SAN FRANCISCO -- The weight of great expectations proved too much for the market to carry today.
There were some encouraging signs on the economic front, as business inventories fell 1% for November, while industrial production slid 0.1% in December, continuing its recent pattern of falling at an ever-slowing rate. Meanwhile, the consumer price index fell 0.2% last month, showing that headline inflation remains subdued.
Beige Book indicated "while there are still indications of caution, there are also scattered reports of improvement."
But a still-muddied economic outlook proved woefully insufficient to inspire buyers, more especially when combined with
capital expenditures cut,
J.P. Morgan Chase's
losses stemming from its
and Argentina exposure, as well as worries about potential asbestos liabilities facing Dow components
"The market was priced for that perfect recovery that will not occur," commented Kent Engelke, capital markets strategist at Anderson & Strudwick in Richmond, Va. "Our greatest concern is that the recent volatility is a harbinger to that proverbial strike three and you are out."
Strikes one and two occurred last January and April, respectively, when stocks rallied on "interest rate/recovery euphoria only to make lower lows, as an immediate rebound did not occur," Engelke recalled. "Each time the coveted recovery does not occur, conviction levels drop, akin to the little boy who cries wolf. How will investors respond if we have that horrid
double dip recession?"
Today's market activity, which left the
Dow Jones Industrial Average
at its lowest level since late November and erased the
year-to-date gains, was presumably a preview.
And the Follow
It occurred too late for the
Midday Musings , but I spoke with Dan Niles, chip analyst at Lehman Brothers, about the implications of
capital expenditures cut.
"The spending number is good
and I'm glad it's low," said Niles, who noted Intel's capital expenditures doubled from 1999 to 2001 while its revenues fell by 10%.
But "Intel has said before that capital expenditures to some degree is a reflection of their optimism about the growth rate in the future," Niles recalled.
He also noted that for all the talk about economic recovery and improvements in the PC space, Intel is forecasting gross margins will be 51% this year. "How many people are talking about huge upside in margin and they just gave a guidance flat with the fourth quarter," Niles said. "Yes, they're being conservative but it all ties back to the capex discussion
and how they feel about the future."
Lehman has done underwriting for Intel and Niles has a market performer recommendation on the stock, although he last week recommended investors sell shares into the earnings.
That Intel's earnings bested expectations by 4 cents and the stock still fell 2.9% "tells you what expectations are baked into stocks at this point -- they're huge," the analyst said. "Obviously, things are getting better for Intel but the question is do you want to pay
about 35 times next year's earnings for it?"
In a microcosm, that neatly surmises the dilemma facing the broader market right now.
And the Follow, Part II
fell 2.7% today as the paper-products giant faced unfriendly fire on two fronts. First, shares of companies with
asbestos exposure were under pressure. Second, the California Public Employees Retirement System encouraged
to drop its bid for G-P building products division and accept
$55 per share bid.
Weyerhauser has said almost two-thirds of Willamette shareholders have tendered for the $55 per share bid, although the would-be acquirer still faces a poison pill if Willamette's board remains recalcitrant.
But it's increasingly unlikely that Willamette will commit corporate hara-kiri by assuming the asbestos risk imbedded in G-P's building products group. That suggests no relief on the asbestos front for G-P's shareholders.
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.