A portion of an article by Jeffrey Applegate, in this months Bloomberg Personal Finance.
However, given the huge decline in prices for tech products since last summer, capital goods price deflation is back and now stands at -l percent. Labor costs for the first quarter were up 4 percent in line with the prior period. So the spread between the two has widened to 5 percent. Historically, this is a wide gap. This spread, plus the continuing need to replace rapidly obsolescing high-tech equipment should accelerate the rate of capital spending. The rebound won't materialize in every industry. For instance, we expect capital outlays for the telecom sector to he flat this year and to decline by 10 percent in 2002. But telecom capital spending is less than 10 percent of total capital expenditures. Overall, we're forecasting a recovery in capital spending growth next year to 5 percent and in IT growth to 9 percent.
There's another reason we believe business investment will pick up. In announcing its surprise intermeeting interest rate cut in April, Fed governors mentioned their concern about slackening business investment. Likewise, when the central bankers lowered rates again in May, they remained concerned that a poor profits climate and an uncertain business outlook were sill combining to restrain capital spending. So we thought we'd take a look at the lags between the start of monetary easing and the trough in capital and IT spending. Over the past few decades, the low point in capital spending lagged the Fed's first move to ease monetary policy by an average of only one quarter; the longest lag was three quarters. IT spending has responded to lower interest rates a bit more slowly, with an average lag of two quarters; the longest was four. Clearly, there is ample evidence to support our forecast that steadily falling interest rates will generate a cyclical rebound in capital spending.
A return to the robust capital spending of recent years, coupled with the structural productivity improvements that have reshaped corporate America, will result in higher profit margins and richer stock market valuations.
According to our fair-value model, the Standard & Poor's 500 Index was 26 percent undervalued at its April 4 low. The subsequent rise in stock prices and 10-year Treasury yields erased most of this undervaluation by mid-May, but the market remains attractively valued according to our model, with a forward price to earnings ratio near 22 at the same time that the 10-year Treasury note trades near 5.5 percent. Many bears contended that the stock market was highly overvalued, even in early April, because most of the valuation metrics, like the forward P/E ratio, were well above their historical averages despite the correction. But unless one expects inflation, interest rates, and marginal tax rates to rise all the way back to their historical means, there is no reason to expect the same of forward P/E ratios. In fact, the recently passed tax cuts will boost our model fair-value P/E ratio by one point when the cuts are fully implemented.
Historically, the S&P 500 has bottomed an average of three months after the Federal Reserve Board started lowering interest rates. The market bit its trough on April 4, right on schedule at three months and one day after the Fed began its recent campaign to lower rates on January 3. Furthermore, now that more than four rate decreases have taken effect, one has to go all the way back to the Great Depression to find a time when Fed rate cuts failed to ignite a recovery in the S&P 500.
He's not a permabull
aol.thestreet.com
Sees better times ahead
smartmoney.com
The Internet brings Prices DOWN
Jeffrey Applegate- Lehman Brothers Investments
posted 03/01/2001
The Internet is the most deflationary event of our lifetime. [It] shrinks time and space and makes things more efficient. That was what the railroads did in the 19th century, and prices came down enormously. It is what drives all the business-to-business initiatives via the Internet. Lawrence Bossidy of Honeywell said that if his company purchases something in the real economy and it costs $10.50, in the virtual economy it would cost $.50. You hear examples of this almost daily.
The Internet has a lot of staying power as well. Nothing lasts forever, but think about how long the Industrial Revolution lasted. A LONG LONG time. What's different about this is that it's much bigger and it's much faster and it's much more global, which the Industrial Revolution never was. |
