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A Guru Calls the Rally in Brokers -- and Sees Pain for the Dow

GuruVision: One Good Call Deserves a Follow-Up

SAN FRANCISCO -- On Thursday, Sam Ginzburg, senior managing director of equity trading at Gruntal, suggested here that regional brokers might be good trades as takeover targets. He expected another round of mergers as part of a re-emphasis on traditional brokerage business.

One of the possible targets he mentioned, Morgan Keegan (MOR), rose 35.4% today after agreeing to be acquired by Regions Financial (RGBK), which rose 4.6%.

Other brokerages the trader mentioned last week, Raymond James (RJF) and A.G. Edwards (AGE), rose 5.9% and 4%, respectively, while the Amex Broker/Dealer Index gained 1.7%. (Meanwhile, the Philadelphia Stock Exchange/KBW Bank Index rose 4.1% as investors warmed to the idea of a possible Federal Reserve ease tomorrow.)

Emphasis on the more traditional brokerage business -- evident, he said, in Prudential Securities' announcement today it will cut 160 investment banking jobs and reassign remaining staffers in the unit to focus on research -- is going to lead to "more and more" mergers involving regional brokerages, "assuming we don't go to zero."

While kidding (of course) about the "zero" comment, Ginzburg cautioned: "I don't think all the badness has happened yet," noting the Dow, particularly, remains at a fairly lofty level -- specifically, 10,645.42 after today's 2% advance.

"I just don't see any reason why we should be rallying," Ginzburg said. Currently, his desk is both avoiding tying up capital overnight and staying hedged, he said, but is "shorting into any intraday spikes." Others appear to be employing similar tactics, particularly with the Nasdaq Composite, which fell 1.1% to 2624.53 after trading as high as 2726.20. The S&P 500 rose 0.8% to 1322.74, about 10 points below its intraday high.

The trader recommended Providian Financial (PVN), which rose 3.3% today, as a specific target for shorting because of both technical reasons and a sense the U.S. consumer is "tapped out."

Finally, the trader said the current bear market won't end until the Wall Street gurus (including Gruntal's own Joseph Battipaglia, I presume?) recommend that investors "please proceed to the nearest exits in an orderly fashion."

GuruVision: Looking Ahead

Ginzburg didn't mention Battipaglia specifically. Regardless, heading for the exits was the last thing on most gurus' minds this week:

  • Thomas Galvin, U.S. portfolio strategist at Credit Suisse First Boston, predicted the Fed will lower interest rates 75 basis points by the end of second-quarter 2001, helping to reignite "high-octane stock returns." The S&P and Dow will rise about 20% each next year while the Comp climbs "an astonishing" 50%," he forecast. The strategist's top picks for 2001 are Nokia (NOK), Applied Micro Circuits (AMCC - Get Report), Celestica (CLS), Allegiance Telecom (ALGX) and Morgan Stanley Dean Witter (MWD). (CSFB has done underwriting for Applied Micro and Morgan Stanley; a spokeswoman was unable to determine if CSFB's recent merger partner Donaldson Lufkin & Jenrette had done underwriting for any of the aforementioned.)

    Galvin's optimism is based, in part, on a view that the reacceleration in mortgage applications makes a hard-landing scenario unlikely and that the "huge run-up" in refinancings "is quite likely to fatten consumer pockets."

    But doesn't that suggest the Fed won't have to cut rates as aggressively?

    Strength in housing does not offset weakness developing in "most other pockets of the economy," Galvin replied in our interview today. Additionally, he believes energy prices will fall in the coming year, leading inflation to "drop like a rock," thus clearing the way for the Fed to ease. (Crude futures rose 3.1% today while natural gas prices added another 1.6% to their recent rally.)

    Finally, the credit crunch Galvin predicted back in August has proven to be an "even bigger and worse beast" than he expected, and will inspire the Fed to cut rates aggressively, he said. The strategist deserves kudos for being far ahead of the curve on the crunch-watch, and his prediction for a Fed ease by March 2001 also looks prescient. But the resulting stock market rally he's also called for repeatedly has (obviously) not materialized.

    Galvin does not expect a rate cut tomorrow, believing "the Fed always likes to bark more than it bites," suggesting the central bank prefers to talk ease first, before actually doing it. If the market cooperates with the jawboning, the Fed can "keep more basis points in ammunition" for future easing, he said. "But I'll take it if it comes" tomorrow. (For more on the Fed, check out this story I did as part of our New Year, New Rules series.)

  • Jeffery Applegate at Lehman Brothers forecast the S&P 500 will hit 1675 next year on earnings of $61.25 per share, while the Dow rises to 13,000. Notably, his estimates are not predicated on Fed rate cuts. "Should the Fed ease, the price/earnings multiple will be higher and the stock market will do even better," he wrote. Still, the strategist conceded his record for 2000 was "hardly stellar, with more misses than hits."

  • Thomas McManus of Banc of America Securities wrote the average stock is "attractively valued" based on current estimates and continued to recommend overweighting utilities/energy, health care, consumer nondurables and (to a lesser extent) financials. McManus continues to underweight tech, however, believing more earnings misses are in the offing and Nasdaq fans are "still in denial despite recent woes."

  • Finally, Brian Belski, fundamental market strategist at U.S. Bancorp Piper Jaffray in Minneapolis, "continues to believe the stock market is drawing out a significant fundamental valuation bottom, especially in terms of technology and telecom stocks and that the current environment actually favors longer-term investors, especially those who want to employ a growth discipline."

    But Belski concedes "the market lacks the confidence for an explosive rally ... that would likely be needed to pull itself out of the doldrums." Thus, he recommends a combination of technology/telecom stocks and "defensive growth" names for the next six to 12 months.

    In the former category, he recommends Agilent Technologies (A), ADC Telecommunication (ADCT), Comverse Technology (CMVT), Dell (DELL), JDS Uniphase (JDSU), Intel (INTC), Level 3 Communications (LVLT), OpenWave System (OPWV), Siebel Systems (SEBL), and Stratos Lightwave (STLW).

    In the latter, he likes Baxter International (BAX), Biomet (BMET), Conagra Foods (CAG), Fannie Mae (FNM), Medtronic (MDT), Michael Foods (MIKL), St. Jude Medical (STJ), TCF Financial (TCB), Target (TGT) and UnitedHealth Group (UNH).

    U.S. Bancorp Piper Jaffray has done underwriting for OpenWave and Stratos Lightwave.

    Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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