[Terry Keenan:] Hi, everyone, welcome to MONEYWEEK, where we aim to keep you ahead of the curve for the week ahead on Wall Street. And we begin once again on Wall Street, where tech stocks continued to struggle. Cisco, Dell Computer and Yahoo! all posting losses on the week. But the Dow managed to gain ground, rising to its best levels since April. What left many investors wondering, perhaps valuations really do matter after all. The Dow topping 11,000 for the first time in about four months. While the Nasdaq ended with little change, as many bellwether stocks there sold off even in the face of good earnings. Eli Lilly among the hardest hit Big Board stocks this past week. The company's Prozac drug was stripped of more than two years of patent protection by a federal appeals court. Lilly says it will appeal that decision. And Amazon.com moved lower again. Sanford Bernstein initiated coverage of the e-tailer with an underperform, saying that the stock could lose as much as two-thirds of its value.
[Faye Landes, Sanford Bernstein:] The question really is, what can it do outside of books, music and DVD videos, which I think they have terrific prospects in that in those categories, but what else can the company do? I think the company will continue to grapple with that, as we're likely to see some twists and turns over the next several months.
[Keenan:] Amazon is down about 60 percent on the year so far. Cisco lost ground this last week, despite a good earnings report. And Dell sharply also lower. Second-quarter revenues came in slightly below expectations. There you can see the carnage in Lilly this last week. And The Gap losing ground after the company said the third quarter could be a weak one. Time to bring in our team of experts. Joining me this week: Elizabeth MaCkay, chief investment strategist at Bear Stearns, Rick White he manages the Guardian Fund at Neuberger & Berman and Clark Yingst, a market analyst with Prudential Securities. And welcome, everyone. Rick, let me start with you because this is your kind of market here.
[Clark Yingst, Neuberger & Bergman:] Has been our kind of market actually for the last several months. I think something has very significantly changed since March 10 or so when the Nasdaq broke down, where expectations for the technology sector had tremendous business conditions, had gotten so far ahead of reality, I think, that we started to see thing pull back, and more of a focus on, when will profitability come for some of these companies? And I think that as the last couple of months have unfolded, what we're seeing is a real narrowing, and people have moved away from using proxy metrics, which are how many doctors use your product or how many customers you have, how many households you pass, and focused on what really matters in the long term, on what is earnings and cash flow? And that is something that we really tend to look at a lot, and so we've been benefiting from that.
[Keenan:] Elizabeth, the Dow this week broke out of its trading range. G moved to new high. Tobacco stocks moved higher. Is this, indeed, a real return to valuation?
[Elizabeth Mackay, Bear Stearns:] I think value is taking a stand, and I think at some level, what's been happening is the market has been acting normally. When the Fed is raising rates, we tend to see cyclicals, consumer, discretion financials, underperforming, and I think this past week the market began to believe that the Fed was through raising rates, possibly for this year.
[Keenan:] And the bond market seems to believe it as well, because that inversion we saw at the long end of the yield reversed itself.
[Mackay:] Exactly. We're beginning to see the yield curve flattening, and typically, financials underperform. With an inverted yield curve, that's your
[Keenan:] Clark, do you agree.
[Rick White, Prudential Securities:] I do. I have two observations. One, I think that the broader market independently of technology is discounting a soft landing, and the U.S. Economy, implying a peak, if not a decline in rates, perhaps sometime late next year or early next year. I think that the soft landing would have limited impact or at least tolerable impact on earnings and sectors other than technology. And second observation is, I think there is an important structural change under way in the market, change in both leadership and breadth. I think groundwork is being laid for the broadest stock market advance in two to three years.
[Keenan:] Interesting. Yet this week, we had Cisco report some really good numbers, traded up the next morning, up to almost 70, and then sold off the rest of the week.
[Yingst:] Consistent with the pattern in techs, over the last three weeks, with just a few exceptions, no matter how strong, spectacular the performance, no matter how promising outlook, the stocks have been for sale. I think that's an ongoing technological, psychological adjustment in the sector.
[Keenan:] Rick, if value is back in vogue, what are some of your favorite value plays here?
[White:] Well, I think the key issue is to try and find some stability of earnings growth, because if the economy is slowing down, then we're going to see down you know, people cutting estimates for a number of value stocks. So I don't think want you to be too cyclical. I think I would be focused on names where you can buy some stability in sales and earnings growth and pay a reasonable price for them. So I would use names like Safeway, Kimberly-Clark, some of the energy names, like Amerada Hess; in the financials, maybe Household International or Associate Corp I think all represent pretty good value today.
[Keenan:] I know you like the financials. What else do you like?
[Mackay:] Most of stocks that Rick mentioned fit into groups that tend to outperform when the Fed stops raising rates, according to studies that we've done. It also, we like the defense stocks. Lockheed Martin is one of our favorites. I think the political situation is more favorable for the defense stocks, and we have specific company issues the Lockheeds that we think are turning around more favorably.
[Keenan:] Up next, the SEC approves a new rule intended to make corporate information more available to investors, but it is creating a lot of controversy.