International Markets: New York: You lose some, you win some

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First the bad news: earnings growth in the US is expected to slow this year and next, based on a survey of Wall Street strategists. Now for the good news: that's not enough for most investors to sour on US markets. The magic of rising bond prices, and, concurrently, falling bond yields, make stocks more attractive than they've been in months, some investors say.

"Because of the decline in bond yields, from a valuation standpoint the stock market looks OK," said Martin Sass, president of MD Sass Investor Services. That's a shift because Sass bemoaned high prices for equities much of this year and recommended that investors buy alternatives such as real estate and distressed debt.

In the past month, Sass snapped up shares of Andrew Corp, a telecommunications cable, antenna and switch maker. He also took positions in two manufacturers, Wolverine Tube Inc and Clayton Homes Inc.

Stocks look more attractive now that the Standard & Poor's 500 Index has fallen 2.8 per cent from an 7 Oct record, even as the benchmark 30- year Treasury appreciated 3.5 per cent.

Why do falling bond yields make stocks attractive? Many investors decide whether to invest in bonds or stocks based on which of the two will provide a better return in a given period, say, the coming year.

The benchmark 30-year bond yields about 6.04 per cent, close to a three- year low. By comparison, the bellwether Standard & Poor's 500 Index yields 6.37 per cent. If the bond yield fell 50 more basis points, that would boost the fair value of stocks by 10 per cent, said Sass.

Byron Wien, chief investment strategist at Morgan Stanley, Dean Witter, Discover & Co, agrees that a comparison of bonds and stocks favours stock investing for the next six months or so.

"At these prices, there are plenty of places to put money to work productively," Wien said. Drug stocks, for example, "look like buys".

Strategists on Wall Street trimmed their estimate for growth by 0.3 per cent this year, and 0.2 per cent for 1998, based on a 26 November survey by IBES International. They expect earnings growth of 7.2 per cent next year.

The 31/2-day trading week did little to lessen stocks' allure. The widely watched Dow Jones Industrial Average fell 0.7 per cent to 7823.13, meaning investors can pick up stocks for much the same as they could last Friday.

After a month of watching Asian markets compete in the financial version of the giant slalom, investors have flocked to domestically driven companies with little exposure to outside market forces. Top performers included manufactured housing companies, aerospace companies and defence contractors.

Copyright: IOS & Bloomberg