Well, last week certainly wasn’t the summer rally.
After showing signs of life earlier in the month, Wall Street got caught in the summer doldrums. A spate of exceptional earnings reports failed to ignite the general market, kept in check by dour warnings from Federal Reserve Board Chairman Alan Greenspan about the need for eternal vigilance in combating even a hint of inflation.
So what lies ahead?
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The market appears caught in two conflicting currents. On one hand, many earnings reports do look spectacular, with IBM, for example, rising from the ashes last week to surge ahead as the quarter’s biggest surprise. IBM wound up beating Wall Street’s earnings estimate by about 56 percent: Big Blue raked in $1.14 a share for the quarter, compared with estimates of 73 cents.
IBM stock roared up $6.50, to $62.37, a fact that escaped Nasdaq computers, which insisted for hours after the market closed that IBM had gained only $4.37, to close at $60.25. The error, unfortunately, carried over into this column.
On the other hand, the market doesn’t seem to want to give good earnings much credence unless they shoot far above estimates. There’s some sense in that. Stocks should be priced based on estimated earnings, not actual ones. The market always strains to see what things will be like six months ahead, not what they are today.
But as the Nasdaq error on IBM shows, it’s important to get today’s facts right. And the immediate fact the market is grappling with-in fact, disagreeing over-has to do with the business cycle.
Is the U.S. economy at the top of a business cycle about to flatten out or turn down, depending on how high Greenspan decides to raise interest rates?
Or does the economic boomlet unleashed by lower interest rates almost two years ago have a ways to run, with ever-better earnings stretching ahead?
The conflict between these two views is likely to keep the market within a fairly narrow trading range for the rest of the year-say 3,750 on the Dow Jones industrial average, with a move of more than 200 points unlikely in either direction.
That leaves room for a summer rally in August of modest dimensions.
Heartland report: Oil lies at the heart of economic life in the 20th Century. Denominated in dollars, it is a currency.
Nuclear energy gave its name to the age. But oil kept the century’s armies, industry and automobiles running.
Amoco produces, refines and sells petroleum. And because of that, Chicago’s largest company is in the midst of one of the more thorough restructurings of any big company in this region.
Amoco’s announcement last week of the details of the second stage of its restructuring sent its stock down to $59.62. After rising to a new high of $61.25 over the course of a week in anticipation of the announcement, the stock declined on the news, which should shock no one. Buying on anticipation and selling on news is older than Wall Street.
But Amoco got a downgrade the following day from a well-regarded oil analyst, Bernard Picchi of Kidder, Peabody & Co. Picchi lowered Amoco to “neutral” from “outperform.”
“There wasn’t anything in the announcement beyond what we were expecting,” Picchi said.
The restructuring process will take at least two years to change the “corporate culture” at Amoco, Picchi added. “A lot of people are skeptical that companies as traditional as Amoco can change their culture by fiat.”
Nonetheless, he raised his earnings forecast to $4.25 next year from $4 this year.
With deference to Picchi, who knows his stuff, Amoco’s long-term prospects look like a good gamble. Unlike other oil companies engaged in restructuring, Amoco has chosen to end the traditional triad structure, with three subsidiaries handling exploration and production; refining and marketing; and chemicals.
Instead, Amoco will eliminate a layer of management and have 17 smaller subsidiaries handling highly focused parts of the business. That could be a competitive advantage for Amoco.
And Amoco is cutting deeper than other oil companies. It will eliminate 25 percent of its jobs, if you add the 8,500 jobs lost in the first restructuring to the 4,500 job cuts announced last week.
Lastly, Amoco made the changes because the price of oil has leveled off after two decades of peaks and valleys. H. Laurance Fuller, Amoco’s chairman and chief executive, says the company’s financial planning assumes no help from price increases for oil.
But oil has a life of its own. With Europe and Asia coming out of recessions, demand already is knocking up against supply limits.
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Fuller is following a prudent path in expecting no price bonanza. But even a small increase could have considerable impact on Amoco’s bottom line, considering what is being done to employment.