Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Market Gems:Stocks w/Strong Earnings and High Tech. Rank -- Ignore unavailable to you. Want to Upgrade?

To: AnnieO who wrote (98536)	5/19/2000 2:18:00 PM
From: puborectalis	Read Replies (1) \| Respond to of 120523

worldlyinvestor.com Wake-Up Call Higher Cost of Money Will Hurt By David H. Smith, Columnist The market may have ended the day in rally mode after the Fed rate hike, but we'll feel it soon. OK, the Fed raised rates by a half point, in line with expectations. Stocks had been rallying before, and after only a brief pause they resumed the rally. This was predictable and a little perverse. Predictable because, well, we predicted it, believing that shorts would cover some and longs would add some to celebrate the fact that the Fed news was no worse than expected. But perverse, because rates do matter. The Fed does not raise rates because it is fond of the dramatic gesture. It raises rates to influence behavior. It wants individual Americans to moderate their purchases of vehicles, homes and other durable goods, and yes, stocks. It wants the cost of money to cut a little deeper with businesses that are probably over-investing in capital goods at the margin. Rate Hike Creeps In Economies are dynamic systems. Raising the cost of money, that key input, cuts the demand for the goods that money buys. Tighter money means Toyota (NYSE:TM - news) and General Motors (NYSE:GM - news) sell fewer cars and trucks, Harley Davidson (NYSE:HDI - news) fewer cycles, Toll Brothers (NYSE:TOL - news) fewer new homes, and Sun Microsystems (Nasdaq:SUNW - news) and Hewlett Packard (NYSE:HWP - news) fewer servers. But my little girl still wants to eat at Burger King, a unit of Diageo (NYSE:DEO - news). And after I take her there, I still need to take my Lipitor, produced by Warner Lamber (NYSE:WLA - news) and distributed by Pfizer (NYSE:PFE - news). As long as my clients don't go broke, I still need to shave with Gillete's (NYSE:G - news) products and put on my city togs from Marks and Spencer's (OTC:MASPY - news) Brooks Brothers unit, though I may buy fewer suits as the interest rate on my Capital One (NYSE:COF - news) Visa card rises. I hope this illustrates why rising rates make us flee from producers of capital goods and hide out in the foods, drugs, and other consumer staples. Let's review why interest rates matter, no matter what highly paid market strategists on Park Avenue think. The Cost of Money First, stocks are not betting slips, but shares in businesses, and businesses typically are net borrowers of money. A rising cost of money increases the costs of business directly. Second, businesses sell goods and services to customers who are also impacted by the rising cost of money. Those customers buy less, impacting business revenues directly. Third, the interest rate affects the rate at which investors discount future earnings. A higher discount rate means a lower present value. That is just mathematics. Fourth, bonds compete with stocks for the affection of investors. When bonds yielded 5%, the competition was soft -- after all, a decent tech stock like Sycamore (Nasdaq:SCMR - news) or Broadvision (Nasdaq:BVSN - news) can rise 5% on a pretty normal day. But when bonds yield 7%, that's a different proposition, especially since investors have begun to learn that Sycamore and Broadvision can lose value as well as gain it. A More Sobering Day The indications are that today will be a day of sobering up and consolidating the gains that bracketed the Fed meeting. Lower index futures portend a quick drop at 9:30. Asian markets were mixed. Taiwan was very strong, but there was notable weakness in Hong Kong, with its monetary policy linked inextricably to ours. Telecom stocks were particularly poor performers in the Pacific rim, with Telstra (NYSE:TLS - news), Cable & Wireless Optus and ChinaTel (NYSE:CHL - news) losing heavily. Europe is pretty much all red, with better relative performance from technology challenged markets such as Austria, Belgium, Denmark, the Netherlands and Switzerland. Again, the index damage is concentrated in telecoms -- it is a poor day for Royal KPN (NYSE:KPN - news), Deutsche Telekom (NYSE:DT - news), British Telecom (NYSE:BTY - news) and Telefonica (NYSE:TEF - news), but a day of recovery for Cable & Wireless PLC (NYSE:CWP - news).