Wall Street Awaits Its Goldman Moment

If trading in Goldman suggests there is little free cash in the market, that could bode poorly for growth stocks.
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For weeks now the market has been engrossed by the big moves in cyclical stocks and the debate over whether the move is sustainable. But in the coming week, the market's mind is set to stray from that.

All because

Goldman Sachs

, the stodgy, 130-year-old Wall Street firm, is set to go public on Monday. And while this debutante is of a certain age, that hasn't kept scores of portfolio managers from clamoring to have their names high up on Goldman's dance card. Though its fancy has often been taken by the flash of the latest Internet IPO, for Wall Street the Goldman float bears a great deal more meaning than any .com listing. How Goldman goes out could affect the entire investing landscape.

"It's going to have multiple effects," said Gary Kaminsky, managing director of the private banking group at

SG Cowen

. First effects will be seen in how other financial stocks -- companies like

Merrill Lynch

(MER)

,

J.P. Morgan

(JPM) - Get Report

and

Morgan Stanley Dean Witter

(MWD)

-- perform. If the heavily oversubscribed IPO goes as well as people expect, it could change the way people think about how the financials are priced. Yet there are cross currents here, at least in the very near term. Portfolio managers who are strict about their sector allocations will want to sell off some of their other financial holdings to make way for Goldman.

The effect of the Goldman IPO will extend beyond the financials, though. Besides the obvious ways it could move short-term investing sentiment, "the aftermarket performance could send a real message in terms of continued liquidity and supply and demand," said Kaminsky.

This, in turn, could affect the way Wall Street views the recent broadening of the market, with its shift away from growth and toward issues that rise and fall with the world economy. If trading in Goldman suggests there is little free cash in the market, that could bode poorly for growth stocks -- for while they have come under some pressure as the market's broadened, they've had nothing like the kind of hammering that usually comes to the losing group in a market rotation.

All this assumes, of course, that the rotation will continue. Traders have been saying they are surprised by the momentum of the move in the cyclicals, but that does not mean that those stocks are the place to go if you're buying with a plan to hold for more than a couple of months.

"The cyclical stocks are a good trading opportunity," said Kaminsky. "If you can trade them right, you add incremental returns to your portfolio. But a year from now, the growth stocks will outperform the cyclicals."

That view is shared by Jeffrey Applegate, chief investment strategist at

Lehman Brothers

. A self-described horrible market timer, Applegate is hesitant to suggest moving into an area unless he feels it can outperform for the long haul.

"For it to be sustainable, you have to argue that we're on the verge of a robust local and global GDP acceleration," he said. Applegate doubts that U.S. growth will get any stronger than its current torrid pace -- in fact Lehman's economists have been forecasting (either incorrectly or a wee bit early) that U.S. growth is going to fall off. As for the global economy, "we've had a forecast that we're going to trough in mid-'99 and pick up, but not pick up that much."

That last thought is not uncommon on Wall Street. "It's one thing to say that the foreign economies aren't going into the drink; it's another to say we're having a strong recovery," said Bill Dudley, director of U.S. economic research at Goldman Sachs. While Dudley does see an improvement -- Goldman recently upped its forecasts on Latin America, where it does look like there's going to be a V-shaped recovery -- things still look grim in Japan, the world's second-largest economy.

True, there have been signs that Japan may be pulling out of the trough, but with a heavy restructuring burden, any recovery will be slow at the outset and will likely require additional fiscal spending by the government for it to get beyond the early stages. For that reason, financial markets will be keeping a close eye on Prime Minister

Keizo Obuchi's

meetings with

President Clinton

next week. There have been some rumors that Obuchi will announce a further stimulus package as a sort of gift for Clinton, but this seems unlikely. Japanese authorities would rather wait until the last round of stimulus, just making its way into the economy now, begins to peter out and

then

draft another package. But Obuchi may indicate that his government is ready to offer more stimulus once it's needed. That would be welcome.

On the economic front, traders will be watching the April

Purchasing Managers Index

on Monday and the April

jobs report

on Friday. Both should be strong, said Dudley. The manufacturing sector continues to improve, and that should keep the PMI strong, while payrolls are expected to be robust. The bond market could use a friend these days, but neither of these reports is likely to be one.