Fundamentals don't change

January 18, 1991|By Herb Greenberg | Herb Greenberg,Chronicle Features

Forget what happened to the stock market yesterday or today. The message from gurus galore remains the same: No matter how stock prices act in the days following the war's start, the fundamentals remain the same. Take away the war and it's the same old story as the pre-Saddam days namely, the weak economy and its uncertain future and the debt-burdened banking system.

Using history as a guide, major traumas "soon played themselves out and led to the market's true direction," says Stan Weinstein of the Professional Tape Reader newsletter.

Which is? Well, short-sellers were busy during yesterday's rally shorting stocks that is, borrowing shares and immediately selling them in hopes of buying them back later at a lower price. Despite lower interest rates, negative investor sentiment (a bullish indicator) and prospects of a short recession, there are other factors that could undermine a strong rebound. That's why savvy newsletter editor Martin Zweig of the top-performing Zweig Forecast has been neutral lately. He cites several factors, including corporate earnings. He forecasts that the average earnings for the Standard & Poor's 500 were $22 per share in 1990; the Wall Street consensus is $28.50. That's 30 percent higher, "and we're in a full-blown recession!" Zweig says. "What are these people smoking? That raises the specter of disappointing earnings reports, usually a minus for stocks."

But John Hussman of Hussman Econometrics, a hot-performing

Palo Alto, Calif.-based newsletter, counters: "Forget about roundabout reasoning that as the economy goes, so goes the stock market. A weak economy, historically, tends to be accompanied by a rising stock market, since economic weakness tends to produce falling interest rates. Stock market declines tend to precede recessions because rising interest rates tend to precede recessions. Period."

IN THE HOT SEAT: McDonnell Douglas isn't the only defense contractor in the hot seat these days amid the hubbub over the future of aircraft contracts. The betting in some investment circles is that the Pentagon will abort the B-2 Stealth Bomber project. The plane is being built by Los Angeles-based Northrop Corp.

Several weeks ago it was reported that the Air Force will freeze this year's planned B-2 production. That was followed by another story quoting an official of Boeing, which makes parts for the plane, saying that he understood the Air Force does not intend to "go forward and purchase" the two planes scheduled to be built this year.

A Northrop official says that the decision to continue building the plane is up to the Air Force, and an Air Force spokesman says the stories are "misleading": The Air Force remains "strongly committed" to building the remaining 75 planes called for in the ++ contract, he says.

However, it's unknown how (or whether) the B-2 figures into President Bush's budget, which is expected early next month. Short-sellers are betting that the program will be scrapped. That would be a serious blow to Northrop, which derives about 60 percent of its revenues and most of its profits from its work on the bomber.

BETTING ON BIOTECH: Short-sellers are loading up on biotechnology stocks on the assumption that what goes up as biotech stocks have for two years must go down. Biotech analyst Jeffrey Casdin of Oppenheimer & Co. in New York doesn't doubt biotech will get caught in the downdraft. But he puts it into perspective this way: "Biotech is the first major secular growth story since semiconductors created the computer industry surge beginning 30 years ago. Therefore, these stocks, especially the right ones, will be going up for a long while, and it doesn't makes sense for investors to get caught up in this cyclical mumbo jumbo."

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