"To me, the key driver of the market is going to be earnings growth. "
thestreet.com
Goldman Sachs' Abby Cohen is Wall Street's resident guru and DLJ's Thomas Galvin is the financial media's latest favorite. But market professionals know Lehman Brothers' chief investment strategist Jeffrey Applegate deserves at least as much praise for the simple reason that he's been uncannily right about the market for several years running.
Applegate has consistently ranked among the top stock pickers on Wall Street in recent years thanks to his consistent bullishness on technology stocks. He has been optimistic about the sector since he became Lehman's chief strategist in 1995, and hasn't deviated from that view since.
Having gone through the financial version of hell and back this past spring with the group, Applegate thinks the road ahead is a lot smoother. He is bullish overall, but technology remains his favorite, thanks to a belief in the sector's continued growth prospects and ability to positively affect everything from productivity to profit margins.
In our conversation with him, Applegate used history as a guide to put April's frightful market action in perspective, noting the market has had a habit of hitting a low and then rebounding in advance of the final Fed tightening. Recent action seems to fit that pattern, given that the Fed last tightened on May 16, while the 10-year bond hit its nadir on April 10 and the S&P 500 on April 14.
But whereas a prior model exists for observing the relationship between financial markets and central bank cycles, the so-called New Economy is uncharted territory, he admits. Just a few years ago, for instance, it would have been difficult to imagine a company such as Razorfish (RAZF:Nasdaq - news), or a business model along the lines of priceline.com's (PCLN:Nasdaq - news), Applegate concedes.
Similarly, new divisions such as fiber optics now account for a substantial portion of revenues at more-established tech companies, such as Cisco (CSCO:Nasdaq - news). He may not know what technologies will emerge next, but Applegate is confident industry leaders will rapidly adapt to the changes, and that new bellwethers will emerge.
Calling the latest business cycle "extraordinary," Applegate thinks we are in the same bull market that started in late 1990. Of course, there will be "risks and bumps" along the way, he says, but going forward 12 months, stocks should do better than other asset classes.
Critics might charge that Applegate will playing the same old note, but those who've followed his advice in recent years have heard the sweet sound of the cash register ringing, over and over again.
Participating in the chat were Aaron Task, Eileen Kinsella and Justin Lahart.
Disclosure: Both Applegate's portfolios -- the U.S. Strategy Portfolio and the Virtual Economy Portfolio -- are also Lehman Brothers Asset Management products. In short, Lehman is long these stocks.
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TSC: To start with, what's your synopsis of what's going on with the market? What do you think is going to happen?
Jeff Applegate: We're still bullish. We think the correction is behind us. The house view is that the Fed isn't entirely out of the picture: We're still looking for the Fed to go another quarter-point -- not at the June meeting, but the August one. Obviously, it's highly dependent on what kind of data we get between now and then. It looks to us like the second quarter is probably below 4% in terms of local GDP, which we think puts things below potential. That should take some of the heat off the Fed.
Obviously, we have a fair amount of evidence now of a slowdown. Decent CPI, PPI and Greenspan's pretty market-friendly commentary on productivity. Obviously he's been on that for some time, but he keeps on extending his argument. I guess what I found interesting about this set of comments was that where 18, 24 months ago he was fretting, "Well, we've had this acceleration in productivity and how long will it last?" now it's, "Well, we've made a structural change here and it looks like this can persist for a long time." That has enormous implications for how fast the economy can grow, what that means for inflation, what that means for profit margins. And profitability can improve even though you don't have any significant pricing power.
In a cyclical sense, we do think the worst of the correction is behind us and it's entirely conceivable that the Fed is done. If you look at the history, and if you look at prior periods during extended business cycles when the Fed has been tightening to slow, but not stop GDP [not create a recession], there were two examples in the '60s ('62 and '64), two in the '80s ('84 and '87) and now one in the '90s ('94-'95). If you look at history, because markets are discount mechanisms, both the stock and the bond market tend to trough and begin to rebound in advance of the final Fed tightening. On average, it's about four to five weeks in advance, and that's been the pattern over decades. It's entirely conceivable that the final tightening was May 16, and the trough in the bond market was April 10, and the trough in the stock market was April 14.
If you look what the stock market does forward 12 months from that trough, historically the forward 12-month return has been very good -- in excess of 30%. If you look at where we are at the moment from April 14, the S&P is up about 9%. I think the markets are in the process of reprising what they've done a whole bunch of times. We still think we're in the same bull market that got under way in October 1990.
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"The key driver of the market is going to be earnings growth."
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TSC: In terms of a repeat of the '94-'95 scenario, what do you say to the idea that part of what got the market further was the fact that bond yields fell about 200 basis points after the Fed was done tightening? They're pretty low now and there probably isn't that much room for them to fall further. Do you need to see much lower bond yields to get the stock market reaccelerated?
Jeff Applegate: No. We've got forecasts that earnings growth is going to be double-digit. We've got it slowing, sequentially, because we've got global GDP slowing. So we've got earnings growth going from about 20% in the first quarter to about 16% this quarter, then 14%, then 15%. But it's still double-digit earnings growth. And next year we have inflation down-ticking a bit. That ought to buy you a little multiple expansion -- I don't think much, but a little.
To me, the key driver of the market is going to be earnings growth.
TSC: Is that concentrated in any sector?
Jeff Applegate: It's pretty pervasive. We've had a very bullish view on profit-margin expansion. At the moment, we're sitting around with a forecast that next year after-tax profit margins are going to get higher than they've ever been before. And if you look at where we are in that pattern, because we now have the data from the first quarter, profit margins increased by another 20 basis points. At the end of the first quarter, after-tax margins are up to 6.8%, which is the highest in half a century. We've basically got a view that companies can deliver consistently above top line, because margins are expanding. We relate that to two things: globalism and technology, and the impact of both those things on productivity.
All things being equal, if the Fed's either on hold or close to being on hold, that should be OK for the stock market. You've got a few bumps in inflation, just because of what energy just did, but with some disinflation next year and double-digit earnings growth, and productivity that, if anything, looks like it's accelerating -- that ought to be fairly decent for the stock market.
TSC: Could you talk about why you don't see great risk to what's going on with energy prices right now?
Jeff Applegate: I think part of it is just going to be a slowdown here. I think the other part is you get to a point where OPEC doesn't want alternative sources of energy coming on stream. We're at that level now. Plus, the outlook we have for global growth is OK, but it's not wildly robust. We've got Europe growing around 3%, us decelerating to below 4%. But we've still got Japan, which is the second-biggest economy on the planet, bumping along the bottom at 1%. We've got global growth around 3%. That's better than it was, but still not wildly robust. Certainly in the futures market and the spot market, you probably have some more upside on energy prices, just because you tend to overshoot on the way up just like you tend to overshoot on the way down.
TSC: You're still overweight capital goods, communications and technology. Even the groups that aren't technology per se, like communications services -- you have Nextel (NXTL:Nasdaq - news) -- those are companies that are definitely using technology like no other companies are.
Jeff Applegate: And if you look at the capital goods names -- Flextronics (FLEX:Nasdaq - news), Jabil Circuit (JBL:NYSE - news), Solectron (SLR:NYSE - news) -- those are the guys who make all the stuff that Cisco, etc., don't make.
The tech thesis is really pretty simple. It's also pretty compelling. We've been overweight tech since the summer of '93, and at the time tech was 7% of the S&P. We put in place a weight of 12%. Today, tech is about 32% of the S&P, and our weight is in excess of 50%. The ratio in the portfolio is about the same as it was seven years ago. Obviously the absolutes are much higher, because the tech weighting is much higher.
The thing that originally got us there seven years ago was simply observing what was going on with capital goods as compared to the cost of labor. If you go back about seven years, capital goods prices in the U.S. were rising by about zero, and labor costs, as measured by the Employment Cost Index, were rising by a little over 4%. Just looking at those economics, we came around to a view where it looks like we've got in place the economics for a pretty robust capital-for-labor substitution process. That should mean on the corporate side that demand for technological products ought to be fairly consistently good, possibly for an extended period, because if you go back earlier in this business cycle, about 30% of cap-ex was on tech.
Fast forward to where we are today.
Overall capital goods prices are now falling by 2% a year, and labor costs are rising in excess of 4%. So the spread between these variables is now about 6% -- it's actually wider than it was earlier on in this business cycle. We would submit that the bunch of conclusions we came to seven years ago are still valid. The economics driving the capital-goods-for-labor substitution process is still intact. That should mean that workers will continue to get better tools on a recurring basis, so that will be pretty good for productivity. Since your increasing capital spending is generally faster than GDP, prospects remain good for a long business cycle -- because you're increasing capacity as you move through the cycle. This is the best capacity creating cycle that we've had -- you can't find one better than this. A corollary to that is pricing power. Since you're increasing capacity, companies don't have a lot of pricing power, but productivity ought to be good because of tech. What's chiefly different today, versus seven years ago, is that 60% of cap-ex is tech, not 30%.
I'm not an economist, but when I look at the economics, I have a very difficult time dismantling the deflation in capital goods. The reason you've got this deflation is the world of semiconductors that we live in, and the big debate in tech-land these days is not whether Moore's law is intact, but whether it's accelerating. If you look at labor cost in the U.S. -- given that unemployment is bumping around 4% -- I think it's tough to make a forecast that labor costs are going to start falling a significant amount.
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"In all the rich countries on the planet, capital goods prices are low or falling, and labor costs are fairly high."
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Moreover, this phenomenon is not just a U.S. phenomenon, it's a rich-country phenomenon. In all the rich countries on the planet, capital goods prices are low or falling, and labor costs are fairly high. Relate that back to tech. For the S&P tech sector, 48% of sales are from outside of the U.S.
And then of course you have the Internet. Obviously, we couldn't foresee that in the summer of '93, nobody could, but that's a pretty interesting metric.
No question we've got a big weight in tech, it's a highly concentrated portfolio. But we still think that's the way to go. These are the growth stocks of our era.
TSC: You also have the Virtual Economy Portfolio. I guess you put that together, what, a half-year ago?
Jeff Applegate: Yes, last fall. This is the all-tech, all-the-time portfolio. This is highly risky, and designed as such. But it's hopefully a way to have a more direct, albeit riskier call, on the very robust growth of the virtual economy.
Virtual Economy Portfolio
Name Dow Jones Internet Index Weighting Lehman Brothers Weighting
Overweight
Infrastructure 17% 51%
Brocade Communications (BRCD:Nasdaq - news)
Broadcom (BRCM:Nasdaq - news)
Cisco (CSCO:Nasdaq - news)
EMC (EMC:NYSE - news)
Intel (INTC:NYSE - news)
JDS Uniphase (JDSU:Nasdaq - news)
Juniper Networks (JNPR:Nasdaq - news)
Lucent (LU:NYSE - news)
Nextlink Communications (NXLK:Nasdaq - news)
Qwest Communications (Q:NYSE - news)
Redback Networks (RBAK:Nasdaq - news)
Sun Microsystems (SUNW:Nasdaq - news)
Underweight
Applications & Services 46% 32%
Broadvision (BVSN:Nasdaq - news)
Critical Path (CPTH:Nasdaq - news)
Exodus (EXDS:Nasdaq - news)
Infospace (INSP:Nasdaq - news)
Liberate Technologies (LBRT:Nasdaq - news)
Microsoft (MSFT:Nasdaq - news)
Phone Com (PHCM:Nasdaq - news)
Razorfish (RAZF:Nasdaq - news)
RealNetworks (RNWK:Nasdaq - news)
Scient (SCNT:Nasdaq - news)
Siebel (SEBL:Nasdaq - news)
Verisign (VRSN:Nasdaq - news)
Intermediary 18% 9%
Ariba (ARBA:Nasdaq - news)
CMGI (CMGI:Nasdaq - news)
Commerce One (CMRC:Nasdaq - news)
Internet Capital Group (ICGE:Nasdaq - news)
VerticalNet (VERT:Nasdaq - news)
E-Commerce 19% 6%
America Online (AOL:NYSE - news)
Priceline.Com (PCLN:Nasdaq - news)
Yahoo! (YHOO:Nasdaq - news)
Source: Lehman Brothers
table 2 U.S. Strategy Portfolio
Name S&P 500 Weighting Lehman Brothers Weighting
Overweight
Capital Goods 8% 9%
Flextronics (FLEX:Nasdaq - news)
Jabil Circuit (JBL:NYSE - news)
Solectron (SLR:NYSE - news)
Communication Services 7% 16%
McLeod Communications (MCLD:Nasdaq - news)
Nextlink Communications (NXLK:Nasdaq - news)
Primus Telecom (PRTL:Nasdaq - news)
Qwest (Q:NYSE - news)
Sprint (FON:NYSE - news)
Vodafone AirTouch (VOD:NYSE ADR - news)
VoiceStream (VSTR:Nasdaq - news)
Technology 32% 54%
America Online (AOL:NYSE - news)
Applied Materials (AMAT:Nasdaq - news)
Cisco (CSCO:Nasdaq - news)
Comverse (CMVT:NYSE - news)
EMC (EMC:NYSE - news)
Intel (INTC:Nasdaq - news)
JDS Unifphase (JDSU:Nasdaq - news)
Lucent (LU:NYSE - news)
Microsoft (MSFT:Nasdaq - news)
Oracle (ORCL:Nasdaq - news)
Siebel Systems (SEBL:Nasdaq - news)
Sun Microsystems (SUNW:Nasdaq - news)
Yahoo! (YHOO:Nasdaq - news)
Market Weight
Energy 6% 6%
Calpine (CPN:NYSE - news)
Dynegy (DYN:NYSE - news)
Underweight
Basic Materials 2% 0%
Consumer Cyclicals 7% 3%
Home Depot (HD:NYSE - news)
Tiffany (HD:NYSE - news)
Consumer Staples 10% 3%
Clear Channel Communications (CCU:NYSE - news)
Financials 14% 6%
Citigroup (C:NYSE - news)
Morgan Stanley Dean Witter (MWD:NYSE - news)
State Street (STT:NYSE - news)
Health Care 11% 4%
Pfizer (PFE:NYSE - news)
Transportation 1% 0%
Utilities 2% 0%
Source: Lehman Brothers
This portfolio actually posed some interesting challenges. We wanted to come up with a weighting scheme much as we weight the other portfolio versus the S&P, so we had to choose an index to weight it against. We chose the Dow Jones Internet Index because it's cap-weighted.
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"The strategy at work here is basically a view that the e-commerce space is, one, hugely crowded, and two, full of a bunch of flawed business models."
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Then we had to come up with some kind of weighting scheme. If you think about cyberspace at the moment, it's a work in progress. You really don't have identifiable economic sectors -- you will, but I don't think we're there yet. So what we adopted was this architecture -- infrastructure, application, intermediary, e-commerce. Then we said, OK, within the Dow Jones Internet Index, let's see how much of that index is represented by those layers, and then how do we want to weight the portfolio. Infrastructure is roughly a fifth of the Dow Jones Internet Index, but it's half our portfolio. We're hugely overweight there. By contrast, e-commerce represents over a quarter of the Dow Jones Internet Index, but it's only 7% of ours.
The strategy at work here is basically a view that the e-commerce space is, one, hugely crowded, and two, full of a bunch of flawed business models. A lot of shareholder equity is going to go to zero, because not all these guys are going to make it. So we tried to identify the companies that are successfully involved in building this new global utility we call the Internet.
This portfolio has certainly had its bumps. If you look at the performance year-to-date, and this was through June 7, the portfolio on an absolute basis is down 6%, versus the Internet index, down 25%. So it's doing better than the index, which is great. Nonetheless, when you're down in an absolute sense, clients don't want to know about relative return. You're just down.
TSC: That leads to a question. You've been bullish on tech since 1993, you remained bullish through the winter and spring when things got pretty rough. What was the response from your clients? And, looking back, would you have done it all the same if you had a chance to do it over again?
Jeff Applegate: I would have done it the same. I long ago demonstrated to myself that I have zero talent in terms of sector rotating. I'm crappy at it. If you think about tech, tech is a highly volatile sector. You've got short product cycles, leadership changes. If you look at S&P tech versus the S&P 500, it really started significantly outperforming in something like the first quarter of 1993. But since that time you've had huge swings in relative underperformance. It's been a little bit more than an annual event. What we've decided is that as long as we keep revisiting the fundamentals -- cap-for-labor, what's going on with the Internet -- we're not going to try to sector-rotate around stuff.
On our own metrics, trying to look at valuation for tech, it was pretty clear to us by the middle of January that tech had passed through fair value and was on its way to getting overvalued. And then by early March it was overvalued, no question. And I remember sitting around with our group here, saying, We've seen this movie, we know what the next frame is, but we're not going to do anything. So we rode the whole thing down to the trough, and that was hugely painful, and we had a huge swing in relative performance in the portfolio. We were 10% ahead of the market through March and then we were 10% behind the market by the middle of April.
TSC: At a point like that, when you're heading into March and can see what the next frame is, do you take any kind of defensive measure?
Jeff Applegate: I don't try to. Again, because that to me is saying you think you know how to sector-rotate, and you can time the point when you want to sell Cisco and buy Duke (DUK:NYSE - news). To me, that's too short-term a call.
If you think about "the market," you spend about a nanosecond at fair value on your way to a different value. You're either undervalued or you're overvalued. So when you get these huge swings in relative performance, much as you overshot on the upside, you're going to overshoot on the downside. Which is what I think happened.
The way I think about performance for both of these portfolios -- both of which are also asset-management products for Lehman Brothers -- it's not forward month, forward quarter, but forward 12 months. The portfolios on a year-over-year basis look just fine. They're starting to come back now, and I think forward 12 months it's going to be OK and we'll be properly deployed for beating the indices. But it's been a very difficult late winter, early spring.
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"Every company on the planet wants to look as much like Cisco and Dell as it possibly can."
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TSC: It sounds like you think there's something materially different between this swoon and the past seven, whereas other people say that the bubble has burst.
Jeff Applegate: Certainly you've had a different phenomenon this go around with a lot of dot-coms. You had a lot of companies that typically operated in private-equity land now operating in public-equity land. Some people were fairly happy to go out and buy a bunch of companies that were losing money on an accelerating basis. So in that sense was there something different? Yeah, no question. But to me that's a stock-selection issue, choosing where you want to be.
In this virtual economy portfolio, since it's a riskier portfolio, you can see that about a fifth of the names are still losing money. We think they have business models that will get them to profitability. So, when we put this portfolio together, another decision was, "OK, if we're going to start playing the game of buying companies that are losing money, let's put in place some decision rules around that."
We're not going to spend a moment on any company that's losing money unless it's passing three screens: 200% year-over-year revenue growth, 70% gross margins, and a globally scaleable business model, click, not brick -- so Yahoo! (YHOO:Nasdaq - news), not AOL (AOL:NYSE - news). Most dot-coms can't pass one of those screens. My hope with that is at least we'll start out with a very robust business model. And then you do your fundamental research -- do you like the management, do you like the product, do you like the space they're in? Which doesn't mean we won't make mistakes -- of course we will -- but hopefully we'll make fewer mistakes.
If you think about where we are with the virtual economy at the moment, it's still only 2% of retail sales, and it's about 3.5% of wholesale sales. First one looks like it's growing at 100% year over year; the other one looks like it's growing 150%. If you think about where we are with the Internet at the moment on a company basis, Cisco and Dell (DELL:Nasdaq - news) are the preeminent examples of B2B and B2C. Every company on the planet wants to look as much like Cisco and Dell as it possibly can. It's the most efficient way to do business, reduce cost of goods sold, improve productivity, etc. And everyone will get there to a degree, depending on what kind of business they're ultimately in. The economics there are exceedingly compelling on the B2B side. Then you've got the B2C side. We go to the Internet for convenience, for fulfillment, for price. If you think about the Internet for consumers, it's cumbersome, it's a pain to use. It's still very crude. It's also not a mass market -- but it will be. And when it becomes a mass market, that's going to demand a lot more routers, switches, servers, bandwidth, storage.
TSC: What companies that we don't consider technology companies right now do you think might really benefit from the advent of the Internet?
Jeff Applegate: Oh, I think everybody will.
TSC: As an investor, are there areas you can look at outside of technology and say, wow, these guys, they're smart management, they understand technology, and here's a company or an area where the Internet or new technology is going to do incredible things to the bottom line?
Jeff Applegate: In an absolute sense, what you're talking about is going to improve the profitability and the margins of Phelps Dodge (PD:NYSE - news) and Alcoa (AA:NYSE - news) and Ford (F:NYSE - news) and Wal-Mart (WMT:NYSE - news). It's a whole bunch of Old Economy companies.
The real question is: Is that the security that is going to beat the market? And when I look at a lot of those companies, and the final demand characteristics they face as compared to the final demand characteristics of a Cisco or a JDS (JDSU:Nasdaq - news), or an EMC (EMC:NYSE - news), I don't think it's much of a horse race. While we would make the argument that all this IT is going to have a significant impact on profitability for the market, we still argue about [where the] most robust growth is. And that, to me, is not going to be Ford.
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"We couldn't have sat here five years ago and figured out that there would be such demand for people who could create and maintain cool Web sites."
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TSC: Are there any areas in the New Economy that you think are going to be pretty exciting?
Jeff Applegate: The way I think about your question is, we couldn't have sat here five years ago and figured out that there would be such demand for people who could create and maintain cool Web sites, because we didn't know.
Well, here we are. And now you've got folks like Razorfish and Scient (SCNT:Nasdaq - news) -- companies that didn't exist prior to this. You've got business models like priceline, which is basically an inventory clearance mechanism that couldn't have existed before the Internet. Or eBay (EBAY:Nasdaq - news), which is kind of like a global garage sale, which couldn't have existed before the Internet.
Whenever you get rapid technological change like we're seeing, you'll get a substitution effect. Without trying to predict precisely how this will evolve, particularly on the service side, what we try to focus in on is who's going to be involved in improving the sensory capabilities of cyberspace. That's what the name of the game is: to make the thing easier to use. Accessing cyberspace ought to be as easy as turning on your toaster, but it's not. Who are the companies that are going to get us there?
Now, what businesses is Cisco going to be in five years from now versus where they are today, when they weren't even in photonics and fiber optics 18 months ago and now it's 20% of their revenues? I don't know, but I'm betting that management is going to be able to figure out where they want to go.
TSC: What about biotech and genomics? It doesn't seem like you have much of a focus on those.
Jeff Applegate: We don't and that's really lack of knowledge to be frank. We did a fair amount of work in the second half of last year, and then they had these parabolic price moves. We have been doing more work, and we're looking to add some of those names to the traditional portfolio in the health care sector. We just haven't done anything as yet.
If you look at the traditional portfolio, where for all intents and purposes we've got three-quarters of this portfolio in tech or tech-related. ... On traditional metrics people would argue that this is a hugely concentrated portfolio. My response to that would be certainly, on traditional methods. But we're living in a fairly atraditional world where the advent of the virtual economy is going to have an enormous impact on a lot of physical economy business models. The challenge for a lot of these guys is going to be to move their brand, their valuation, and their profitability increasingly to cyberspace. And we'll see who makes it and who doesn't.
I find it fascinating to think about the next generation of shopping bots as we move to handheld wireless. These guys are working on devices and software that in the future will allow you to be in whatever store and you'll see whatever it is you want, and you're going to be able to input an SKU or brand name and what's going to come back to you is the cheapest price online or off-line. What's that going to do to the pricing power of Wal-Mart, Target (TGT:NYSE - news) or Amazon (AMZN:Nasdaq - news)? So we've decided we don't own any of those stocks.
We used to own Wal-Mart. We don't anymore, which has been a mistake because it's done pretty well. Wal-Mart, to me, is a great company -- probably the best of the breed globally. They've got a very sensible e-commerce strategy in their joint venture with AOL. Most of their customers are not on the Internet, and they're going to get them there, but I'm hugely concerned about their pricing power. And I'd apply that to any retailer I can think of. Though we've still got Home Depot (HD:NYSE - news) and Tiffany (TIF:NYSE - news).
TSC: They're more high-end.
Jeff Applegate: Well, certainly Tiffany is. They're not a price sensitive kind of thing. And Home Depot is not Wal-Mart, it's not Gap (GPS:NYSE - news), it's got a different product line where people want to kick the tires.
But if the Internet is the most deflationary event of our lifetime -- which I think it is, and it's barely begun -- it ought to have a huge impact on a lot of companies' pricing power.
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"Accessing cyberspace ought to be as easy as turning on your toaster, but it's not."
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TSC: So much so that it could cut into profit margins?
Jeff Applegate: Yes, for some companies it will. The challenge for companies is going to be getting down your cost of goods sold faster than pricing power is falling. And I think a lot of companies are in fact going to be able to do that. But then you've got the additional issue of, OK that's fine, it's a nice company, but is it going to be a good security? And that gets to my concern about a company that's as good as Wal-Mart trading at the kind of premium valuation it's trading at, with expected earning growth of 16% long term. That's good, but if you look at what I/B/E/S bottom-up is for the market, it's 17%. Should Wal-Mart really be trading at a sizable premium to the market? I question that.
Meanwhile, by any metric, this is an extraordinary business cycle. I don't find a lot of the history or the cycles I've lived through to be a terrific guide to this one. It's so different, in part because of globalism, the world we put in place, which is a world we've never had before. And now what's going on with IT, which is just massive.
TSC: When you worry about things, what do you worry about?
Jeff Applegate: Policy matters a lot to me, so there's always the risk of a policy mistake, which then sends the markets haywire. Russia defaulting was a policy mistake, and obviously it didn't sit real well with the markets. But the response to that mistake was an appropriate response, so the markets righted themselves.
We pay an immense amount of attention to the Fed and what we think they're up to and what's the risk for policy mistake. I don't think the risk is high. They've gotten it: Productivity has accelerated, GDP therefore can run faster than traditional models will tell you, so we can have more output, more income, higher stock prices, etc., than would be the case without inflation problems. And Greenspan's next term started this month. So that looks OK.
On the fiscal side and the election, both Gore and Bush are free traders, so we have a hard time worrying that we're going to have some protectionist |
