falling, enabling some consumers to refinance. Falling mortgage rates also cut the threat of the looming readjustments of adjustable-rate mortgages handed out in recent years.
"Fidelity trades below book value, has an 8% dividend yield and has no credit exposure," said Mr. Fournier, who profited last year from bets against subprime mortgages.
A riskier bet: metals. If a global economic slowdown has begun, global mining shares are likely to keep falling. But foreign economies could hold up, assuming central bankers overseas follow the Fed and cut interest rates, helping mining shares.
Brazil's Companhia Vale do Rio Doce fell almost 7%, even as the Brazilian market rebounded 4.5%, after confirming it is in talks to buy Swiss miner Xstrata.
In major U.S. market action:
Stocks fell; bonds rose. The 10-year note gained 1 10/32 points, or $13.125 for each $1,000 invested, pushing the yield down to 3.484%.
The dollar was mixed. The dollar rose to 106.58 yen from 105.99 Monday. The euro rose to $1.4620 from 1.4444 Monday.
