Yardeni supports a W scenario though I expect more volatility than he's reckoning on:
www.yardeni.com
Sunday evening, November 11, 2001
COMMENT: Will this year's excess liquidity overcome the excesses of the
1990s? I think so, but probably not until the second half of next year.
MZM--which includes M1, savings deposits, and money market mutual funds--is
up more than $900 billion over the past 52 weeks. This is an extraordinary
increase. On the supply side, the Fed has certainly contributed to this
flood of liquidity by cutting the federal funds rate 10 times so far this
year from 6.5% to 2%. On the demand side, investors' liquidity preference
has been heightened by the plunge in the Nasdaq since March of last year,
the shock of the terrorist attacks during September, and mounting job
insecurity.
But where will all this liquidity go? It might stay in MZM for a while
longer despite interest rates of 2% and less. But by the second half of next
year, it should revive economic activity. It should also boost both stock
prices and home prices by then. We may be in a "liquidity trap" for now, but
I doubt that it is comparable to Japan's long-lasting problem. The banking
system is broken in Japan. Ours is in much better condition. With 95 million
kids aged 0-25 years old, America's demographic outlook is much more bullish
for the economic outlook than Japan's aging and shrinking demographic
prospects.
SUBSCRIBERS: In my latest GLOBAL PORTFOLIO STRATEGY, I conclude that if the
flood of liquidity is likely to revive the economy next year, then the bond
rally may be coming to an end. This is why I am raising my stocks/bonds
ratio. Over the next few weeks, I will be searching for opportunities to
invest in more cyclical stocks including Basic Materials, Retailers, and
Financials. On Monday, I will discuss asset allocation issues in my WEEKLY
AUDIO FORUM.
PUBLIC: At the top of the HOME page, you'll find links to the November
issues of my "Earnings Month" and "Analyst's Handbook: Technology." The
first publication shows which industries' earnings prospects have been
hardest hit by the terrorist attacks. The second shows that the valuations
of many technology stocks remain irrationally exuberant. Click on the
following to hear Debbie Johnson's audio analysis of the PPI release:
yardeni.com (using realplayer.com.
GLOBAL COLUMN (Excerpt from November's "Nothing To Fear But Fear Itself"): .
President George W. Bush urges all patriotic Americans to fight terrorism by
going shopping. Like President Roosevelt, he believes we have nothing to
fear but fear itself.After the September 11 terrorist attacks, economists
predicted that US consumers might stop spending, pushing the US economy into
a recession. They were wrong. Consumers did not panic. Retailers panicked
that consumers might panic, so the shopkeepers slashed their prices, and the
shoppers have been spending like mad. Most amazing is that auto sales rose
to an all-time record high of 21 million units, at a seasonally adjusted
annual rate, during October thanks to 0% financing offered by the major auto
companies.
This development is a major setback for the V-shaped economic scenario,
which became the instant consensus after the attacks. Like everyone else,
stock investors were shocked and unsettled by the terrorist attacks, but
they also took comfort in the V. They did so because the bad news would be
packed into the remainder of this year, but then the economy should recover
starting early next year in response to stimulative monetary and fiscal
policies.
Of course, the forward-looking stock market has already discounted much of
the V as prices regained during October all that was lost the week after the
attacks. However, this relatively happy and bullish consensus outlook
already needs to be amended. The price discounts, the Fed's aggressive
easing of credit conditions, and falling oil prices are all moderating the
retrenchment in consumer spending. They are also moderating the economic
recession and probably prolonging it into the first half of 2002.
The problem for stock investors is that these spending incentives are all
coming out of profits, particularly of retailers, auto companies, banks, and
the oil industry. In other words, the profits recession is getting worse,
which means that capital spending (including on technology) is also likely
to remain depressed into next year.
Another problem for the V-bulls is that the worst of the consumer recession
might hit the economy early next year. By then, auto sales are bound to
plunge from October's record high even if the auto companies continue to
give their products away at a loss. The unemployment rate might rise above
6% by then, and possibly peak at 7% next spring. Many corporate business
strategists are reassessing the plans they formulated during the boom of the
late 1990s, and they are concluding that their companies over-invested and
over-hired. This explains why the capital spending recession has been so
severe all year. Now the layoffs are beginning to mount too.
This raises an important question: How long can businesses attract consumers
by cutting prices, and at the same time attempt to offset the negative
impact on their profits by firing workers? I suspect the answer may be "not
much longer." The stock market's bullish visionaries apparently have the
power to see well beyond any such difficulties ahead.
The fact is that the stock market is already discounting happier times. I
don't disagree with an upbeat outlook for next year, especially by the
second half of the year. However, I do think that this means that the upside
for the market is rather limited from current levels. The flood of liquidity
provided by the Federal Reserve both before and after the attacks could
prove me too conservative. I am more inclined to believe that the liquidity
might help to limit the downside for the stock market should the profits
recession worsen or should there be another shocking terrorist event.
I see a flat, but volatile, scenario for the stock market through mid-2002.
The Dow Jones Industrials Average first rose above 10000 during March 1999.
It could soon do so again for the fourth time. However, a move to new highs
is unlikely until late next year. I do believe the September 21 low was "the
bottom" for this cycle. One of the best times to buy stocks is during
crises, when panic selling occurs. The crises usually trigger corrective
policy responses, which prove the doomsayers wrong. So they present great
buying opportunities for bargain hunters.
So how do we make money in a flat stock market? Obviously, momentum
investing is dead, at least on the long side of the market. Of course, there
has been lots of momentum on the short side, especially among technology
stocks since March of last year. For example, one widely followed index of
semiconductor stock prices is down 65% since early 2000. However, there have
been five rallies averaging 35% gains since then. Nevertheless, catching
these swings is too risky, and likely to be unrewarding. I am not worried
about missing the next huge move up in semiconductor stocks. They sport an
irrationally exuberant 2002 price-to-earnings ratio of 70 currently, while
industry analysts now project only a 10% rise in earnings next year to the
1993 level!
There are opportunities in technology. I would focus on software and
services companies, as well as companies likely to profit from the
increasing commoditization of high-tech equipment and components. While the
PC is certainly becoming a commodity, the PC troika (Dell, Intel, and
Microsoft) is likely to benefit from this trend. The wireless troika (Nokia,
Motorola, and Ericsson) is likely to profit by selling more infrastructure
systems as next-generation handsets become commoditized too. The database
troika (IBM, Oracle, and EDS) should benefit from more spending by the
private sector on backup systems and by the government on national security
systems.
There are also opportunities in consumer-related stocks despite my concerns
about the outlook for employment. Even if the jobless rate rises to 7%, this
still leaves 93% of the labor force employed and enjoying low mortgage
interest rates. Many Americans are responding to the new terrorism in the
United States by staying closer to home. This scenario favors homebuilders
and mortgage lenders, including the quasi-government duopoly of Fannie Mae
and Freddie Mac.
Fears of another terrorist attack are diminishing now that Congress has
provided law enforcement officials with greater powers to monitor, to
detain, and to arrest suspects. Nevertheless, the anthrax mailings are
unsettling and certainly increase the possibility of much more deadly
scenarios. The geopolitical consequences of US military actions against the
Taliban and Al-Queda are unpredictable. Yet, for now, both shoppers and
investors seem to agree with President Bush that we have nothing to fear but
fear itself.
Dr Ed |
