Value Goes to Market

SAN FRANCISCO -- So the C.O.N. ("cult of now") on Wall Street is awash with proponents of value stocks. You can't swing the ghost of a 19th century British author (more on that in a minute) without smashing into somebody touting cyclicals or some other recently putrid group.

I first wrote about the move toward value on Dec. 21 ; maybe not first to the dance, but timed pretty darned well to the music. Certainly, value is what's working right now. The Dow Jones Industrial Average wildly outperformed the Nasdaq Composite again today, rising 130 while the Comp shed 150. Additionally, the S&P Barra Value Index rose 1.5% while its growth counterpart declined 1.2%.

As an aside, while the overlords of the S&P 500 have been criticized for allegedly "juicing" the index with growth stocks, that average seemed to best reflect today's bifurcated action, rising a paltry 0.1%.

Playing the value theme this week, Sam Ginzburg, managing director of equity trading at Gruntal, said he enjoyed some "phenomenal trades," which produced more gains "in the first three days of the month than we usually make in a quarter."

The trader declined to specify individual issues but said the windfall resulted from long positions in supermarkets, oil and other cyclicals, plus closed-end bond funds paired against a short position on the Nasdaq 100 Trust (QQQ Quote).

You can rest assured Ginzburg wasn't alone.

While the QQQ fell 6.9% today, stocks hitting new highs included Enron (ENE Quote), Dynergy (DYN Quote), Union Carbide (UK Quote), Illinova (ILN Quote), Dow Chemical (DOW Quote) and Weyerhauser (WY Quote).

Also, Deere (DE Quote) rose 5.1% to a 52-week high of 46 1/16 after Merrill Lynch issued some positive comments.

Whether this sudden trend of value trumping growth continues tomorrow (and beyond) is predicated on a number of factors, not the least of which being the market's reaction to the profit warning from Lucent (LU Quote).

Judging by the after-hours activity, it's not going to be pretty. After closing the New York session at 69 1/16, Lucent fell as low as 50 1/2 in heavy-duty after-hours trading before settling at 52, a 25% drop (!).

Lucent's announcement was tough timing for Lehman Brothers, which upped its price target on the stock to 95 from 90 this morning. In the silver-lining department, I think we can safely say Lehman wasn't tipped off about the shortfall by the company. I could not reach the firm's analyst, Steve Levy, but my colleague Joe Bousquin did.

Now Lucent is not the market and the market is not Lucent, but the company clearly has cache. Early indications are that the recriminations are going to be harsh tomorrow. Nasdaq 100 futures were recently quoted at 3264 in Globex trading, or some 77 points below where the NDX closed in the cash market.

"It looks like our Nasdaq targets might get hit tomorrow," said Scott Bleier, chief investment strategist at Prime Charter. As I reported in today's Roundup, Bleier predicted the NDX could fall as low as 3100 and the Comp as low as 3500 before finding meaningful support.

Bleier reiterated a view that Lucent's news wouldn't "vaporize" the market, but acknowledged investors (and himself?) may have been "too complacent" about the Comp's declines so far this week.

Speaking of complacency, don't be so sure everyone is going to run for the hills.

"I don't know if it's critical to buy aggressively tomorrow but at some point in the next week everyone will say what's happened is way overdone," said Brian Gilmartin, portfolio manager at Trinity Asset Management, who suggested 12% below the Comp's all-time high would be a good re-entry point. "Sharp corrections like this rarely lead to anything serious. It's not as bothersome as like July to September 1997 when it was death by water torture for a whole quarter."

I can imagine market players who recall the 1970s rolling their eyes at the thought of one quarter of negativity being considered torturous.

But in Gilmartin's defense, some (other) folks are acting like their fingernails are downright stuffed with bamboo, what with the horrid week the Nasdaq is shaping up to have.

Great expectations, indeed.

That Time of the Month

With Wall Street cramped up over Lucent, the fact that December's employment report is due Friday got somewhat obscured. (TSC previewed the data.)

Earlier in the week, bonds and their equity surrogates were under siege amid rumblings about a "blowout" report featuring a jobs figure over 300,000. Today interest-rate sensitive stocks and bonds found eager bidders, suggesting the fears were already discounted because I didn't get a sense anybody thinks the data will prove tame.

The consensus is for nonfarm payrolls of 240,000 and the unemployment rate holding steady at 4.1%. Average hourly earnings are expected to rise to 0.3% while the average hourly workweek is unchanged at 34.6.

Ken Mayland, chief economist at KeyCorp in Cleveland, forecast a "healthy, but not outstanding" payroll figure closer to 200,000. But he sees the unemployment rate falling to 3.9% and average hourly earnings rising 0.4%.

"If numbers come out as I laid out, I think the initial impact would be negative on fixed-income and equity markets," the economist said. "But that's the initial impact. Maybe later in the day things would come around and even turn positive as bargain hunters come in and mop up."

One thing I can say with 100% certainty: Tomorrow's gonna be, tomorrow's gonna be, tomorrow's gonna be another day (hey, hey, hey, hey).

P.S.

That swing ghost, Charles Dickens, has contacted me from beyond the grave to plead for a moratorium on the phrase "a tale of two markets" to describe days like today.

Don't ask how or why the scribe chose me to be his muse, but I can assure you I'm not getting paid by the word.

Unfortunately.