New On Dr Ed's Economics Network
Monday afternoon, June 18, 2001
COMMENT: The Fed still has 400 basis points between the federal funds rate
and zero. However, stock investors are starting to wonder why the 250 basis
points that have been cut from the Fed's key rate so far this year haven't
done much to revive economic growth. Lower interest rates won't stop the
tech recession. Nortel's earnings bombshell makes it crystal clear that
telecom companies built too much capacity. The latest US production numbers
suggest that the tech wreck has broadened into a full-blown manufacturing
recession. The recession is spreading overseas, especially to Asian
tech-exporters like Taiwan, Korea, and Singapore. As a result of weaker
growth in the US and Asia, European growth is slowing along with export
business.
The weakest global link is likely to be Japan. The wildly popular new
government has promised to implement reforms and restructure the economy and
the banking system. Their intentions are good, but their timing is bad. To
fix Japan requires long-overdue, and now more painful measures that will be
even more painful if the global economy remains weak. This assessment is
confirmed by the Nikkei's failure to sustain the recent rally beyond its
200-day moving average. Bank stocks are also on the critical list again.
A dark and gloomy picture indeed, but let's not forget that there are still
those 400 basis points of light. I'll turn more bearish if, and when there
are only 300 basis points left, and no sign of an economic upturn.
On the other hand, with the market's 12-month forward P/E at 22, stocks aren
't as cheap as they usually are coming out of a recession. The market has
already discounted a Fed-engineered economic recovery. If there is a
surprise, it is more likely to be a disappointing outcome. A surprisingly
strong rebound in the economy and profits is especially unlikely since the
Fed's easing so far has averted a sharp decline in housing and autos sales,
which remain well above the previous recession's lows.
SUBSCRIBERS: In the latest GLOBAL PORTFOLIO STRATEGY, I discuss what all
this means for the profits outlook. I've been on the cautious side of the
Street's estimates, yet I am starting to think that I may have to lower my
$50 per share and $60 per share numbers for 2001 and 2002, respectively. On
the brighter side, I update some of my analysis of the Baby Boom demographic
trends and see opportunities in consumer finance, property causality
insurance, and health care (particularly big-cap hospital management,
mid-cap medical products, and bio tech).
Biotech appeals to me as a very concrete application of the Information
Technology (IT) revolution. It is a hybrid of the technology and health care
industries. Generic IT hardware and software are vulnerable to intense
competition, eroding profit margins, and uncertain final demand. The Biotech
application of IT may take longer to deliver marketable products, but when
they do arrive, they are likely to have more patent protection and more
stable markets.
PUBLIC: The latest GLOBAL ANALYST'S HANDBOOK and EARNINGS MONTH are updated
and posted on the site. So are chart books on money supply, flow of funds,
banking, the Fed, and much more. Find links to them all on the WHAT'S NEW page.
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