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Income Equity Portfolio
Weekly Portfolio Update
as of October 18, 2002
The Market This Week:
- The market continued to rally from its October 9 closing low, now up +13.9% through Friday’s close. For the week the S&P 500 was up +5.9%, while the Russell 1000 Growth and NASDAQ were up +6.0% and +6.4% respectively.
- Also, the market has been extremely volatile in this period as some of the excessive fears have unwound and bargain hunters have stepped in. In the last 14 trading days the S&P 500 has risen or fallen by 2% or more on 9 of those 14 days. Interestingly, the CBOE index of volatility, which reflects hedging activity, actually hit its most recent high on October 9, the day before stocks started to rally. The index above 50 is a point from which stocks normally rally as they did in July this year.
- It is also encouraging that with the exception of the down draft on Wednesday related to a number of earnings disappointments, the market has tended to hold-up well after strong moves, such as on Monday after the rally on Thursday and Friday of the previous week, and on Friday after Thursday’s very strong move.
- It’s noteworthy that in ISI Group’s weekly survey, hedge funds are still more short their benchmark exposure than at any time since July (the start of this particular survey). That suggests the buying so far has been natural buying and the shorts have not yet covered, which is a positive for the market’s continued rebound.
- Additionally, institutions for the most part still need to readjust their asset allocation of bonds and stocks to more normal levels; and with stocks at their lowest valuation in relation to bonds in 20 years, we may need only a whiff of normalcy to get the process moving.
- One of the factors positively affecting the market has been better news on the earnings front.
- We finished the period of preannouncements—that is, warnings of not achieving guidance or expectations. We are now in a period when companies are actually reporting, and the news isn’t that bad. In fact what is now considered fairly positive news, because expectations have been set so low, is companies merely reaching their guidance as opposed to exceeding their guidance. To date, 38% of the S&P 500 companies have reported 3Q earnings and after a very negative preannouncement period, the reporting is following a fairly normal pattern with 61% of the companies reporting positive surprises, 27% in-line, and 12% negative surprises.
- Movements in the market this week on a daily basis were very much influenced by earnings announcements. Earlier in the week bellwether companies, Citigroup, General Motors and Johnson and Johnson, reported better than expected results, helping to fuel the rally on Tuesday. The market then stalled on Wednesday on poor results from Intel, Coca Cola, Motorola, and J.P. Morgan Chase. Good earnings reports helped the market rally again on Thursday—IBM, Nokia, and SAP were positive.
- The movements in the market were fairly broad, which is always a good sign. In the Russell 1000 Growth Index at a +6.0% gain was only modestly ahead of the Russell 1000 Value at +5.8%. The strongest sector in the market was Financials, +9.2%, Technology was up +6.8%, while Health Care, a defensive group, was up +6.0%.
- An interesting sidelight on the market is that the six months from November through April are generally the best six-months of the years, averaging a gain of +8.34% since 1980. The groups that typically lead are Financials, Consumer Discretionary, and Technology, which has certainly been the case since the start of the rebound.
- Another interesting statistic is that whenever a Northern California baseball team has faced a Southern California team in the World Series, the market has subsequently rallied significantly over the next twelve months.
- The economic news this week wasn’t startling, but nothing to make us think the slowdown in September is accelerating.
- ISI Group’s surveys on retailing in fact are continuing to show an up-tick in activity in October--"Cool weather warms retailers” was the conclusion.
- Homebuilder surveys have continued to show excellent strength. In fact housing starts jumped +13.3% last month, the biggest increase since 1995.
- Unemployment claims moved back over 400,000 to 411,000, but the four week average is now declining and is expected to go lower.
- Industrial production was down –0.1% m/m in September. However there still hasn’t been any significant inventory building (inventory to sales ratios are still extremely low), which means that production is likely to pick-up as a result of the pick-up in consumer spending. The –1.3% m/m decline in exports helps explain some of the sluggishness in mfg. activity.
- The October Philly Fed mfg. activity index was a bit of a shocker—much weaker than expected at –13.1 vs. 2.3. However, the report was not as weak as the overall number indicated. New orders fell to –1.3 vs. +5.6 and employment fell only to –5.1 from –4.9. The capital expenditures component actually increased from +13.4 to +14.5.
The Portfolio this Week
- We like the direction of the market since October 9 and we are very pleased that our types of stocks (large, dividend-paying companies) are performing right in line with the S&P 500.
- Relative performance has been weak for consumer staples, the big winner category over the first nine months of the year, and for utilities, drugs and energy stocks. The real strength since October 9 has been in financials, where we are overweighted relative to the S&P 500 but underweight relative to the Russell Value index, and technology. Our financials were very strong, led by BankAmerica, Marsh McLennan, Washington Mutual and Wells Fargo, but we also got big boosts this week from G.E. and SBC Communications.
Trading Activity
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Copyright 2001 Berkeley Capital Management.® All rights reserved.
Berkeley Capital Management is registered with the SEC under
the Investment Advisors Act of 1940. All information provided herein
is general in nature. Nothing on this page constitutes an offer to
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constitutes investment or legal advice. Click here for Compliance
Disclosures.
The opinions expressed are those of Berkeley Capital Management and
based upon sources deemed reliable. BCM shall not be held liable for
inaccurate information obtained from these sources from which BCM could
normally, reasonably depend on as accurate.
Past performance does not guarantee future results.
FOR BROKER-DEALER USE ONLY. NOT FOR USE WITH CLIENTS.
A complete list and description of all the firm’s composites and individual
securities’ transactions and returns for the past twelve months are available upon
request.
Security description and write ups are for informational purposes only, they are
not offered as recommendations.
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