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Pastimes : The New Qualcomm - write what you like thread. -- Ignore unavailable to you. Want to Upgrade?

To: SpudFarmer who wrote (1523)	3/8/2000 9:01:00 AM
From: Sawtooth	Read Replies (1) \| Respond to of 12231

Thought you might enjoy this early morning take on P&G, inflation/productivity, and interest rates from Dr. Ed Yardeni (www.yardeni.com), as it relates well to your post. "Tuesday evening, March 7, 2000 SOME THOUGHTS ON TODAY'S SELL OFF P&G's profit warning and stock sell off was a watershed event. Apparently, consumers are no longer willing to pay a premium for brand names. Investors are no longer willing to pay premium prices for brand name companies. There is simply too much competition in the consumer staples business. Many of the most popular discount department stores, like Wal-Mart, have store brands that are cutting into the market share of long-established brand products. The more general conclusion is that there are only two kinds of products and services: 1) Commodities produced by old economy companies in very competitive markets. They can't raise prices. They must struggle to offset deflationary pressures with measures aimed at cutting costs and boosting productivity. Profit margins are relatively narrow and under pressure. 2) Innovations produced by new economy companies. Their markets are also very competitive. But they are very profitable because they are constantly bringing new products and services to the market. Profit margins are relatively high for innovations because, by definition they are proprietary. But not for long since competitors are scrambling to offer similar products and services or even better alternatives. P&G blamed rising raw materials costs for the profits problem. Some observers say this proves that the global economic boom is reviving inflation. I say, they are right about some nonlabor input prices, but wrong about output prices. If you can't cut your controllable costs and boost your productivity enough to offset increasing raw materials costs, your profits will suffer. Period. In competitive markets, you can't raise prices. The surest way to be profitable is to innovate. But that's hard to do for consumer staple companies. The new economy can be identified as the group of companies that are innovators. They include mostly technology, telecom, broadcast media, and entertainment businesses. Even these companies are under enormous pressure to innovate often as the time it takes for an innovation to become a commodity gets shorter and shorter. On the other hand, these new economy businesses use input commodities that are mostly free including sand, water, and air. The human resources employed by the new economy tend to be more creative and productive than in the old economy. They are also less risk averse, and more willing to be paid in stock options. Is there a future for the old economy? If there isn't a very happy one, can the new economy continue to flourish? Great questions with no easy answers. I expect a wave of global consolidations in old economy industries. While their profits growth may remain relatively unimpressive compared to the new economy crowd's actual and expected earnings growth, they'll have no choice but to spend on technology to boost their productivity. The Fed's monetary policy is widening the gulf between the old and new economies. Old economy companies are squeezed by higher debt financing costs, while the new crowd either has lots of cash or can raise plenty in the equity market. Highly-valued new economy companies use their stock price as a powerful competitive tool to acquire smaller competitors or expand into related businesses. Tighter monetary policy seems to be accelerating the flow of financial and human capital out of the old economy into the new economy. Of course, if stock prices continue to weaken, led by the old economy stocks, the Fed is less likely to raise rates after it does so by 25 basis points at the March 21 meeting of the FOMC. Finally, it is very bizarre to see the Fed's chairman promoting the perverse notion that strong productivity growth may have inflationary consequences, as he did again on Monday. On Tuesday, the fourth quarter productivity data was revised significantly higher to 6.4%. How can this possibly be bad news? Dr. Ed"