On the neg. side, a worthwhile point from the NYTimes (free content):
Floyd Norris: This Half-Price Sale Is a
Sign of Economic Woes Ahead
By FLOYD NORRIS
Christmas is more than three weeks off,
but the half-price sale is already going
on.
It is stocks that are on sale; to wit, the Nasdaq
variety. At the low yesterday, the Nasdaq
composite was down 51 percent from the
giddy highs it reached during trading on March
10, when Internet fever peaked.
In fact, if you're looking for deeply discounted
merchandise, that statistic makes the supply
seem smaller than it is. Half the Nasdaq stocks
in the computer and telecommunications
sectors are down more than 75 percent since
March 10. Fewer than 5 percent have risen.
Those brutal facts are not news to many
investors, and they help to explain why this
Christmas will not be nearly as joyful for
retailers as might be expected given the low
unemployment rate. But the broader question
is whether the Nasdaq collapse portends bad
economic times.
Most of Wall Street thinks not. The consensus
is that the economy is making a soft landing
that will leave the annual growth rate around
2.5 percent for a while. The Nasdaq decline is
viewed as a correction of overinflated
valuations, plus perhaps a little overreaction
that has created bargains among the ruins.
At the heart of the optimism is the view that the so- called new economy
is alive and well. Consumer purchases of personal computers may be
plunging, as Gateway shareholders just learned, but companies are sure
to keep investing to reap productivity gains. Those gains in productivity
are slashing costs enough to assure that inflation will not be a threat,
whatever happens to such old-economy indicators as oil prices. That
means the Federal Reserve will be able and willing to bail out the
economy by cutting interest rates next year.
The weakest part of that argument is the assumption that business
spending on technology will continue at the explosive rate of recent years.
Robert Barbera, the chief economist of Hoenig & Company, notes that
the durable goods report issued this week shows that orders for
electronic and other electrical equipment from July through October were
running 6 percent ahead of the 1999 pace. In the first half of the year
they were up 24 percent.
A rise of 6 percent is far from horrible, but it is hard to believe that the
drop stops here. Most of those computer and telecommunications
companies on Nasdaq were buyers of hot new hardware and software.
Now many are scrambling to pay their bills, and new orders are out of
the question. The Chicago Purchasing Managers survey of new orders
— a barometer of industrial health in the Midwest — fell yesterday to its
lowest level in 18 years.
"This is not a valuation adjustment with no economic repercussions," Mr.
Barbera said.
The huge surge in capital spending, which is now coming to an end, may
turn out to be the signal economic event of the last five years. It raised
overall corporate profits because the profits made by the sellers were not
offset by expenses of the buyers, who treated the spending as
investments. That encouraged investors, and the availability of cheap
capital encouraged more capital spending, which pushed up profits
further and sparked talk of a new era.
Now that virtuous circle is ending. Profits will suffer as depreciation
expenses rise. Consumers will cut back as their investments suffer. Tax
receipts will be surprisingly low as capital gains payments fall.
The Fed will try to help by cutting interest rates next year, but the
surprise may be how little help that provides. |
