Donald, you have some very interesting ideas. Here's my view, incorporating mostly fundamentals:
ADVICE FROM PRISON
NO TELLING where one can find good investment advice these days. Here are four sources, somewhat conflicting, but each one with useful ideas on where the market is going.
INMATE #90T182 at the Elmira prison in upstate New York seems to have had more success than most investors. As reported in the New York Times, the inmate, currently serving up to 20 years for murder, favors CORNING, JUNIPER (a competitor with CISCO), JDS UNIPHASE (recently merged with SDLI, and a competitor with some products made by Corning), and AT&T (because of its planned split into four separate companies). Long term, the inmate, whose funds for investing came initially from a judgment against a downstate county jailer for raping him, remains very bullish. He believes the NASDAQ, currently near 2600, will reach 6500 by the end of 2002 and adds that "we're not headed for no recession, and if we do go into recession, it's because of the media. It's a self-fulfilling prophecy." From a maximum security prison, almost anything must look promising.
A GROWING NUMBER of professional analysts whose advice is aimed at institutional and large individual accounts believe we are in for at least two quarters of poor economic performance. They are down on technology stocks in general, and point to recent earnings announcements of key companies, such as Cisco, to illustrate their point. CSCO shares recently dropped almost 15 percent after the company announced it had missed its target by a penny a share (2 percent). Notwithstanding that earnings were up 48 percent from last year, or that revenues were up 55 percent, the analysts thought that the one-cent shortfall, combined with increases in unsold inventory and accounts receivable could be interpreted only as bad news. CSCO currently trades near 31, about 30 times forward looking earnings. A much smaller group of analysts rates Cisco a buy because (1) it is the dominant supplier of key equipment for online data communications, and (2) even the most pessimistic earnings projections for the rest of the year point to about 40 percent earnings growth. Because Cisco's market value places it among the half dozen largest U.S. companies, what happens to Cisco has an impact on almost every other technology stock. As long as analysts remain skeptical of the future for Cisco, other tech stocks, such as IBM, INTEL, MOTOROLA, QUALCOMM, and SANDISK, will trade below prices ordinarily justified by their earnings.
THE WHITE HOUSE, believing we are already in a recession, at least in the manufacturing sector, says we can't recover without a $1.6 trillion tax cut. What kind of tax cut is less important than the total amount, which, according to the President and his advisors, is "the right amount." Presumably, if Congress authorizes the right amount of cuts (in the first six months of 2001), the stock market will recover. It remains to be seen whether lower interest rates, together with tax cuts not favored by the Administration (such as a cut in the corporate income tax rate) would be more efficient and/or less inflationary.
THE VIEW FROM THE BLUFF overlooking one of New York's finger lakes, held by this analyst at least, recognizes that the herd instinct co-opts many on Wall Street and tends to cause the markets to overreact to bad or good news. Thus, Corning is down partly because many other profitable technology stocks are down, and partly because of fears that the recently approved merger between JDSU and SDLI will make it more difficult for Corning to compete in fiber optics. Part of the merger terms assure that SDLI will not raise prices on components purchased by Corning. More to the point, Corning has just announced plans for a new fiber optic plant in Oklahoma, plus expansions of existing plants. When capital expansion plans involve billions of dollars, as they do here, it is unlikely that a company would commit itself without a very good idea of future growth in demand. Corning, now selling at less than 47, remains one of the best BUYS in any technology stock, not just because of its growth potential but because of its low downside risk.
ALTHOUGH many companies are temporarily scaling back plans for capital expenditures in information technology, the sector is growing so rapidly that sheer survival demands continuing investment. Is the current slowdown in the economy temporary? Yes. Can companies do well even when the economy is running below par? Yes. Is recovery imminent? No. Recovery depends on many factors, including interest rates, tax cuts (amount and type), and a strong world economy. Investors ought to direct their concerns to Japan, the second largest economy, which reported another quarterly decline in its gross domestic product, adding to some ten years of substandard performance. In a world as interconnected as ours, no single nation can determine its well being, nor is there any single antidote for its ills, no matter which perspective you accept. It's easy to focus narrowly on a problem and come up with a limited solution. In that respect, we are all prisoners of the quick fix.
Art Bechhoefer |
