Moneyweek

Stocks Plunge then Rally in Frenzied Trading

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ANNOUNCER: From the world headquarters of CNNfn, the financial news network of CNN, this is MONEYWEEK, with Terry Keenan.

TERRY KEENAN, HOST: Hello, everyone, and welcome to MONEYWEEK.

We have a special program in store for you. A bit later we're going to have the results of our first annual stock-picking contest. We've invited back the two Wall Street experts who have posted the highest returns on their stocks picks over the last year or so, and we will find out their winning stocks and what they're buying now.

But first, it was yet another wild week in the markets. Stocks plunged, then rallied in frenzied trading.

But it was a very different story for Big Blue. IBM was hammered after posting some weak revenue numbers for its latest quarter.

Shares of Microsoft, however, managed to move higher after it beat the Street.

And finally, the results of our stock-picking contest.

But we begin with the wild ride in the stock market this past week. Share price plunged in and then rallied as earnings reports whipsawed the market. In fact, the Dow was down as much as 435 points on Wednesday before erasing most of those losses. And on Thursday, the Nasdaq soared more than 200 point, one of its best days ever.

That gain was led by shares of Microsoft, the stock soaring almost 20 percent following a strong earnings report. But IBM had a much tougher week, after its revenue growth fell short of expectations. The stock is now trading near a 52-week low. And there you see the damage in Big Blue. Microsoft, though, did move higher, along with JDS Uniphase. The drug and financial stocks also had a good week overall.

And looking ahead to next week, the earnings season continues in earnest. On Monday, we'll here from American Express. Compaq Computer and Lucent. Out on Tuesday, AT&T out with its earnings on Wednesday. And finally on Thursday, JDS Uniphase will release its numbers.

Well, it's time now to bring in our team of market experts. Joining us this week, David Jones, economist with Aubrey G. Lanston; Dennis McKechnie, a portfolio manager with Pimco Equity Advisors; Gregg Hymowitz of Entrust Capital. And joining us from the trading floor at CS First Boston is the chief investment officer there, Tom Galvin.

And, gentlemen, welcome back.

Tom, let me start with you, because you have been one of the most stalwart bulls on this market. What do you make of the Nasdaq? Are we still in a bull market in terms of the Nasdaq, or is this just a rally this week in a bear market?

TOM GALVIN, CS FIRST BOSTON: No, I think we will be able to extend bull-market gains. I think if anybody has a 12-month instead of 12-minute horizon, I think we'll probably see the Nasdaq about 30 percent higher in a year's time, because I think the Middle East will be less tense a year from now, I think the earnings visibility less dubious. Inflation, I think, will be lower, interest rates, I believe, will be lower, and all those things are good underpinnings for the market.

At the same time, importantly, this year I think will be known as the year where we've wrung out of lot of excesses, excess enthusiasm towards some fly-by-night dot.coms. At the same time, we've had a clearer capital market seize in places like high yield, and that's had an impact.

But technology growth, I think, is not going to die. It may slow, but that's going to create opportunities when you've had the extreme drop in sentiment. So my guess is this remains a tremendous buying opportunity right here. It's just going to be selective. Not all stocks, tech stocks, are created equal, as evidenced by IBM and juxtaposed by the rallies that we've seen this week in places like Sun, EMC, Nokia and even Microsoft.

KEENAN: Greg, do you agree that this is the classic October bottom that we've seen in recent years?

GREGG HYMOWITZ, ENTRUST CAPITAL: It looks that way right now. A little -- one thing that Tom says which I'm a little concerned about is technology stocks, given their valuations, really can't afford to have their growth slow that much. And you've seen that happen in a number of technology stocks, whether it's Intel, Cisco, IBM, Lucent. They can't afford, given their previous valuations -- now the valuations in a lot of these names seem a little more realistic. And clearly, the wheat is separating from the chaff. Clearly now there's bifurcation in technology, and the winners, the market leaders, will continue to do well. But that secondary and tertiary tech names I think are gone for a long, long time.

KEENAN: Dennis, do you agree?

DENNIS MCKECHNIE, PIMCO EQUITY ADVISORS: In part, I do agree, but then in part I do disagree. The large-cap techs are subject to the deceleration of the economy, so we've seen Lucent, Microsoft, Intel all facing this decelerating seven-five-three environment. We've seen software companies blow out their earnings and move much higher. So maybe it is the second tier of that's working instead of the top tier, but the third tier is indeed left out.

KEENAN: Tom, what stocks do you think are going to lead the Nasdaq that extra 30 percent higher that you see in the next 52 weeks?

GALVIN: Well, coming out of a crisis period, it is usually the larger liquid names that are the ones where investors whose confidence has been very fragile at best are going to move gingerly back into those names. So I'm sure it will be most of the top 50 type of Nasdaq names.

But I do believe, again, it's going to be a winners-and-losers affair. I think semiconductor and semiconductor stocks will be under pressure because I think we will see negative booking trends over the next several months and probably earnings next year which will continue to be revised downward. And that will continue to pressure the stocks, especially if a price war is breaking out with Intel and others.

But as far as optical networking, data storage, customer- management software, even some of the Web-hosting areas, also as we go to packet switching and get the networking process and systems in place, I think they are going to continue to remain very vibrant areas.

DAVID JONES, AUBREY G. LANSTON: Tom, this is David Jones. How do you see the old-economy stocks doing if we, in fact, as I certainly would predict, are moving into soft-landing kind of growth in the 3 to 4 percent range over the next year perhaps longer?

GALVIN: I think they'll probably underperform. I think the appetite for growth will be better accentuated next year because of the overall general profit slowdown. For example, here in the third quarter, S&P 500 profits are up about 15 percent. That includes technology, up about 30 percent, and energy, up about 80 percent. The non-tech, non-energy companies only up about 7 percent right now. Next year, I think you're right, they're going to be almost half that level, somewhere in the 3 to 5 percent kind of growth.

And as we go back to, say, 1998 as a parallel, when we had global problems clearly, we did have a global slowdown. We also had a very significant reduction in capital spending, but only really in the old- economy traditional business-equipment areas, while the technology space remained vibrant. And that's part and parcel of the fact that I think technology remains the competitive weapon to win the war. If you don't spend on technology, you're going to lose your customer and you're cost structure is going to implode.

So I do think that there will be a reversal of some of the activity we've seen this year, more of a liking to some of the tech names that have survived these incredible stormy seas. And I think because there will be so little earnings growth out there for many companies, the fact that even though tech growth is slowing, I think people will want to come back into those names.

KEENAN: OK, still bullish. Thanks, Tom.

GALVIN: Thank you.

KEENAN: Tom Galvin, now at CSFB.

When we return, rising energy prices and the economy. We're going to hear about that from one of the nation's leading CEOs, Jack Welch of GE.

And a bit later, their stock picks have soared over the last year. We'll tell you who tops our MONEYWEEK stock-picking contest.

(COMMERCIAL BREAK)

KEENAN: Federal Reserve Chairman Alan Greenspan this past week remained upbeat about the U.S. economy, an economy he says continues to benefit from technology-driven productivity. Mr. Greenspan, however, warned that rising energy costs could threaten future economic conditions.

Earlier this week, I spoke to GE Chairman Jack Welch, and he sounded some of the same themes as the Fed chairman.

(BEGIN VIDEO CLIP)

JACK WELCH, CHMN. & CEO, GENERAL ELECTRIC: The facts are that the short-cycle businesses, the advertising market that you live off of, Terry, is very slow right now. There's no question. Consumers are holding back. They've been hit with an oil shark, a gasoline shark. They've been hit with rate increases so every month their mortgage payments are higher.

Now our long-cycle strength is better than ever. So you get a real mixed bag. The consumer is scared, there's no question -- uncertain may be a better word.

(END VIDEO CLIP)

KEENAN: OK, well on the docket for the economy next week, we will get the latest figures on existing home sales and the employment cost index.

David Jones, let me ask you about what Jack Welch had to say. He's seeing a slowdown in his consumer-driven businesses but not in the corporate-driven demand side of his business.

JONES: That's exactly as I see it, Terry. And I think that's the reason we get the soft landing. Remember, historically, it's not easy to get a soft landing. You're either booming or you're busting in this economy. But I think this time around, because of that interesting trend, the long-term trend up, the short-term consumer trend weaker, will slow this economy down to the 3 to 4 percent range, down from 5 percent or higher in many preceding quarters. And I think that is going to be the key story.

Alan Greenspan on top of that was surprisingly optimistic. He was optimistic that higher energy prices have not yet spilled over to a significant degree to the rest of the economy, optimistic again, as he has been so long, as you mentioned in the sound bite, in terms of higher productivity growth. And I think that he also is forecasting a soft landing. That keeps him stable. I think we've seen him -- he's finished tightening for the cycle, but he could hold -- he could keep policy on hold for a fairly considerable period of time through the end of this year, perhaps well into next year.

HYMOWITZ: David, here's my concern. I'm curious to know what you think the Fed does. You have oil price high. Ultimately, I think it seeps into the economy. You have an economy, to your point, slowing a little bit. So you're going to have inflation, I think, tick up a little bit while the economy slows. What does the Fed do? Do they raise rates to keep inflation down, possibly injuring the economy, or do they lower rates to get the economy going again?

JONES: Well, that's a very good question. I think they just keep rates where they are. But they could fall behind the curve in terms of when they cut rates. If I say they finished tightening for the cycle, that means someday, when they change policy again, it will be in the direction of ease and lower rates. But that may be a long time. That may be even well into the second quarter of next year. And that could, if we see widening credit spreads, other kinds of difficulties and lesser-rated borrowers getting money, that could really hit the economy a little bit harder than even the Fed thinks as we go into the spring of next year.

KEENAN: Dennis, how does this shake out in some of the stock that you follow, because we've seen slowdown in demand for companies like Lucent, yet other companies don't seem to be experiencing this.

MCKECHNIE: Well people forget that technology is not amorphous. Technology runs from the growthiest, being the Internet, to the most cyclical, being the PCs and the semiconductors. We watch for that Fed ease at some point. At that point, we would get more constructive on stocks like semiconductors. But right now, we're quite bearish and we're quite underexposed to spaces like that. We're in the high- growth areas that don't need the strength of the economy.

KEENAN: When we return, our Wall Street experts are armed with some of the their top stocks picks. We'll find out what they're buying up next.

(COMMERCIAL BREAK)

KEENAN: OK, it's been a tough year for stocks, particularly in the tech sector. So is now the time to pick up some bargains? Let's get some stock picks from our experts, starting with Gregg Hymowitz.

Gregg, what do you like here?

HYMOWITZ: I'll stay away from techs. Chase Manhattan Bank at eight times earnings, I think they get the merger under way. I think the stock goes higher from here. And Navistar, a truck and diesel engine manufacturer at three and a half times next year cash flow. I think that company's ripe for a take out.

KEENAN: OK -- Dennis. MCKECHNIE: I like Veritas Software. Everyone loves EMC, the storage company, but the fastest-growing portion of their business is software. Veritas does about three times as much software as IBM in the same space, is dominant. They're the market leader.

I also like Palm, Palm Pilot maker. Palm Pilots are now growing at about 60 percent per year. We think we see an acceleration at Christmas time, as the mass market starts buying them.

KEENAN: And the Blackberry isn't a big threat to them?

MCKECHNIE: I've got a Blackberry myself, so I love the product. But I don't think it's as much mainstream. I think it's more for people that need to be tied to the desk all day.

KEENAN: OK, well when we return, we'll gets one predictions. We'll hear what David Jones has to say about interest rates.

Don't go away.

And time now for this week's trivia. What is the worst- performing Dow stock this year? The answer when we return.

(COMMERCIAL BREAK)

KEENAN: Here is the answer to our trivia question. What is the worst-performing Dow stock of the year? AT&T, down 50 percent, believe it or not.

And, Myron Kandel, you had it right, so give us a prediction.

MYRON KANDEL, CNN FINANCIAL EDITOR: Well, I'm really sorry about that, that it did happen. But as far as the market goes, I think that it bottomed out this past week. I think that incredible day we had on Wednesday, October is a bottoming out month and we're seeing it happen again. I, you know, I said 12000 on the Dow by the end of the year. We got a shot at it, I wouldn't give up. It's possible.

KEENAN: OK, let's hope so -- Gregg.

HYMOWITZ: My fellow panelists, Gore slips in a sleeper and Hillary Clinton wins in New York. Those are my predictions.

David.

JONES: I'm speechless. The -- interest rates will be stable through the end of the year but could tick a bit lower, certainly high-quality securities, Treasury securities and high-quality corporate bonds. One note, though: Lesser-rated borrowers are going to be paying more for their money as credit spreads widen.

KEENAN: OK, and Dennis.

MCKECHNIE: Nasdaq 4000-plus, but SOX does not break above 800.

KEENAN: Yes, you're negative on the... MCKECHNIE: Semiconductors keep falling.

KEENAN: Keep falling, OK.

Thanks, gentlemen.

And coming up next, we will reveal the results of our stock- picking challenge. Find out who won the coveted top spot with an average return of almost 200 percent.

(COMMERCIAL BREAK)

KEENAN: OK, here it is, the moment we've been waiting for, the winners of our MONEYWEEK stock-picking challenge. We've tallied up the stock picks of all of our guests over the last year and a half or so. Taking top honors, Marc Klee. He is the technology portfolio manager with John Hancock Funds. Coming in second place, Andrew Barrett of Salomon Smith Barney.

The names that won Mark the top spot, the infrastructure software maker BEA Systems -- look at that -- up over 1,200 percent; chipmaker Integrated Device Technology up 420 percent. Mark picked both of those stocks a little over a year ago -- hope you were listening. Seagate Technologies, another one of his picks, also a strong performer in a very tough market.

And here's Andrew Barrett's list. One stock did it all. Applied Microcircuits up 550 percent since last September. He also like IBM, and since he chose it in March it is still up 7 percent. Intel, though, just slipping barely into the red.

And, gentlemen, welcome and congratulations.

MARC KLEE, JOHN HANCOCK FUNDS: Thank you.

KEENAN: Mark, let me ask you first, incredible performance with these three picks. Do you still like each of them?

KLEE: Actually we still do, and we still own all three of them. Seagate, of course, is going to merge and be acquired by Veritas, so that will disappear next month.

Integrated Device Technology has been all over the place, like a lot of tech stocks over the last few weeks. We think down here it's attractive.

And BEA, which has obviously been a stellar performer, still, despite its run, I still think it's attractive.

KEENAN: Andrew, you had that incredible outsized performer and then IBM and Intel.

ANDREW BARRETT, SALOMON SMITH BARNEY: Right.

KEENAN: For people who missed your picks early on, they can get into IBM and Intel at pretty reasonable levels. BARRETT: Yes, I think so.

KEENAN: Do you like them here?

BARRETT: I think so. With Intel and IBM, you both have structural issues -- Intel, of course, the PC demand and IBM currencies and PC demand as well. So both of those are more working- out stories. But, of course, I think that at this valuation level, clearly they're still attractive. Applied Microcircuits fits into our themes very well, and I'm still very comfortable with that name.

KEENAN: Where would you be putting some new money right now?

BARRETT: I'd be still looking in the same, classic themes, but again, let's bring it out outside the PC environment. Storage, we like companies like Brocade. Data Networking, focus on optics, companies like ONI Systems. And then within the communications IC space, we like PMC Sierra.

KEENAN: And, Marc, where would you be putting some new money? And were you convinced that this week was really the wash out that we've been waiting for?

KLEE: I think it probably was. I don't if we're going to go straight up from here. It wouldn't surprise me if we come down and test again. But we've had some incredible buys this week alone, and we've had remarkable recoveries in just a two-day period following that.

I'd be looking at a variety of things. Semiconductor have been hit hard. I like companies likes Altera, which I think has gotten beaten down unmercifully. I think America Online, soon to be the parent of this network, has become very attractive as well, and I think the acquisition of Time Warner will be a very good one for them. And I also agree on the optics space. Personally, I like Corning best of all at these prices.

KEENAN: Andrew, any of the Internet plays that you like here, the B2C, B2B?

BARRETT: Well, I would agree with Marc. I think AOL is probably your best value. You've got the merger with Time Warner. I think that's going to be the catalyst to get institutions back on-line. You tend to see performance out of most of the B2C stocks in Q4, but in general the business models are still being re-evaluated. I would focus with what you know is going to work, and that's clearly AOL.

KEENAN: OK, and that's going to be the last word. Congratulations to both of you.

KLEE: Thank you.

BARRETT: Thank you.

KEENAN: Thanks for joining us.

And that's going to do it for this edition of MONEYWEEK. We'll see you next week. Have a great weekend.

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