06/01/19 ONLINE ORIGINAL: THIS SUPER BULL IS PULLING IN HIS HORNS

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THIS SUPER BULL IS PULLING IN HIS HORNS

Of the half dozen or so top investment strategists who forecast the market's moves, the two whose bullish outlooks have most paralleled each other are Abby Joseph Cohen and Edward Yardeni, chief economist of Deutsche Morgan Grenfell. Indeed, both are expecting gains in the Dow Jones Industrial Average for the rest of 1998. Cohen predicts that the Dow will end the year at 9300, while super bull Yardeni thinks the Dow could touch 10,000.
From there, though, the two part ways. Cohen expects profit growth to accelerate as the global economy improves this year. And she equates fears of rising interest rates and Asia's economic problems with "bad weather" that will not throw "Supertanker America" off its course. In an Apr. 27 report she wrote: "Essential to future stock price performance is the longevity of the profit expansion which we expect to continue throughout our forecast horizon, which now extends until the end of 1999."
By contrast, Yardeni predicts that disaster will strike the economy, corporate profits, and the stock market by late 1999, leading to full-scale recession in the U.S. by the year 2000. Borrowing from Cohen's supertanker metaphor, he thinks the U.S. is facing more than bad weather. "I think we're steaming ahead in to an iceberg field," he says. He predicts that operating earnings per share of the S&P 500 will be $48 in 1998 and 1999, but stumble to only $35 in the year 2000. "We are clearly going in different directions now, Abby and I," he says.
The two pundits diverge primarily over two issues: The Year 2000 computer bug and the impact of Asia's problems. Cohen thinks both will have a limited impact on U.S. corporate earnings. Her investigations into the Year 2000 bug have concluded that many companies have the problem well in hand. Her main concern lies in the chance that companies will halt capital spending in technology once the problem is solved. But she says that even if capital spending slows after the Year 2000, "we don't think it is something that creates a recession by any stretch of the imagination."
Yardeni, on the other hand, is a self-described "alarmist" about Y2K. He thinks computer crashes will disrupt the flow of information (and even of electricity and other utilities, potentially) and will lead to global recession. In his book, The Year 2000 Recession?, which is posted on his Web site, Dr. Ed Yardini's Economic Network (www.yardeni.com), he writes: "Such a worldwide recession could last at least 12 months starting in January 2000, and it could be at least as severe as the 1973-74 global recession. That downturn was caused by the OPEC oil crisis, which is a useful analogy for thinking about the potential economic consequences of Y2K. Just as oil is a vital resource for our global economy, so is information. If the supply of information is disrupted, many economic activities will be impaired, if not entirely halted."
Yardini's views on Asia are also quite a bit more doomsday-ish than Cohen's. "Cheap imports from the region should widen the U.S. trade deficit significantly this year, which will slow GDP growth," he wrote in a Mar. 23 report. "Cheap imports will have a deflationary influence on U.S. prices and depress profit growth, in my opinion."
After reviewing corporate earnings for the first quarter, Cohen believes Asia is affecting individual companies both positively and negatively. "In some cases it has impeded demand," as Asian businesses no longer need to buy as much from U.S. companies. But some companies are benefiting from the currency devaluations throughout the region because the costs of manufacturing in foreign countries are so much lower once the local currency is converted to U.S. dollars.
Cohen doesn't spend much time reviewing the research put out by other market strategists. "There is so much available in primary form that I don't want to spend my time or energy on secondary stuff," she says. But Yardini says that he admires Cohen's work, even though he thinks she underrates the Y2K problem and has come to the wrong conclusion about Asia's impact. "She has done a great job, but with all due respect, I disagree."
It won't be long until the market decides who is right: Cohen, Yardeni -- or neither one.
By Amey Stone, Associate Editor, Business Week Online, with Anthony Bianco, in New York

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