July 29, 2012 5:39 pm
Giant Stocks Are Walking Tall Again - CNBC
Stocks around the world have been struggling lately, but one group of equities may ultimately benefit from all the fear and uncertainty: so-called megacaps.
Ever since worries over the European debt crisis began to escalate more than a year and a half ago, the biggest American blue-chip stocks have been among the few bright spots for investors.
Since the start of last year, the Russell Top 50 index of the largest-capitalization domestic stocks has climbed more than 14 percent, while the MSCI EAFE index of foreign equities has sunk more than 15 percent and the Russell 2000 index of small-company shares has gained just 1 percent. Tack on dividends and megacap stocks have returned more than 18 percent during a period of heightened volatility and fear on Wall Street.
These giant stocks, with a market capitalization ![[cnbc explains]](http://media.cnbc.com/i/CNBC/Sections/News_And_Analysis/_News/_CNBC_EXPLAINS/_IMAGES/CNBC_explains_icon1.gif)
of around $50 billion or higher, managed to avoid losses in what’s been a tough month for many smaller stocks. The megacaps are up around 2 percent in July, while small-cap stocks are off nearly 1 percent.
Because of their size and industry dominance, megacaps have traditionally been seen as a relatively stable spot for equity investors. But their recent outperformance was a notable turnaround for a group that had generally been out of favor since the late 1990s, when shares of giant companies like Microsoft [MSFT Loading... () 
] and Cisco Systems[CSCO Loading... () ] dominated the market before the growth stock bubble burst in 2000.
Some strategists say this could be an early sign of the market’s gradual shift back toward big stocks after years of favoring small-company and even international equities.
“Large caps may finally be having their day in the sun,” said Jack A. Ablin, chief investment officer at Harris Private Bank.
Mr. Ablin added that while equities are still slogging through a rough patch, a number of factors are weighing in the favor of large-cap stocks in general right now. “One is their stability,” he said, “but there’s also their dividends.”
The 50 megacap stocks, most of which pay dividends, have an average yield of 2.2 percent, which compares favorably with the 1.6 percent average payout of small-company stocks and the 1.5 percent yield on 10-year Treasury notes.
The recent turmoil in Europe may be indirectly helping the megacaps in other ways. For starters, as global investors have been fleeing the euro, they’ve been driving money into dollar-denominated assets like Treasuries. That has bolstered the value of the dollar, which is up 13 percent since April 2011.
“Basically, people have been looking to escape Europe, and those who want to keep their money in equities are probably seeking the safer shores of megacaps in the United States,” said Sam Stovall, chief equity strategist at S.& P. Capital IQ.
The strengthening dollar has also focused American investors’ attention back on the domestic market. When the dollar was falling for much of the last decade, Americans could make money on their foreign investments simply through the currency fluctuation.
From January 2002 to April 2011, the dollar lost 39 percent of its value against a basket of foreign currencies. During that stretch, European stocks sank 6.5 percent when measured in the local currency. But because of the sinking dollar, Americans actually saw their European shares soar 61 percent.
Now that the dollar has reversed course and is gaining ground, American investors have less desire to invest abroad and more reason to keep their money in domestic shares.
But aren’t megacap stocks also exposed to foreign markets?
Yes. The average large company generates more than 46 percent of its revenue abroad, versus just 31 percent for small companies, according to S.& P.
Yet megacaps have generally done well anyway. “Bigger businesses, in particular since the financial crisis, have clearly proven to be more adaptable than a lot of people thought,” said Keith Trauner, co-portfolio manager of the GoodHaven Fund, which invests in a mix of big and small stocks. “They’ve been able to reduce costs and adjust their expense structure better than most people would have imagined.”
Mr. Trauner’s fund has beaten 75 percent of its peers in the last year, thanks in part to big stakes in megacaps like Microsoft and Wal-Mart. He added that some investors were probably still overlooking this group because many megacaps were “dead money” for more than a decade.
From 2000 through 2010, for instance, Microsoft lost 4.6 percent while Wal-Mart sank 1 percent, both annualized.
Wallace Weitz, president of the Weitz Funds, said, “I’ve been doing this for more than 40 years, yet it still surprises me that people look away from good companies because they ‘haven’t done anything’ for a long time.”
That’s exactly where value-minded investors ought to be looking for attractively priced shares, he said.
MEGACAP stocks, which in 2000 had a frothy price-to-earnings ratio of 33, are now trading at 13 times estimated earnings. By comparison, shares of medium-size companies have an average P/E ratio of 16, while the figure for small companies is nearly 20.
“It’s a question of what risk you want to take,” said Pat W. Dorsey, president and director of research and strategy at Sanibel Captiva Investment Advisers. Investors fearful of stocks with any European exposure may be wary of megacaps. But in such times, skittish investors are also prone to punish stocks with high P/E ratios.
Mr. Dorsey says many megacap are cheaply priced — and they appeal to him. “I would prefer to take less valuation risk,” he said.
RPT-Wall St Week Ahead: Rolling out red carpet for central banks - Reuters
By Jonathan Spicer and Rodrigo Campos
NEW YORK, July 29 (Reuters) - Stocks took off at the end of last week, drawn by the allure of a helping hand from the world's two most powerful central banks. Traders are unlikely to resist those charms again this week.
The U.S. Federal Reserve and the European Central Bank both meet this week amid investor expectations of action to stimulate economic growth and, in the case of the ECB, tackle the spreading euro zone debt crisis.
The drumbeat of weak economic data and disappointing U.S. corporate profits and outlooks mean central banks can be stocks' best friends.
Equity prices tend to rise sharply in the hours before a Fed statement like the one expected on Wednesday as traders and investors jockey for position and a chance to make a profit.
This week's calendar has a double-whammy. The Fed's monetary policy statement will come one day before an ECB meeting packed with intrigue. ECB President Mario Draghi said last week the bank was ready to do whatever was necessary, within its mandate, to save the euro.
"People in this business like to get in front of big events, especially if (they) could be very, very positive for the market," said Brian Reynolds, chief market strategist at agency brokerage Rosenblatt Securities.
In that sense the strategy "is almost like a lottery ticket," he said.
But was that ticket already cashed? The S&P 500 rallied to levels not seen since May on Friday, a rally that was sparked a day earlier after Draghi stoked expectations the ECB might resume its Securities Markets Programme (SMP) and possibly adopt more aggressive quantitative easing.
Reports of meetings with the head of Germany's Bundesbank fueled a Friday rally that outpaced Thursday's gains.
Equity markets have for weeks been leaning on hoped-for stimulus from the Fed or ECB. Despite weeks of softening economic data, including a dismal payrolls report for June and a poor outlook for corporate profits, the S&P 500 has risen in seven of the past 10 weeks. It closed on Friday near a three-month high.
REMARKABLE PATTERN
At the same time that traders position themselves to benefit from the Fed's latest easy-money policy, those betting against market gains get out of the way and selling pressure recedes.
"It's very scary to short the market ahead of a Fed meeting," said Dennis Dick, a proprietary trader at Las Vegas-based Bright Trading and co-founder of Premarketinfo.com. "So you have this short-covering that drives prices up."
That helps explain the rise in stocks in the 24 hours prior to the U.S. central bank's policy decisions -- a pattern that tends to hold irrespective of what the Fed actually says in its statement.
Economists at the Federal Reserve Bank of New York performed a study of the pattern.
Starting mid-afternoon the day before such decisions, stocks in the United States, Britain, Germany and other major markets begin a sharp rise and don't stop, on average, until just before the Fed unveils its policy decision at 2:15 p.m. EDT (1815 GMT) the following day.
Since 1994 a whopping 80 percent of the premium in gains of U.S. stocks over yields on short-term government bonds has been earned in these 24-hour periods, the study found.
The pattern has grown starker as the Fed took increasingly aggressive actions to rescue the U.S. economy from recession. The two rounds of major asset purchases, known as quantitative easing, or QE1 and QE2, in recent years strongly boosted stocks.
"Perhaps this shows markets have given the Fed their seal of approval," said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin.
"At least from a market participant perspective, they are confident the Fed will fulfill its mandate. I try to talk to individual investors to remind them that the stock market is going to react much more quickly than the economy to what the Fed does," he said.
CENTRAL BANKS OVERSHADOW EARNINGS
The focus on central bank meetings will get in the way of a heavy week of earnings for S&P 500 companies at a time when the outlook continues to worsen.
Major companies due to report include AIG, Kellogg , Procter & Gamble, Kraft Foods, Pfizer , MasterCard and General Motors.
Among the 290 companies in the S&P 500 index that have reported earnings for the second quarter, about 67 percent have beaten analysts' estimates, slightly higher than the long-term average of about 62 percent.
But just 40 percent have beaten on revenues, the worst record since the first quarter of 2009.
More worrisome is the market's outlook. Third-quarter earnings are now expected to decline 0.4 percent from a year ago, compared with an expected rise of 1.4 percent last week, according to Thomson Reuters data.
Also on investors' radar this week is another legal battle in California over patents between Apple and South Korea's Samsung. The trial's outcome could reshape the smartphone and tablet wars between the iPhone's maker and its rivals.
Dubai Stocks Gain on Europe, Earnings Bets; Abu Dhabi Advances - Businessweek
Abu Dhabi stocks rose the most in a month on bets the government may permit foreigners to buy shares of Emirates Telecommunications Corp. (ETISALAT) and amid optimism Europe’s policy makers will take steps to ease the debt crisis.
Etisalat, as the phone company is known, advanced the most since June. First Gulf Bank PJSC (FGB), Abu Dhabi’s third-biggest bank, increased 1.3 percent. The ADX General Index gained 0.6 percent, the most since June 21, to 2,485.51 at the close in the emirate. Dubai’s DFM General Index (DFMGI) slipped less than 0.1 percent, while the Bloomberg GCC 200 Index (BGCC200) of stocks in the region gained 0.2 percent.
State-controlled Etisalat will “soon” allow foreigners to own its shares, Al Khaleej reported, citing Group Chief Executive Officer Ahmad Abdulkarim Julfar. Etisalat is 60 percent owned by state-controlled Emirates Investment Co., according to data compiled by Bloomberg. European and U.S. equities rallied July 27 on bets the European Central Bank would begin a new round of joint-bond purchases to ease borrowing costs in Spain and Italy, while Germany and France pledged to do everything to protect the euro.
“A report that Etisalat will soon allow foreigners to own its shares supported the market today in addition to the good results announced by the Abu Dhabi banks last week,” said Samer Darwiche, a Dubai-based analyst at Gulfmena Investments Ltd.
First Gulf Bank, which last week reported a better-than- expected 14 percent jump in quarterly profit to 1.02 billion dirhams ($278 million), advanced to 8.72 dirhams, the highest since May 29. U.A.E. banks are recovering after the global financial crisis slowed lending, hurt investment banking revenue and led to an increase in bad loans.
‘Protect the Euro’
The ECB will hold talks in the coming days, and the Federal Reserve will announce Aug. 1 whether it intends to take additional measures to bolster the U.S. economy. All of the six Gulf Cooperation Council’s members except Kuwait peg their currencies to the dollar.
“Assuring a safe euro means lower hedging costs for foreign traders in our markets,” said Talal Touqan, the Abu Dhabi-based head of research at Al Ramz Securities.
About 21 million shares traded in Abu Dhabi today, compared with a 12-month daily average of about 59 million. The Islamic holy month of Ramadan, when Muslims fast from sunrise to sunset and business activity slows, has started.
Crude for September delivery rose 0.8 percent to $90.13 a barrel on the New York Mercantile Exchange on July 27. Gulf Arab oil exporters, including the U.A.E. and Saudi Arabia, supply about a fifth of the world’s oil.
Saudi Arabia’s Tadawul All Share Index (SASEIDX) gained less than 0.1 percent after climbing 1.5 percent yesterday. Qatar’s QE Index (DSM) gained 0.7 percent, Oman’s MSM30 Index (MSM30) fell 0.2 percent while Kuwait’s gauge was little changed and Bahrain’s measure decreased 0.4 percent.
Etisalat rose 1.4 percent, the most since June 21, to 9.35 dirhams. The company said last month it’s up to the federal government to decide on foreign investments after Emarat Alyoum reported a law that governs Etisalat may be amended to allow foreign and institutional investors to hold shares. Etisalat’s second-quarter profit rose 17 percent to 1.87 billion dirhams, beating analysts’ estimates. The shares have increased 2.4 percent this year compared with a 3.5 percent gain for the benchmark ADX General Index. (ADSMI)
In North Africa, Egypt’s EGX30 Index (EGX30) gained 0.1 percent. Israel’s market was closed for a holiday.
To contact the reporter on this story: Zahra Hankir in Dubai at zhankir@bloomberg.net
To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net
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