Dot coms, dog coms and the rest's not so hot
Date: 23/07/2001
Why bother with G-8 when the world's markets are going to the dogs?
WALL STREET by Brian Hale
Wall Street's dog days of summer are howling already and wagging the tails of financial markets around the world.
The devastation wrought on globalised markets by the rapidly shrunken earnings of globalised super-companies would have provided a stack of reasons for investors to storm the barricades at the G-8 summit in Genoa if the politico's talkshop had any real relevance.
It certainly had irony, taking place with the global economy stalling in an Italy whose own standing in the global economy is as tentative as its ability to perform in the already troubled euro zone.
But, given US Federal Reserve chairman Alan Greenspan's dour assessment last week of the US and global economies, where better to lock up a bunch of pollies who think they run the world as well as a mob of anarchists who believe them.
Certainly not Washington where, in his new guise as the grim reaper, the Fed chairman really set the hounds barking by pushing the prospects for US recovery out into the future.
That's helpful for the euro - and in turn the Aussie dollar - but it didn't do much for equity markets which were spooked despite the implicit message of another 25 basis point interest rate cut in August; maybe more to come after that; and probably no backtracking until well into next year at least.
The bond market was cheered though and Treasuries rallied across the curve because they already had priced in the next 25 basis points, with August Fed fund futures indicating a 100 per cent chance of a 25 basis point cut (and even a 15 per cent chance of a 50-pointer) and October contracts pricing a 30 per cent chance of another 25 bp cut at the October Fed meeting.
Sharemarkets would have reacted better if they hadn't been coping with the main week of what used to be called the quarterly corporate profit reporting season but which seriously lacked the p-word this time around.
Even the techs and lingering dot bombs who long ignored generally accepted accounting principles in favour of reporting what they like to call "pro forma profits" (a sort of almost net revenue before costs and charges), were finding themselves posting pro forma losses last week.
Most also claimed little "visibility" of potential profits or losses in coming quarters as the Japanese recession and sagging European economy compounds the US slowdown and countries like Argentina go from bad to worse.
Some experts, ignoring the message from Dr Greenspan, the consensus economists' outlook and the relentless stream of poor economic and corporate numbers, claim that bond yields have been driven down and the US equity market undermined by intensified economic and profit bearishness in the press.
The press should feel as chuffed as G-8 that otherwise rational people believe it actually has some power rather than simply reflecting what is said by other rational people, like Alan Greenspan and the CEOs of almost every major technology company in the world; but most of us are too rational.
Real power lies elsewhere, as Merrill Lynch acknowledged last week when agreeing to pay a former client $US400,000 ($783,000) to settle allegations that he was misled by overly bullish research by Internet stock analyst Henry Blodget as well as information provided by his Merrill broker.
The heart of the case was that the firm kept a "buy" recommendation on the stock, Infospace, even as it flagged. Merrill said it had settled the arbitration case to "avoid the further distraction and expense of protracted litigation".
The ramifications are uncertain because it is expensive for investors to pursue such matters but Merrill's willingness to settle has triggered thoughts that investors do have some recourse after all, even though most people now recognise that analysts these days generally are cheerleaders for companies their firms are targeting for corporate fee work and/or commission-hungry hype-merchants.
Wall Street's new code of practice looks like being a ban by broking firms on analysts owning stocks that they "research". What a shame they don't ban clients owning them too.
When investors sort through the lessons from the carnage, they might also recognise not just the unsustainability of the extremely high valuation levels reached during the bubble but the analysts and broking firms' role in creating those levels.
As the downturn rolls on, investors might also question analysts' current focus on companies faring better-than-expected when what was expected already was diabolical.
On Friday, some were taking their axes to forecasts after the gloomy announcements from Microsoft and Gateway as well as a study suggesting that PC sales are slumping around the world for the first time since 1986.
But they were not backing away from long-term "buy" recommendations even for companies like PMC Sierra whose share price managed to fall 92 per cent in little more than a year even though some analysts expect its revenue to collapse further and foresee six quarters of worse operating losses ahead.
Not that PMC is alone. The world's briefly largest company, Cisco Systems, managed an 83 per cent tumble and most well-known tech stocks have lost at least as much with the better performers losing just three-quarters of the prices for which they once sold.
On most days now an economic recovery with an increase in capital spending and demand for business products has been discounted until well into next year, and some pundits argue that it could be even further away.
Morgan Stanley's global strategist Barton Biggs says he doesn't see a lot of good things happening with "the recession spreading from the US to Europe and Japan, ... the contagion spreading to Latin America and Asia ... [and] the extent of the collapse in tech spending stunning and undermining economic activity and stockmarkets everywhere".
"How long can the non-tech parts of the market hold up?" asks Biggs. "Not much longer," he says because he doesn't share the "impressive" complacency about consumer spending and "can't believe the toxic combination of the wealth effect, lay-offs and higher energy prices won't affect the highly leveraged, under-saved and over-spent American consumer".
Technical support for that view comes from Salomon's Louise Yamada who thinks more storm clouds might be brewing in a "technically fragile market" that has seen failed rallies, false breakouts and "almost execution-style support breaks" as well as an historically sub-par response to six months of Fed rate cuts. So much for a summer rally. The dog days are back.
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