Hi, Rob - "I am nervous about the telecomm equipment sectors in general because I think it will be longer than many think before spending resumes at near the levels of last year. They were one of the last bubbles to pop and will be perhaps the last to re-inflate. Within the broad telecomm industry, FBWA should be one of the first to rebound. "
I have been trying to research the financial status of telecomms over the last few months.
There is no doubt that Greenspan has opened the taps on liquidity - and has been, for months. Yet, despite that, the sector is languishing. Why? Part of the answer lies here...
"Well, if Greenspan was pumping liquidity back into the markets, where was it?
The recent newsletter by Ed Yardeni supplied part of the answer. (I will paraphrase, out of necessity)...
He said that in 1984, he coined the term "Bond Vigilantes" to describe the growing power of fixed income investors and traders over the economy. In recent years, he said, they've lost some of their clout because the U.S. Treasury is paying off the federal debt. Also, inflation has been relatively tame, and so have they. Venture capitalists became the new power elite in the late 1990s leading the Nasdaq to record highs.
He says that now the bond crowd is back: they are tightening credit conditions, while the Fed is easing. The Treasury bond yield is up over 50 basis points since March, which is boosting mortgage rates. The spread between A-rated corporate and 10-year Treasury yields has widened dramatically from around 150 basis points at the end of 1999 to more than 250 basis points recently. The high-yield and commercial paper markets are essentially shutdown for all but prime borrowers."
Message 15750339
Going to deeper background, what is happeing to money in the markets as opposed to the sector, itself?
"The Wealthy and the Wealth Effect
Study of Spending, Saving Finds Answer Among the Very Rich
By John M. Berry
Washington Post Staff Writer
Sunday, May 13, 2001; Page H01
For many years, Federal Reserve Chairman Alan Greenspan and some other economists have argued that the soaring U.S. stock market -- icing on an already tasty cake -- was the reason American consumer spending skyrocketed in the late 1990s. Employment, wages and most other types of personal income also rose at a healthy pace, but consumer spending increased much faster than incomes, and the economists said the sharp gains in household wealth from stocks had to be the reason.
But another group of analysts questioned that conclusion, saying that while nearly half of all households directly or indirectly own some stock, most of those don't own enough for even a booming market to make much difference in their finances.
For instance, the Fed's 1998 Survey of Consumer Finances found that the wealthiest 1 percent of households owned almost half of all common stock and the top 5 percent owned three-fourths of it. The concentration of stock ownership was so great that the wealthiest 20 percent of American households owned 96 percent of common stock.
But despite the relatively small number of households with big portfolios, a recent study by two Fed staff economists concludes that the huge increase in stock market wealth was indeed primarily responsible for two phenomena of the 1990s -- the surge in consumer spending and the disappearance of saving from current income.
"What is novel about our study is that it reveals, essentially for the first time, that [the same groups] of households whose portfolios surged in value decreased their saving rates sharply over this period," the economists, Dean M. Maki and Michael G. Palumbo, wrote in the study published last month. They were speaking of saving as the difference between disposable income and spending -- not including capital gains from the rising value of stocks, real estate or other assets.
"In fact, we show that the well-documented decline in the economy-wide rate of personal saving over the 1990s can be attributed almost entirely to a sharp reduction in the saving rate of [groups] of families who experienced the largest capital gains," wrote the authors. (Maki recently became a vice president at Putnam Investments in Boston.)
In other words, a relatively small group of very wealthy, high-income households changed their behavior so dramatically in response to their stock market gains that they affected the national figures, causing the overall saving rate to drop.
From 1992 through last year, disposable personal income -- essentially after-tax income -- rose 47 percent, according to Commerce Department figures. Over the same period, personal spending climbed a lot more, 61 percent.
With spending going up faster than incomes, personal saving went down. Among all households it plummeted from a robust 8.7 percent of disposable income in 1992 to nothing at all last year. Nationally, both disposable income and personal outlays were just shy of $7 trillion last year.
But the savings arithmetic for an individual household isn't at all the same as it is at the national level. Households save to accumulate wealth so they can spend more sometime in the future. They may save for a rainy day, for the down payment on a house, for their kids' education or for retirement. And if wealth piles up because the value of their home rises or the stock market takes off, so much the better. Those capital gains represent household wealth every bit as much as money taken out of a weekly paycheck and deposited in a savings account, but they are not included in the national figures as income.
Maki and Palumbo credit Greenspan for suggesting their novel approach to analyze how much impact the trillions of dollars in new stock market wealth had on spending and saving. Most previous attempts to measure what economists call the "wealth effect" -- that is, by how much households increase their spending after they receive an additional $1 in wealth -- have relied on data for all households. Generally, researchers have concluded that for each additional $1 in wealth, spending goes up by 3 to 5 cents, although there has been less agreement on how quickly that spending occurs.
The new research finds a wealth effect of about that same size.
What Greenspan suggested was to use both such macroeconomic data and the information about individual households the Fed obtains every three years when it conducts its Survey of Consumer Finances. Using both types of figures, Maki and Palumbo hoped to shed light on the reasons behind the plunging saving rate. Their results were striking.
"No matter what we did to the numbers, we couldn't make the effect go away," Maki said in an interview. For instance, they got the same results when they divided households by educational attainment rather than by income level.
The macroeconomic data they used were not the familiar national income and product accounts -- for example, the closely followed numbers for gross domestic product come from those Commerce Department accounts -- but rather a financial counterpart that the Fed itself produces. This counterpart, known as the Flow of Funds, tracks money flowing into and out of all types of assets and liabilities, including, for instance, the purchases of real estate and the mortgages used to finance them, money flowing into and out of the stock and bond markets, and many other such combinations.
Unlike the Commerce Department accounts, the Flow of Funds figures show not just items related to current income and spending but also the change in the value of assets, such as homes and common stock, as well. At the beginning of 1992, according to these figures, households and nonprofit organizations together owned $3.1 trillion worth of corporate stock and mutual funds. (The published figures do not separate household holdings from those of nonprofits.) By the end of 1999 that had shot up to $11.9 trillion, nearly a quadrupling over eight years. Last year's break in stock prices trimmed the figure back to $9.6 trillion.
The Flow of Funds also provides an alternative measure of national saving. The more familiar Commerce approach subtracts personal outlays -- that's spending on goods and services plus interest paid by individuals and transfers of money individuals send out of the country -- from disposable personal income. The difference between the two is counted as saving from current income and is usually expressed as a percentage of disposable income. In the first quarter of this year, the Commerce saving rate was negative -- that is, households and nonprofit organizations spent 1 percent more than they received in disposable income.
In the Flow of Funds, saving is simply the difference between the net acquisition of assets and the change in financial liabilities.
Neither approach counts capital gains as part of saving, and over the course of the 1990s both saving measures fell sharply.
Using Commerce figures on disposable personal income, Maki and Palumbo divided U.S. households into five groups of equal size. Their analysis focused on the 20 percent of households with the highest income level because the vast bulk of stock ownership is by that group. Since there are slightly more than 100 million American households, there were roughly 20 million in that top income group.
But wealth is more concentrated than income. The top 20 percent of households by disposable income have about 44 percent of total income and about 63 percent of the wealth. By consuming out of both current income and wealth, the top group accounted for 46 percent of all U.S. consumption last year.
Maki and Palumbo found, consistent with the concentration of stock ownership, that from 1992 to last year, this top group had by far the greatest increase in net worth relative to their incomes. All of the five income groups except the one in the middle had some increase in net worth relative to income. Part of the broader increase in wealth was the result of appreciation of owner-occupied homes, which is the most important item of wealth held by most Americans.
The data showed that "early in the 1990s the distribution of saving was very skewed, more so than either consumption or income," Maki said. So to find out what caused saving to fall, the focus "really had to be on people who were responsible for most of that saving" -- the top income group.
Maki and Palumbo found that in 1992 the Flow of Funds saving rate was 5.9 percent. The saving rate for the top income group was a high 8.5 percent. The rate for the second highest income group was 4.7 percent, for the middle group 2.7 percent, then 4.2 percent for the next-to-lowest and 3.8 percent for the bottom one-fifth.
By last year, the overall saving rate had fallen to zero. Nevertheless, for the bottom two groups, the rate had nearly doubled, with both rising above 7 percent. The saving rate for the middle income group had risen slightly, to 2.9 percent. The rate for the next-to-highest income group had fallen to 2.6 percent from 4.7 percent.
But the saving rate for the top income group had simply collapsed. From that 8.5 percent rate of 1992, it had plunged to a negative 2.1 percent. In other words, that group was spending 102.1 percent of its disposable income.
The swing over the eight-year period was an incredible 10.6 percentage points. And since total disposable income for the top group is far higher than that of the other groups, this decline swamped the increases in saving at the lower levels of the income scale.
Those with lower incomes, who got very little direct benefit from the stock market boom, increased their saving from current income during the '90s. Those with higher incomes, who benefited enormously as the markets surged, saw their wealth soar -- and they cashed in part of their gain to finance a spending spree.
Over the eight-year period households and nonprofit organizations sold more corporate equities than they bought, to the tune of $2.1 trillion, according to the Flow of Funds.
"One thing that gives me reassurance that we have found what was going on is that households have been large net sellers of equities," Maki said. "The only ones who could have sold are those who owned large amounts of stock," so they had to be in the upper income groups.
To make sure the net stock sales were not just a matter of investors shifting the proportions of different assets in their portfolios, the economists examined net changes in other types of assets and could find no offsetting increase elsewhere.
So what happens now that stock market wealth has declined? From this study there is no way to tell whether high-income consumers will pull back on spending and save more as their portfolios shrink. But consumer spending has been decidedly weaker since the middle of last year."
washingtonpost.com
The picture is far from complete, but one gets the sense that investors in all segments (ie., commercial paper, stocks, venture cap) are avoiding telecomms like the plague - and retail investors are still largely out of the market.
This says to me that those companies that can survive the present downturn will be the future winners. In that respect, Wi-LAN's piranhas are doing well.
Potentially there are other indicators, but I'm time-constrained right now. There's more to this picture. However, by comparison with its peers, many of whom are biting the dust, Wi-LAN isn't doing too badly.
Dangerous to predict, but I am guessing that is a good sign for the future.
Comments, criticisms, and outright disagreements solicited and welcomed.
Regards,
Jim |
