Dow fizzles...Russell sizzles
Blue chip stocks finished in frantic gyration just shy of the close Thursday to end the 1998 trading year sharply lower. The DJIA shed 93.21 points to finish at 9,181.43 ending up roughly 16% for the last 12 months. While the DOW stocks were fading, the Nasdaq index was posting a modest gain and one more record close, as a selection of some of the larger Internet related issues finished positive. The composite index closed with a gain of 25.74 points to a record 2192.69 and passed the 2,200 level for the first time during the session. The index of technology stocks closed 1998 with an annual gain of 39%, the third highest in history.
The long-suffering Russell 2000 Index of small stocks also lead the market, closing up 10.05 points at 421.96, and adding credibility to the belief held by some on Wall Street that the group will shed its laggard status in 1999. For the small-cap investor, it has been a rough year up until about six week's ago with index down about 3% for the year, but the new strength in lower priced issues is just starting to surface.
Analysts and traders described most of the day's trading as last minute portfolio adjustments (window dressing) and small investor profit taking but the highlight of Thursday's dealings was the new stalwart showing in the broad market. For most of 1998, many market watchers moaned about the lack of breadth to the advance in many U.S. market shares.
In the bond market, Treasury trading was choppy but most traders were reluctant to attribute the fluctuations to any particular piece of fundamental news. Volume and activity was low as the 30 year treasury fell 14/32, to yield 5.12%. Most bond players looked forward to the National Association of Purchasing Management's December business survey released on Monday. Bond traders regard this release highly in terms of a forward look at the U.S. economy. This is due to its broad look at the manufacturing sector as well as being one of the first economic indicators released each month.
Stocks in the news...
AT&T and Time Warner are putting finishing touches on their joint telecommunications venture to bring high-speed Internet access and alternative local phone service to households across the USA. AT&T would finance most of the upgrade of Time Warner cable TV networks for voice and high-speed Internet access and would pay a fee for each home along the network's path and for each customer who signs up. Corporate insiders and industry analysts say negotiations are nearly complete and that an announcement is likely two weeks away.
Bell Atlantic is said to be in discussions to acquire AirTouch for about $45 billion in a deal could be announced early next week. AirTouch is the second largest provider of cellular phone service in the United States, after AT&T and Bell Atlantic and ATI already operate a joint venture, PrimeCo, that supplies digital personal communications services.
The nation's unemployment offices experienced a very unexpected holiday-season rush; the largest weekly jump in benefit claims since 1992. The number of Americans now filing for unemployment benefits rose by 79,000 and the increase in claims could be a sign that hard times abroad are hurting U.S. companies. A more reliable and closely watched four-week average of unemployment claims was only slightly higher than November's average, when the nation's unemployment rate fell to a six-month low. On the positive side, job analysts said that report indicated that many workers laid-off by manufacturing companies were finding service-sector jobs.
U.S. corporations are loading up on debt at the fastest pace since the late 1980s and the surge in corporate bond issues and new bank lending stands in stark contrast to the recent worry that a credit crunch was hitting the business sector. Corporate debt is up 11% $3.6 trillion outstanding and some on Wall Street now worry that corporations will come to regret their new debt if the economy slows and profits sink in 1999.
The dollar fell against the yen and mark Thursday ahead of the introduction of the euro, which is expected to boost demand for securities denominated in the European Union's single currency. The start of the euro could weaken the dollar as investors buy euro-denominated securities and central banks reshuffle their currency reserves in 1999. Many analysts played down the effect of the euro currency introduction, which officially takes place January 1. The European Commission set rates for 11 currencies transitioning into the new currency. The euro goes into effect tomorrow and the dollar will begin trading at $1.16675 per euro. It's certainly a significant event but most analysts agree that it's already anticipated, and will probably have little initial impact on the U.S. equity markets.
A London trader who went 10 times over his authorized limit prior to Christmas may have sparked the biggest crisis in derivatives markets since the collapse of the Barings investment bank Barings in 1995. An independent trader named John Park lost $10.2 million and this prompted the Securities and Futures Authority to close two companies which cleared its trades. Over 100 other traders on the London International Financial Futures/Options Exchange have seen their capital frozen and stand to lose about half of it.
This was a year of big events in the business and financial world. The U.S. stock market surged, plunged, then surged again. Foreign economies in Asia and South America felt the impact of the global financial crisis that spanned all continents and spared no country. There was an explosion of electronic commerce on the Internet and it finally became an essential part of any corporation's business. Software giant Microsoft was taken to court in a landmark antitrust case that revealed the cutthroat nature of big business. Greenspan cut borrowing costs for the first time in almost three years in an effort to spur investment and once again, "irrational exuberance" overwhelmed the market. Merger mania was in full swing with goliath deals (involving some of the biggest companies in the world), that would have been considered absurd a few years ago. And all of that happened while the U.S. government was snarled and incapacitated by scandal, seeming to prove its own growing irrelevance.
Analysts are mostly optimistic in their market outlook for 1999, the last investment year of this century, but the question is:
Can the U.S. market continue to grow at the double-digit rate of the past four years?
The era of gravity-defying Internet stock valuations and the universal optimism over Web-related stocks will probably come to an end in 1999. Internet valuations can be partially justified because of the "explosive" potential of the market but just a few negative announcements could lead to a sharp industry correction. Investors won't hesitate to dump the under-performers and that will easily define the winners in the Internet market, creating intense competitive pressure and driving the smaller companies to merge and consolidate to avoid extinction.
On a larger scale, the last year of the millenium promises more fallout from world economic woes, bigger mergers, more fluidity of currency and capital, and increased communication based upon instantaneous information leading to closer ties around the globe. The simple fact is; economies of the world have never been more entangled and this is the reason for the increasing tendency of the world to act as one market instead of a series of national ones. The immediate effect is that trouble can spread across one continent after another like a virus and the U.S. markets are now more vulnerable to almost any economic catastrophe of the smallest foreign country.
From an optimistic viewpoint, even while many of the experts are forecasting slower growth and slimmer corporate profits most still see plenty of room for the astute trader to achieve consistent returns. Valuation analysts recommend that an investor should look carefully at individual stocks and sectors for earnings growth and shift to the highest-quality issues in each group to ride-out the slumps when the market turns sour. As traders, our opportunities for profit are much better because we thrive on the momentum and changing trends. Market volatility has been excellent for the last two years and should remain with us in the coming months.
I expect that most of us will continue to be avid (and profitable) followers of the OIN and in particular, Jim's market observations. Our company is committed to giving you more timely and relevant investment strategy information than any other source and we all look forward to contributing to the success of our readers. From everyone at "Option Investor.com", have a safe and happy New Year!