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Gloomy Spin Makes Economy Look Worse Than It Is
By Bill Meehan
Special to TheStreet.com
1/10/01 9:34 AM ET
The Nasdaq Composite Index managed to post its first gain since the Fed cut rates last Wednesday, as the market ambled through the day. The Dow was weighed down by weakness in cyclicals along with its financial components, as American Express (AXP:NYSE - news - boards) and GE (GE:NYSE - news - boards) both have ugly short-term charts that continue to worsen.
Nonetheless, that the overall tone was modestly positive was an accomplishment considering Nokia's (NOK:NYSE - news - boards) disappointing handset sales, and increasingly nervous investors and traders.
Let's hope the market's ability to hold up in the face of disappointing news is a sign that the market is in the process of making a bottom. However, continued weakness in financial stocks is far from a positive omen and shouldn't be cavalierly brushed off. And things hardly look cheery overseas, and on Globex early Wednesday morning.
Many bank stocks are about where they were before Uncle Al hacked short-term rates by a half-point. So much for the conventional wisdom that trading the group is a lay-up once the Fed begins to ease. And so many hopes are being pinned to the historical pattern of the market's response to rate cuts that it's hard to believe that Mr. Market will make it so easy to coin money again. That's one of my biggest worries right now.
In addition to the relatively positive response of the overall tech sector to Nokia's announcement, there are a few more positives at hand. The Naz remains extremely oversold, the Fed is easing, earnings expectations are low and declining, valuations outside of tech and some of the blue-chip defensive names are reasonable, analysts have unleashed a flood tide of downgrades and sentiment has become much more pessimistic.
An Associated Press poll showed that only a third of Americans expect their family financial finances to be better a year from now vs. more than half in the spring. And more than half said that if they had $1,000 it would be a bad idea to invest it in the stock market now. The AP pointed out that, "A strong majority said in a poll last spring that they would invest the money in stocks, and the number dropped progressively throughout the year."
A quote from a 25-year-old mother of two in the AP story got my attention only because it fits with my notion that the media have played a significant role in the recent plunge in consumer confidence. She said, "It looks like my family finances are going to be worse in a year. I get that feeling from the news reports, from technology stocks going down." How a revaluation of tech stocks in a saner manner affects a young mother in Louisville is beyond me, but the story also cites the fact that, "Retailers just announced they had their weakest holiday sales in a decade." That's a variation of headlines seen in newspapers throughout the land over the past month or so.
It's a fact that sales growth for most retailers was disappointing. But the truth is that most retailers reported sales that were higher than last year's record level, and that's more telling about the current state of the economy. December retail sales are expected to be down 0.2% when reported on Friday, and ex-autos consensus is for a slight uptick. We all know that vehicle sales have weakened, and there's a glut of inventory that's leading to production cuts.
However, this year's outlook for vehicle sales -- if met -- would make 2001 one of the strongest in history, just not as strong as last year's record pace. At least it's stimulated some nice designs, improved quality and fostered great prices for those who want to help take some of that inventory off the dealers' lots. But $40,000 for a T-Bird this summer? Good thing Ford (F:NYSE - news - boards) is only going to produce a limited quantity. I'd go for the Benz SLK 230.
Yes, the economy has clearly been showing signs of slowing, and the manufacturing sector may already be in recession. Yet, with unemployment still running at 4.0%, I think that much of the blame for a recession that appears likely to me can be reasonably assigned to the wordsmithing and quote-choosing in the media. It's not that they invent news; they simply spin it in a manner that captures the largest audience. And it's generally not the reporters or talking heads who are responsible for slanting the news, it's management and editors who shape how reality is reflected in the media, relying on the worst interpretation of statistics, rather than resorting to lies or damned lies.
The source of much of the misinformation is the whining, misplaced judgments of so many sell-side economists who have taken off their rose-colored glasses and have been busy pressing the Fed to pour on the liquidity. Where were they when the first signs of stress in the bond market were evident months and months ago? Where were they when it was evident that consumers where fueling the New Economy by going deeper into debt, inflating the tech bubble and saving less than nothing?
Ah, yes, they were singing the productivity hymn while genuflecting before the Fed Head's altar. And their strategists were touting that the market looked great because the economy was so strong. (I never learned that buying stocks when the economy is raging was the best time to do so, but who cared? It was different this time.)
Did the "productivity miracle" just evaporate or was much of it an illusion? And if the rate of productivity growth has made a once in a lifetime leap, why the need for such drastic action from the Fed?
My, how quickly things changed in the minds of so many dismal scientists. Perhaps they should stick to long-term forecasts, where they might be more successful, and few will remember their predictions. There are exceptions, of course, but they're few and far between on the Street of Dreams.
I was glad to see Marc Chandler's piece, "The Politics of 'Recession'" on www.RealMoney.com Tuesday afternoon, if only to confirm that I'm not a lone raving lunatic, as some have suggested. Although not an economist (thank heavens), Chandler is the chief currency strategist for Mellon Bank, and he's certainly no lunatic (I'll reserve self-judgment).
While we disagree about whether the U.S. economy is heading for a recession (he doesn't think so), we both agree that "Wall Street is not Main Street. Nor are its concerns necessarily reflective of the country as a whole," to use his words. I hope you read his comments.
With all of that said, I still believe that many stocks should be bought at or near current levels by investors. Having about two-thirds of one's money allocated to equities now seems appropriate. And value remains the name of the game, so I'd avoid the defensive plays; and it's a bit too early to look at most cyclicals, but their time is likely to come soon. Financials are overowned, overloved and overburdened by questionable credit and equity portfolios, and a global economic slowdown is also likely to contribute to lowered earnings expectations for the sector.
A couple of value names that I mentioned in the dark of morning on CNN Tuesday were Apple Computer (AAPL:Nasdaq - news - boards), Jones Apparel Group (JNY:NYSE - news - boards) and Zale (ZLC:NYSE - news - boards); I also like Ericsson (ERICY:Nasdaq - news - boards) here in anticipation that they'll exit the handset business (which I saw Jim Cramer talk about on Squawk Box Tuesday morning).
For those who are looking for growth, I'd suggest looking at Microsoft (MSFT:Nasdaq - news - boards), Oracle (ORCL:Nasdaq - news - boards) and Wal-Mart (WMT:NYSE - news - boards). More aggressive investors or traders should consider Gemstar-TV Guide International (GMST:Nasdaq - news - boards), Qualcomm (QCOM:Nasdaq - news - boards) and Siebel Systems (SEBL:Nasdaq - news - boards). I'm hoping to add to energy exposure on further weakness, with Smith International (SII:NYSE - news - boards) my only current position.
If we can rebound from what looks to be a down opening I believe the market will wash out weak shorts and make an attempt to break the downtrend lines in the Nasdaq Composite and the S&P 500 relatively soon. In any event, well-positioned investors should sit chilly with about a third of the portfolio dedicated to equities sitting in cash. That cash should be used on a breakdown through the recent lows or perhaps on a break above the aforementioned trendlines. We'll see how it goes. |
