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Non-Tech : Berkshire Hathaway Class B -- Ignore unavailable to you. Want to Upgrade?

To: jhg_in_kc who wrote (870)	7/31/1999 1:43:00 PM
From: Michael & B.Anne	Respond to of 1652

As way of response following is article from "the dismal science" -- IMO best of economic overview web sites dismal.com regards Past is Not Prologue for Stocks Analysis by Mark M. Zandi Written July 30, 1999 Nothing has been more rewarding in recent years than to be a stock investor. An investor who had put $10,000 into an S&P 500 index fund five years ago and did nothing else, would find approximately $30,000 there today. This translates into a 25% annualized return, and a 22% return after accounting for inflation. The outlook for stock investing is much less sanguine. Driving stock values higher has been a combination of quickly expanding corporate profits, falling interest rates and voracious demand for U.S. assets by foreign investors. Prospects are for much more weakly growing profits, more monetary tightening and less aggressive foreign buyers. Investors have been cheered by the seemingly strong 2nd quarter corporate earnings reports. When totaled up, year-over-year profit gains for S&P 500 companies will be well into the double-digits. But last year this time was a particularly difficult one for U.S. companies. The global economic and financial crisis was coming to a head and the combination of reeling foreign economies and a surging dollar undermined profitability. Corporate restructurings and the usual associated writedowns were also at a fever pitch. Recall that S&P 500 profits fell over 5% in 1998 on top of only a 2.5% gain the year before. While 3rd quarter earnings will also show a sizable gain over last year's depressed numbers, this will be the best earnings news for sometime. Not only is the economy slowing and destined to slow further, thus resulting in slower growth in business sales, but profit margins will weaken due to more quickly rising labor costs and higher interest expenses. Yesterday's employment cost report, which showed a surge in labor compensation growth in the 2nd quarter, was not an aberration; the weak 1st quarter gain was. Businesses must raise compensation more quickly to simply hold on to their current workforce, let alone attract new workers. More monetary tightening is also on the way. Economic growth is decelerating, but not enough to satisfy policymakers at the Federal Reserve Board. The economy grew at over a 6% annualized pace in the 4th quarter of last year, over 4% during the 1st quarter of this year and just over 2% during the 2nd quarter. The 2% gain in the second quarter overstates the slowdown, however, given that growth would have been well over 3% in the quarter if not for much weaker inventory investment. Given the already record low inventory-to-sales ratios, it is unlikely that businesses are looking to reduce their inventories relative to sales. As such, businesses are assuredly going to be building them aggressively in coming months, particularly given the disruptions businesses likely fear will result from Y2K. The Fed is targeting sustained growth of 3% or less. The economy is not there yet. Moreover, it is unlikely that the economy will cool sufficiently until the stock market does. The economy's growth is being fueled by a torrent of consumer outlays, which in turn are being prompted by surging stock values. Thus, in a very real way, when the Federal Reserve says it is working toward a slower growing economy it is working to rein in the stock market. The appetite of foreign investors for U.S. assets is also likely to fade as their own economies and markets rebound. Overseas economies from Asia to South America to Europe are on the mend. Industrial production is now even rising in Japan. Foreign financial markets reflect the current and expected further improvement in these economies. While there are sure to be times when global fears rise and investors rush to the safety of U.S. assets, these times are growing fewer and farther in between. Foreign capital inflows to the U.S. will weaken in coming months. The outlook also appears somewhat foreboding for those stock investors who derive some value looking at charts (see Chart). Of course, last year's late summer plunge in stock prices was precipitated by a worldwide financial panic which will not likely be repeated again, at least not this year. But also unlike last year, the Federal Reserve will not be ready and willing to bail out a stock market that may sell off for any of a number of other reasons. After five years of meteoric gains, stock investors should be prepared for something substantially less in the next five.