worldlyinvestor.com Wake-Up Call
Having Technical Difficulty
By David H. Smith, Columnist
In these gloomy times, I want to get rid of the techs and go with cash, drug and food stocks.
Yesterday, as the Nasdaq headed back toward its lows, 37% below levels of only two months ago, my mood turned fairly gloomy. When things are bad, I have this unfortunate tendency to take my market hits personally. The opposite, however, is not true: when things are going really well, I stay pretty cool and do not get euphoric.
Which is to say that the market gives me pain but not pleasure. You may ask, what's the point of this mono-polar emotional control?
And that is exactly the question I was asking myself when the good people at Sage Online phoned me up for my regular Wednesday stock chat. The questions of callers to the show indicated they were as troubled as I. What should I do with Cable and Wireless HKT (NYSE:HKT - news)? What should I do with Pacific Century Cyberworks (OTC:PCCLF - news)? What should I do with Softbank (OTC:SFTBF - news), with Quepasa.com (Nasdaq:PASA - news), with China.com (Nasdaq:CHINA - news)?
Can't Prevaricate
I can't lie and tell them everything is cool. I tell them I don't want this new economy stuff now. I don't want to hear hairy stories about 2005 earnings potential. Not another word please about business plans, models, spaces, or any of those new economy buzzwords. I want cash on the balance sheet, cash coming in the front door and not flying out giant holes in the back wall. I want drugs, I want foods, I want financials.
A caller familiar with drugs from the consumer end helpfully furnished some mood-alteration ideas, but Sage didn't post them, just in case children were staying home from school to participate in online investment chats.
A Silver Lining
The fact is that there are positive trends in stock markets, and many of us are still too painfully overweighted in new economy stocks left over from 1999 to get any benefit from them. In the food and consumer products group, Coke (NYSE:KO - news) is it and so is Pepsi (NYSE:PEP - news). Procter & Gamble (NYSE:PG - news) is recovering well. Procter's global rival Unilever (NYSE:UN - news) and Unilever's acquisition target BestFoods (NYSE:BFO - news) both put on weight.
In a strong retail group Wal-Mart (NYSE:WMT - news) was the major feature but there were other good performances including Bed Bath & Beyond (Nasdaq:BBBY - news). Power utilities American Electric Power (NYSE:AEP - news), Duke Power (NYSE:DUK - news), and Dominion Resources (NYSE:D - news) were in demand for their defensive characteristics and powerful dividend yields.
Champion (NYSE:CHA - news), the company at the center of a takeover battle between International Paper (NYSE:IP - news) and UPM Kymmene (NYSE:UPM - news), led forest products gainers. Normally we would look for pharmaceuticals on a list of defensive sectors that moved up in a down market. Some drug companies, notably Alza (NYSE:AZA - news), rose as expected. But there were some industry-specific factors keeping the group subdued.
News that the German drug and chemical group Bayer is settling charges of overbilling Medicare and Medicaid infected Glaxo Wellcome (NYSE:GLX - news) and Smithkline Beecham (NYSE:SBH - news), which stand similarly accused. Word that a number of major global drug companies will radically reduce prices of AIDS treatments in Africa raises questions about their motivations at a time when they are under political and regulatory pressure.
Born Again Old Economy
In the international context this morning, it is Old Economy Good, New Economy Bad.
We have a 4.6% loss in the Japan's Nikkei 225 index leading all key Asian markets to losses of more than 1%. This brings the Nikkei to six-month lows under 17,000, about 10% below the pre-Golden Week levels and almost 20% below recent highs. Losses were led by Matsushita Electric (NYSE:MC - news), which depended too heavily on securities gains to show its seven-fold rise in profits and which issued a less than confident trading statement.
To the extent that the Nikkei has become a Nasdaq proxy full of high-tech companies like Kyocera (NYSE:KYO - news), Advantest, Matsushita Communications, DDI, and NTT DoCoMo (OTC:NTDMY - news), it bore the full brunt of yesterday's Nasdaq collapse. This is putting pressure on the yen this morning.
In Europe, losses are fractional everywhere, save Sweden, where Ericsson (OTC:ERICY - news) dominates, and the Netherlands, where Royal KPN (NYSE:KPN - news) continues to pay the price for failure to make terms with Telefonica (NYSE:TEF - news). The Swiss and British markets are higher, reflecting their great mass of defensive stocks such as Novartis (OTC:NVTSY - news), Nestle (OTC:NSRGY - news), Roche (OTC:RHBBY - news) in Switzerland, Unilever, National Power (NYSE:NP - news), Diageo (NYSE:DEO - news), Astra-Zeneca (NYSE:AZN - news) and British American Tobacco (NYSE:BTI - news) in Britain.
On the Data Front
We have retail sales data later this morning, and the producer price report tomorrow. Signs of weakening consumer demand could help snap this market out of its deep depression, but nothing is likely to change the expectation of a 50-basis-point rate rise when the Fed meets next week.
The European Central Bank is meeting today, and the question must be how to respond to the downward pressure that the increasing differential between US and European interest rates exerts on the euro. It is perceived as not an easy task to keep pace with US tightening without hurting the nascent recovery in core European economies.
David H. Smith is managing director of Grayling Management. Grayling manages hedge funds and private accounts, and performs customized research for institutional clients. Smith specializes in Asian and emerging market equities. His column analyzes global economic and corporate events that happened overnight, and tells investors how those events affect their portfolios. He has clients with positions in Astra Zeneca, Glaxo, and Smithkline.
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