Ladies and Gentlemen. In bowling alley #1 we have Billy the bull with blinders on.
In Bowling alley # 2 we have Skeeter Bug.
The audience is scratching their heads wondering if either can throw a strike!
Btw
Sb, do you love the smell of napalm in the morning?
>He added: "In my world there's nothing more satisfying than ‘the smell of napalm in the morning' -- the feeling that you get when you look at how the world economy is unfolding and you realize you were right. Individual investors should really think hard about how they get their information, who's filtering it and manipulating it, and why they want you to think the way they do."
>By Jon D. Markman
At the Skyway Bowl & Casino in Renton, Wash., the card tables on Sunday filled with blackjack players and bowlers lined up for lanes. In this blue-collar section of greater metropolitan Seattle, where groups of African-American and Vietnamese neighbors mix with post-millennial ease, the threat of world financial collapse seemed as unlikely as my 6-year-old daughter bowling a 300 game.
In a persistent hunt for local clues to the direction of the global economy, I was struck by the effortlessness with which dozens of modest-income Americans were spending a relatively expensive afternoon. The notion had apparently occurred to investors as well, since shares of Brunswick (BC, news, msgs), the nation's leading maker of bowling balls, pleasure craft, outboard motors and fishing equipment, struck a series of 52-week highs last week. If scads of hard-working men and women were truly in imminent danger of being thrown out of their jobs, why would the shares of a company that depends more on marginal dollars than perhaps any other in America be sharply outperforming the broad market?
During the 1990-91 recession, after all, Brunswick fell much harder than the S&P 500 ($INX), and during the Asian financial crisis in 1998 it got crushed -- falling from $36 in April to $12 at its low six months later. Yet on Monday, even as bears make the case for international consumer conflagration, Brunswick traded flat at $22.23, up nearly 48% for the year.
It's little things like this that make me wonder whether the bears have it wrong this time. Shares of chemical manufacturers, energy producers, shoe makers and auto dealers -- all highly sensitive to fluctuations in the economy -- are making new highs lately. Even as the Nasdaq Composite ($COMPX) and Dow Jones Industrials ($INDU) continued their slow-motion crash on Monday, new highs outpaced new lows on the New York Stock Exchange, 102 to 89. Are optimistic NYSE investors in small-cap and mid-cap cyclical stocks wrong, or are the pessimists wrong?
In this lane, the bulls ...
To be sure, the large tech companies that define the Nasdaq were grossly overvalued and were destined to sink until they reached parity with the Old Economy companies that they essentially serve (as I wrote in a December column, "Why the Nasdaq decline was healthy"). But is it not possible that the loud burst of the tech bubble has deafened our ears to our resilient, broad economy's mild but distinct roar?
Let's take a look at the arguments on both sides. Bowling in Lane 1, wearing black jerseys, are the bulls, who think that no recession has occurred, is imminent or is likely. And bowling in Lane 2 are bears, wearing red jerseys, who see evidence of a dramatic business slowdown that could take all major indexes down to pre-1998 levels.
Leading the bull team is Billy the bull, the Federal Reserve and its chairman, Alan Greenspan. In his optimistic Humphrey-Hawkins testimony early this month, Greenspan relied on a series of positive recent economic data to make his case: Employment reports looked solid; personal income is up; construction spending is up; consumer credit is up; and automobile buying is up. In addition, though it's not widely followed, money-supply growth is way, way up at levels that are typically very positive for stocks.
... and in Lane 2, the bears
Leading the bear team are crack economists like Ed Hyman,and Skeeter Bug, whose highly influential ISI Group focuses on a different set of data compiled over the same time period. In a recent weekly report to institutional investors, ISI cited rising unemployment claims, declining durable-goods orders, falling earnings estimates and weakening industrial output as signals of impending doom. ISI also said it believes that Mr. Market is in the pessimists' camp, with the Nasdaq and Japan's Nikkei both breaking down to new lows, commodity prices making new lows -- prices for DRAM (dynamic random-access memory chips, a basic material of the digital age), are consolidating at around $4.40 on the spot market, down from $45 two years ago -- and bond yields making new lows. And, ominously, it says the economy can expect no relief from tax refunds this year, as they are only 2% higher than last year, dramatically down from the 12%, 18% and 20% advances of the past three years.
ISI sees the distinction between the two lanes of opinion this way:
Economic bulls focus on business inventories and consumer confidence as drivers of the recent slowdown. These are two elements that can turn around rather quickly as inventories are depleted and consumers feel better about the security of both stocks and their jobs.
In contrast, bears focus on the prospects that a downward turn in an extended business cycle has led companies to drastically cut capital expenditures of all sorts, as well as marketing and hiring. They also foresee the prospects for a "synchronized" global slowdown that has already claimed Japan as a victim. The pessimists believe that business confidence is more important than -- and leads-- consumer confidence. They also believe that business confidence is worsening at an alarming rate. The bears cite the severity and speed in the deterioration of business in all the major tech players: Oracle (ORCL, news, msgs), Nortel Networks (NT, news, msgs), Intel (INTC, news, msgs), JDS Uniphase (JDSU, news, msgs), Cisco Systems (CSCO, news, msgs), Motorola (MOT, news, msgs) and EMC Corp. (EMC, news, msgs).
For every positive, additionally, the bears see a negative. For instance, ISI agrees that consumer spending is holding up, but believes it is being attacked on two fronts: by layoffs and bonus cuts, and by persistent stock-market weakness. Its economists think retail spending will fade dramatically in March as a result of the Nasdaq's big swoon in February. And they believe that when a final accounting is done, the unemployment rate will be revised to 4.5% in February, en route to 5% in the spring or early summer. As evidence, they cite statistics showing that temporary employment, which tends to lead overall employment, has just posted its biggest three-month decline since the 1990 recession.
Plus there's that pesky world economy. In the view of ISI, the "perfect storm" of high interest rates, high oil prices and crumbling tech spending that coalesced to swamp U.S. equity markets over the past year is now slowing growth and threatening stock prices abroad. ISI reports that a three-year global business cycle that peaked in 1994, 1997 and 2000, is currently midway through the steeps of a down-leg that is expected to bottom only in the fourth quarter of this year, or early 2002. Evidence, according to the economists, includes declining industrial production from all G7 countries. This is coupled with declining manufacturing expectations from Europe to Canada, steep declines in Taiwan's industrial index, a slowdown in Russian GDP (from 7.7% last year to 4% this year), negative GDP growth reported last quarter in Australia, as well as softening diamond sales in South Africa. They also point to deepening problems in Turkey and Argentina, which are small crises on the world stage, but part of the mounting number of signs that the world economy has developed a "serious crack."
Of course, worst of all is Japan, the world's second- largest economy, which is believed to be in the third quarter of recession. In Japan, ISI reports, industrial production in January declined 3.3% from the prior month, the sharpest decline in eight years. Mitsubishi (MSBHY, news, msgs) alone plans to cut production capacity by 20%, according to reports. Meanwhile, companies are finding it impossible to raise prices to counterbalance the loss of sales, generating a deflationary spiral that has conspired to send the Nikkei Index below 12,000 -- its lowest level in more than a decade.
Bears further point out that all of these problems became evident way back in September of last year when Intel and Nortel first warned of slowdowns -- and that hedge-fund short-sellers took advantage of this macroeconomic understanding to exploit the mistaken optimism spread by bulls at investment banks that everything was all right even as the Nasdaq began to unravel. ISI Group, for its part, believes that a recession may be avoided in absolute terms, defined as two consecutive quarters of declining gross domestic product. Yet the extremely sharp delta, or rate of change, between the 6% growth of last year and the 0.5% to 1% growth of the past two quarters has virtually the same effect. “The weight of evidence is on the weak side,” said ISI Group economist Michael Reynnells.
Revising your game plan
What should we make of all this? How does it help us look forward?
One of those fund managers, who declined to be quoted by name, told me on Monday that private investors are at a disadvantage now if they do not take the time to understand the world, rather than just a stock chart, or a few price ratios or the raw stats of sector indexes. "What's really at issue now is the complexity of understanding a global economy that's tied together by financial and geopolitical information -- and whose true condition is constantly being spun by brokerages, the media and politicians," he said. "I wish the world were more simple, but it isn't."
He added: "In my world there's nothing more satisfying than ‘the smell of napalm in the morning' -- the feeling that you get when you look at how the world economy is unfolding and you realize you were right. Individual investors should really think hard about how they get their information, who's filtering it and manipulating it, and why they want you to think the way they do."
This manager, who has successfully been long and short regularly over the past year, said his own set of beliefs about the world's economic direction led him to get aggressively short on Friday after the latest U.S. unemployment report showed what he considered to be a "biased" and false number. And he doesn't expect to cover his shorts and go long equities until the Fed meets on March 20; his targets are 9,575 for the Dow Jones Industrials ($IUX), around 1,750 for the Nasdaq Composite and around 1,130 for the S&P 500 Index -- not too far from present levels. (Events could lead him to change his mind at any time, so caveat lector.)
What say the bulls? They still point out that Americans are still employed at record rates, that they're still spending at bowling alleys and ski resorts as if it were 1998, that until Monday, the Dow Jones Industrials and S&P 500 had not seriously broken down, and that shares of highly economically sensitive companies like Caterpillar (CAT, news, msgs), Deere (DE, news, msgs), United Technologies (UTX, news, msgs), Alcoa (AA, news, msgs), Lockheed Martin (LMT, news, msgs), Illinois Tool Works (ITW, news, msgs) and Texaco (TX, news, msgs) are still flirting with 52-week highs. And finally, the bulls note that even in the worst case, long-term investors should take advantage of the deep pessimism about the prospects of great companies in devastated sectors, such as technology, to establish positions to hold for the next decade.
We will learn soon enough which team has rolled a resounding strike -- and which ends up in the gutter. (For the record, I’m currently wearing the red jersey even though it’s not a perfect fit.) |
