AY: Monday Morning Musings - Looking At Sales Trends

07:39am EDT 20-May-02 Salomon Smith Barney Intl  (Tobias M. Levkovich)

SALOMON SMITH BARNEY                                             Industry Note

Institutional Equity Strategy

Monday Morning Musings - Looking At Sales Trends

May 20, 2002              SUMMARY

* We examined quarterly sales trends of each S&P 500

Tobias M. Levkovich       sector

            * Data for the most recent quarter suggests that we

   may be at or near an inflection point

* Energy, Utilities, Materials and IT showed the

worst declines, while Telecom Services were not as

                 bad as might be expected

* Not surprisingly, the Consumer Discretionary

sector has been able to maintain its sales growth

* Recent data suggests the consumer remains likely to

hang in there

OPINION

When trying to assess business trends, we often look at many big picture items

such as GDP figures, new orders indices, consumer or business confidence and

earnings, but we rarely, it seems, look to sales.  Yet, we can review

historical patterns to understand the way in which the market or groups

perform.  As can be seen in Figure 1 below, when we look at the S&P 500

constituents that were in place back in 1990, we can see that their combined

sales growth in 2001 was not as severe1y hit as was the case in the prior

recession, possibly due to mergers, overseas trends, etc.  But, when we look at

the more recent quarterly data (Figure 2), we can see that declines started in

3Q01 and have continued through 1Q01 for the 471 constituent companies that

have reported thus far.  Indeed, the year over year dip actually improved in

1Q02 vs. the reported 4Q01 decline.  Thus, we truly may be at that inflection

point that we have been projecting for the market over the past two months.

Indeed, we find it interesting that many market doubters seem to have seized on

last week's market strength to shift from their more bearish postures over the

weekend based on our purview of articles in various financials publications and

web sites.

Figure 1

Source: Factset

Figure 2

Source: Factset

Interestingly, when we break this down to sector level views, the quarterly

data is quite revealing (see Figures 3-6).  The big declines in sales have come

in the Energy sector (due to lower commodity prices), Utilities (where some

sales now are being questioned), Materials (as production slumped) and

Information Technology (as the bubble burst).  Moreover, the Health Care and

Industrial sectors slowed meaningfully.  The funding mechanism, Financials,

suffered as well.  Fascinatingly, in Figure 7, we show that despite all its

woes, the Telecommunications Services sector was not as bad as many would have

assumed, probably due to the large established players, including AT&T and the

RBOCs as well as merger activity.

Figure 3

Source: Factset

Figure 4

Source: Factset

Figure 5

Source: Factset

Figure 6

Source: Factset

Figure 7

Source: Factset

Not surprising, given the resilient consumer, we can see that the Consumer

Discretionary sector (Figure 8) has been able to maintain its sales growth and

we continue to consider the consumer to be in much better shape than many

perceive.  As we demonstrate in Figure 9, the "adjusted" savings rate used by

the Bank Credit Analyst shows that significant buying power still exists.  The

adjustments reflect 401(k)'s, pension income, capital gains and amortization of

durable goods purchases over the life of those assets, essentially determining

the savings rate from the perspective of the consumer rather than the

government's view.  In fact, the last time we witnessed such strength was back

in 1986 when debt service as a percent of disposable income was around current

levels (Figure 10) and the consumer failed to back off then also. Thus, once

again, we see that the current consumer experience is not an anomaly tied to

questionable assumptions of housing bubbles.  Accordingly, the strength in

April retail sales and auto sales is not as unsustainable, as many might think.

In fact, the consumers' wherewithal is not collapsing as some have claimed and

the recent Manpower survey is encouraging on the labor front too.

Consequently, the consumer sentiment numbers released on Friday and the strong

results posted by the likes of Wal-Mart, Kohl's and JC Penney might reflect

some of these fundamentals that we think many investors have either overlooked

or simply do not really understand.

Figure 8

Source: Factset

Figure 9

Source: Bank Credit Analyst Research

Figure 10

Source: DRI

Note that new hiring could also provide some support for IT sales as well given

the historical relationship between employment and technology investment.

Thus, even the fears related to capital spending being in a downturn could

begin to ease late this year, if history is any guide, given that both higher

profits and more jobs could turn the tide on tech investment patterns.  This

would coincide with the normal lag after profits recovery, which we anticipate

begins in 2Q02 (with capex recovery beginning two quarters later).  In this

context, Dell's commentary on initial signs of life in tech spending might not

be a false dawn nor was the semi equipment's strong book-to-bill numbers.

Accordingly, we think that things are on track but investors continue to want

evidence and are acting in a reactive rather than anticipatory mode after being

"burned" the past two years.  As a result, we remain bullish on equities as we

have been since February 19th, 2002.

Companies Mentioned:

AT&T (T-$12.87;1M)

Dell (DELL-$27.95;3H)

JC Penney (JCP-$25.00;2H)

Kohl's (KSS-$77.75;2M)

Wal-Mart# (WMT-$58.33;1L)

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