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Common Sense
The Wall Street Uncertainty Principle
By James B. Stewart
February 6, 2001
PEOPLE ON WALL STREET can be so greedy sometimes. Last week Alan Greenspan
and the Fed offered a second half-point rate cut and said their bias favored more rate
reductions. Wall Street complained that it wasn't enough. Then, when the unemployment
rate came in Friday at a larger-than-expected 4.2%, they complained that wasn't enough
either.
Fortunately, the rest of us aren't part of Wall Street. A full-point drop in interest rates in a
single month is an aggressive move. Unless the laws of economics have been repealed, it
will stimulate the economy and bolster consumer confidence.
When? That's the question obsessing Wall Street right now. And the answer is, no one
knows.
Let's call this the stock-market version of the uncertainty principle: The more precisely we
measure the recent past, the murkier the future becomes. This helps explain why a slew of
quarterly earnings reports last week had no consistent impact on stock prices. Corning
(GLW) reported terrific earnings but sowed panic in the fiber-optic sector when it lowered
the bottom rung of the range of its projected earnings by a penny a share. No one seemed
to notice that Corning simultaneously raised the upper rung by one cent. Not that either
move makes much difference. Applied Materials (AMAT) warned about a sudden
slowdown in the chip sector, but its stock gained. The chip slowdown is apparently old
news.
No wonder so many people were waiting for the latest earnings from Cisco Systems (CSCO). Cisco Chief Executive
John Chambers, traditionally an optimist, has been making increasingly cryptic remarks about prospects for the giant
networking concern, a tech bellwether. After the market close Tuesday, Cisco reported earnings that fell a penny short of
Wall Street's consensus — hardly a catastrophe, but still disappointing from a company that has beaten earnings
estimates for 25 straight quarters. As for the future, Chambers said only that Cisco is "cautious" as a result of a "pause" in
the U.S. economic expansion. In other words, Chambers doesn't know what the future holds either.
This is disconcerting to a Wall Street that spends billions filtering a river of information for the one drop that will give it
an edge. Perhaps some fact is out there right now that will tell us whether the economy will pick up in July, or
September, or January of next year. But for the patient, long-term investor, I suggest that it doesn't really matter.
Uncertainty is, in fact, a boon to investors who don't treat their portfolios like a full-time job. We remain in an unusual
environment where most stocks are far off their highs of a year ago, with interest rates sharply lower and declining, with
the prospect of a tax cut, with oil prices declining and the dollar stable. What more could we want? With recent gains in
the Nasdaq, I raised a modest amount of cash, but I remain almost fully invested, with an emphasis in my core areas of
technology, financial services, pharmaceuticals and biotech. I have added some of my recent recommendations in basic
industry, such as Tyco International (TYC) and General Electric (GE), to take advantage of an economic upturn,
whenever it comes. Unless there's a surprisingly big move up or down, I intend to ride out this period of uncertainty by
taking a long winter's nap.
As usual, I am not predicting that the market will move either up or down in the short term. But long term, the trend of
the stock market is to rise. At times like the present, when professional investors seem evenly split between bulls and
bears, the odds favor being fully invested, or close to it.
JDS Uniphase Revisited
The Justice Department appears set to approve the acquisition of fiber-optics concern SDL (SDLI) by JDS Uniphase
(JDSU) now that JDS has agreed to sell a manufacturing facility to rival Nortel Networks (NT). Readers may recall my
own antitrust concerns about this particular combination, but now that the deal is virtually done, I can only reiterate that
what's bad for the customer may be good for the investor. I added JDS Uniphase to my own portfolio after
recommending it last year, and I continue to recommend it now that uncertainty about prospects for the SDL
acquisition has been significantly reduced. At a recent price of $50, JDS is less than a third of its 52-week high of just
over $153, and represents an even better bargain than when I first recommended it. While the economic slowdown has
clearly reached the fiber-optics sector, when the turnaround comes, JDS is likely to be a commanding presence.
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