Here was a interesting news letter. Sure doesn't fit todays action
Subject:Weekend Review of Markets and Upcoming Week - Trouble Coming
Date:Sun, 21 Feb 1999 23:33:56 -0500
From:"Agora International Enterprises Corp." <spectra@interlog.com>
To:(Recipient list suppressed)
Bulletin # FEB99-13
ONCE YOU'VE READ THE HEADLINES, COME TO AGORA FOR THE NEWS
Good evening to you all. Please find enclosed our weekend review of the markets and the upcoming week. Based on the data we have seen this past week, we believe this is our most important review to date and would ask all readers to carefully review our comments and supporting data. We would also encourage any feedback from readers who may have questions and/or comments. Some specifics discussed inside:
1] Trade Deficit Sets Another Record and Serves Investors Fair Warning
2] Deflation Worries Return With Latest Consumer Price Index Reports
3] More Y2K Problems Plummet More Companies
GENERAL DATA - MARKETS PERFORMANCE
PAST WEEK YEAR-TO-DATE
S&P/TSE 60 ---- 0.0% 0.00%
TSE 300 Dn 0.4% Dn 1.2%
DOW Up 0.7% Up 1.7%
S&P 500 Up 0.7% Up 0.8%
NASDAQ Dn 1.8% Up 4.1%
GOLD Dn 0.3% Up 0.5%
TED Spread 63.00 points
GENERAL COMMENTARY - MARKETS PERFORMANCE - DEFLATION
FEARS ARE BACK
Contrary to last week, this past week saw the release of some very important economic indicators. First, the US Commerce Department. reported 1998 trade deficit figures surged to an all-time high. The trade numbers, measuring total exports less total exports, showed the US continued to import far more product than it exported in 1998, to the tune of $US 170 Billion. This was 53% higher than 1997 figures and broke the previous record set in 1997. More importantly, 1998 also brought the first actual decline of US exports in 13 years, which
breaks their established track record of continually increasing exports while simultaneously increasing imports at a faster rate.
Second, the US Labor Department. reported The Consumer Price Index rose only 0.1% in January, thus reassuring investors that inflation remained under control.
In Canada, inflation for January was reported at it's lowest levels since 1962 - 0.6%. More importantly, were it not for a cheap Canadian dollar making imports more expensive, analysts stated prices would have actually FALLEN for the first time since 1955. This has several
economists worried that deflation is just around the corner and calling for the Bank of Canada to decrease interest rates. A decrease in rates would encourage further spending by both consumers and business, thus increasing prices and avoiding the effects of deflation.
With respect to Y2K effects on the share price of several tech companies, we reported the following two weeks ago:
"Y2K concerns have now become reality and have commenced their attack on the share price of public companies. The list includes JetForm, Data Mirror and People Soft - all of whom reported extremely weak software sales due to customer concern for Y2K issues."
We can now add GEAC Computer Corp., JD Edwards & Co. and German software giant SAP to that list. Geac shares fell 29% on Monday after issuing a warning that Y2K worries severely effected revenues and profits for the quarter ended January 31. JD Edwards saw it's
stock price fall 30% when it reported software sales were down due to Y2K, while SAP has now lost 50% of it's value since last summer for the same reason.
OUR COMMENTS - TRADE DEFICIT, DEFLATION OR Y2K? MARKETS
WILL FALL EITHER WAY.
1] The Trade Deficit
The latest trade deficit figures should come as no surprise to AGORA readers. For months we have been pounding the table that such "extremes can not hold". In this instance, the US consumer continues to drive the world economic engine by spending more than 100% of their
after-tax income. As such, troubled economies have been able to stay afloat by exporting massive amounts of goods to the US and at extremely cheap prices due to very weak currencies around the world. In the short term, combined with the greatest bull market of this
century, such an environment provided US consumers with the enviable position of unlimited purchase of cheap goods while they continued to increase their overall wealth via the stock market.
However, as we have stated since early 1998, the long-term effect of such an environment will prove disastrous to the US and global economy. Unfortunately, such effects generally lag behind the effects of cheap imports and only begin to surface months later. Specifically, we outlined the following reasons:
a) The state of global economic weakness created an environment in which most countries were unable to continue import levels, especially in goods from the US which are priced in expensive US dollars. On the other hand, cheap currencies in Asia, Russia and South America created an environment in which goods could be cheaply exported to the US. The
inevitable result was going to be a severely unbalanced trading environment.
ba) The flood of cheap imports would cripple the sales and profits of US manufacturers who were now unable to compete on price. This would be true of both domestic and global sales.
b) US manufacturers unable to compete neither domestically, nor internationally, would be forced to cut costs through layoffs and reduced capital spending. Inevitably, this would cause a slowdown in the US economy, consumer spending and the economies of nations who were dependant on massive exporting of goods to the US.
Where are we today? On this past Wednesday, The Commerce Department announced that US manufacturing remained unchanged in January, which followed a very sluggish 1998. The Federal Reserve said this reflects reduced US exports due to global economic weakness and the flood of cheap imports into the United States. Currently, US industry is operating at it's lowest capacity in six years (80.5%), which is low enough to be able to increase capacity without incurring inflation for some time.
Furthermore, analysts now believe this weakness will eventually find it's way into the whole US economy, thereby slowing growth.
2] Deflation
The global economy has been struggling with the possibility of deflation since August of 1997, though Alan Greenspan and company only publicly disclosed their concerns in November of 1997. Deflation was a key element of The Great Depression and economists now worry that
deflation could lead the economy into another downward spiral. The latest inflation numbers out of Canada have led to increased worries and calls for lower interest rates.
Specifically, with prices now showing very little tendency to move upwards, consumers and business may tend to delay purchases in anticipation of possible lower prices. The delay in consumption leads to a slowdown in manufacturing, which then begins the deflationary spiral of falling asset prices. On the surface, one might think this is a good thing, however, deflationary spirals like the one of the 1930's can turn disastrous when asset prices begin falling below associated debt levels. To illustrate, imagine a situation where the price of your home falls below the value of the mortgage on the house. Herein lies the evil of deflation. That is, as asset prices fall, debt levels do not.
Are we in danger of deflation? In Canada, a country heavily dependant on commodities, the latest numbers clearly indicate it is a cause for concern and immediate attention. However, the bigger question is whether this is a concern in the United States. After all, the US is now the undeniable engine behind the world economy and the ultimate dictator of it's direction.
Currently, there does not appear to be any immediate urgency. However, the continued pounding of cheap imports will inevitably lead to a slowdown in the US, which will lead to a slowdown of those economies so dependant on the US and the possible collapse of the global economy.
Thus, we are now in a race against time. Quite simply, the economies of Asia, Russia and South America must sufficiently recover and diminish their dependance of exports to the US BEFORE the US economy grinds to it's inevitable slowdown. Otherwise, there will be nobody left to absorb global production and prices will undoubtedly begin a deflationary spiral.
3] Y2K
Adding to our concerns over the current global economic climate is the Y2K issue. It is important to state from the outset that neither AGORA, nor anyone else can accurately forecast the possible effects of Y2K. However, we can reasonably assume, based on the earlier information presented by technology companies, that a significant global slowdown in the development and purchase of technology as most companies, both big and small, commit resources to becoming "Y2K ready".
Moreover and perhaps most importantly, we can also reasonably assume the level of uncertainty brought on by Y2K will lead to some level of profit taking in North American markets as investors become much more defensive about their wealth. Specifically, baby-boomers have been primarily responsible for market appreciation to date and we anticipate they will be responsible for at least some market depreciation as we approach the year 2000. For further evidence and support of this matter, look no further than the low level of mutual fund contributions over the last few months.
In Canada, mutual fund sales are were down 30% in January and this number climbs to over 50% when you do not include the funds which were placed directly into money market funds. Remember, money market funds do not find their way into equity markets and are nothing more than tax-sheltered interest bearing accounts. We fully anticipate this trend to continue throughout the year.
GENERAL STRATEGY
We continue to remain very defensive in these markets. Quite simply, we do not like what we are seeing. The great levels of uncertainty relating to general global economic health and the Y2K issue means investors can expect, at the very least, great volatility for the remainder of the year.
For our part, we anticipate no better than sideways movement in global equity markets and most likely a downward trend.
We hope you all had a great weekend and look forward to our next bulletin.
Regards, Agora
agoracorp.com
The Agora Wire. Published by Agora International Enterprises Corp. |
