<<note to all: I know that many of you are tired and perhaps pained by my 12 months of bearishness on equities. "All About SUNW" has been my genuine home message room on the net for almost four years now. I consider most of you friends and fellow investors who I have some affection for. If it were not for my gains on SUNW from May, 1997 through January, 2000, I would not be retired, and now a full-time investor. I have not always been bearish, or I would not be here to write this. I continue to add content here because (1) it helps me understand and validate my analysis of what I have read by articulating my thoughts, (2) I need to have some kind of a forum (if only for myself) where I can be right, wrong or somewhere in between and (3) I would like to be of some value to other posters here.>>
Ken Wilson
... having said that, here are two articles from today's New York Times ...
March 18, 2001, Market Watch: The Future Won't Be as Good as It Was, by Gretchen Morgenson
Trillions of dollars in household wealth has vanished in the sickening stock market fall of the past year. College
education funds have been pounded and plans for early retirements probably pushed back as a result. But apart
from some finger-pointing and gallows humor in investing chat rooms, investors seem commendably stalwart about the pain they have endured in this bear market, the worst in Nasdaq's history.
Such investor stoicism is something of a puzzle to many veteran market observers. Since many novices entered the stock market in the 1990's, it was assumed these newcomers would panic and scream bloody murder when their beloved bull was gored.
But calm and quiet prevails, at least on the surface of the market.
There are signs of suffering in indicators like consumer confidence and purchases of consumer goods and capital
goods, argued Peter J. Tanous, president of Lynx Investment Advisory Inc., a money management concern in
Washington. "My sense is that the anguish that people are feeling, they are keeping to themselves because the losses are so big," he said. "Investors are internalizing the pain but it's being reflected in the economy. People are sitting on their hands and their wallets."
Mr. Tanous, author of "Investment Gurus: A Road Map to Wealth From the World's Best Money Managers," makes
investor psychology something of a study. He fears that many investors are holding onto decimated stocks in the
hopes that they will make a quick comeback, as some have in the past.
A big mistake, in Mr. Tanous' view. And he provides a bit of arithmetic to demonstrate why.
Take a popular stock like Intel, which has fallen 63 percent from its high of $75.81 in August. Many investors feel
that Intel's dominance in microprocessors makes it a prime comeback candidate.
Assume that Intel's shares rise 15 percent a year going forward, an enviable return by any investor's reckoning. How long would it take for the shares to get back to their high of just seven months ago?
Seven long years.
Plug in the same assumptions of 15 percent annual returns for the rest of the most popular shares in America and the picture is sobering indeed. These stocks may certainly come back, but if they do, it will more likely be over a period of years, not months.
At 15 percent a year, Cisco shareholders would need to wait a decade for their stock to get back to its high of $82,
seen last March. AT&T would climb back to its peak of last March in seven years. General Electric, which has lost a relatively modest 33 percent since its peak of last August, would need three years to return there.
Microsoft would see $115 again in six years, while Oracle shareholders would have to wait nine years to regain their shares' peak. Nine years would also have to pass before Sun Microsystems stockholders would again see the stock's high of $64.66. emphasis added by kw
Because it has fallen so precipitously in the past year, Yahoo would require even more patience from its stockholders: 20 years of 15 percent gains.
This exercise is not meant to advise investors to dump these shares. Rather, Mr. Tanous wants to show how
investors will have to temper their expectations and learn to be satisfied with the lower returns that are more typical of the stock market.
While pundits and strategists quibble over whether the market has bottomed or has further to fall, Mr. Tanous said
investors should instead bury any notion they may harbor that the bull market of the last decade will stir again.
"I can state with a great degree of conviction that most of us will never see a decade in the market like the '90's in our lifetime again," Mr. Tanous said. "And until investors taper their expectations to more normalized returns, they're going to be in for trouble."
Copyright 2001 The New York Times Company
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March 18, 2001, The American Risk in Japan, by Jeffrey E. Garten
New Haven — We have often seen how the fate of the American economy cannot be divorced from global markets, and how even a spark abroad can create a fire at home. In 1987, for example, the stock market crash was precipitated in part by a dispute between Washington and Bonn over interest rates and trade. In 1998, a financial crisis that began in Thailand ultimately spread until it forced a dramatic bailout of one of America's largest hedge funds — a rescue that prevented an implosion of many American banks. Now Japan is the trouble spot that ought to keep us up at night.
When Tokyo's economic bubble burst in the early 1990's, we held our breath because it seemed the world's
second-largest economy couldn't go into a tailspin without taking the global marketplace with it. In the end the fallout was contained, but that was the result of unusual circumstances. America was entering a powerful business
expansion, Europe was boosted by a new common currency and a burst of internal deregulation, and Mexico, India, China and other nations were reaping the rewards of having recently opened their economies to foreign trade and investment. In that heady environment, Japanese stagnation didn't have as much global impact as we feared it would.
The current global economic scene, in which America and Japan together still account for over a third of global
production, is starkly different. America is headed for recession, European growth is slowing and most emerging
markets are fragile. With other engines of the world economy spluttering, further deterioration of the Japanese
economy could finally have a serious effect on us.
Today, Japan's economic growth is stagnant, property values are declining, government and corporate debts are at an all-time high. Despite the fact that Tokyo has poured trillions of yen into public works and lowered interest rates to negligible levels, not only has the economy failed to respond, but serious deflation is in the air. Adding to the woes, the country's political leadership is in meltdown, with Prime Minister Yoshiro Mori having agreed to resign next month, leaving behind a fractured one-party system of exhausted politicians bereft of new ideas for how to reverse Japan's descent.
One looming problem is that as the Japanese economy contracts, so could American exports. This would hurt the
earnings of many of our most important companies, further impairing their stock prices. But the Japanese banking
system, already choking on bad debts, is the major point of vulnerability. The reason is that Japanese banks carry
much of their reserves in the form of Japanese equities, and the major stock market index has now declined to its
lowest levels in more than a decade. If some Japanese banks become insolvent, that could impair the health of foreign banks that have extended loans to them or that have other complex financial relationships. A crippled banking system would be unable to extend credit and would therefore drag down Japanese companies, too. In recent days, the Japanese government has acknowledged these acute problems, but given its miserable track record, whether it will address them effectively is another question.
If Japan's problems mount, companies there could begin liquidating their investments abroad. In the late 1980's
American officials and business leaders worried that Japan would sell some of its American holdings as leverage to get the United States to ease its pressure to open the Japanese economy to trade. Most experts concluded that would never happen because the value of the Treasury securities held by Japanese was so vast that selling some would weaken the price of the billions they still held. However, if Japanese investors become sufficiently desperate now, selling may be the only option.
Japanese entities still own some $350 billion of Treasuries, about 25 percent of all such holdings outside of the United States, not to mention hundreds of billions of other marketable bonds and stocks. Japanese firms own some $150 billion in direct investments in America, more than those held by any other foreign country except for the United Kingdom. And Japanese companies employ over 550,000 Americans.
A Japanese sell-off of American assets could mean more downward pressure on our softening economy — more
surplus property, more layoffs. It could mean that the Japanese would exchange dollars for yen, weakening the dollar, which in turn would lead to increases in the price of imports that are now crucial to our economy. Rising prices in a no-growth economy — stagflation — may be more possible than we think.
Everyone wants and expects the Federal Reserve to bail out the economy, not only by lowering interest rates on
Tuesday when the Open Market Committee meets, but also by lowering rates over the next several months. But if
Japanese investors sell off their American assets and cause the dollar to sink, the Fed could face an agonizing
dilemma. On the one hand, cutting interest rates could help revitalize the economy and the stock market. But it could also further weaken the dollar by making dollar- based returns less attractive, thereby discouraging European and Latin American investors from continuing to invest in American securities.
We have seen how herd-like markets can run wild, and were there to be a precipitous decline of the dollar, the Fed
would have to consider holding rates steady or even temporarily raising them. This is not a position that Alan
Greenspan would want to be in. As consumers, investors, employers and employees, neither would we.
Jeffrey E. Garten, dean of the Yale School of Management, is author of "The Mind of the C.E.O."
Copyright 2001 The New York Times Company |
