Stocks: Get In, Get Out or Get Smart?
Jun 23 6:49am ET
By Pierre Belec
NEW YORK (Reuters) - Don't hold your breath waiting for Alan Greenspan to hand you a pot of gold.
Have things gotten better since the Federal Reserve chairman slashed interest rates five times this year? That's the big question that "thinking" investors are asking as they ponder whether to get in or get out of the market. Many want to rediscover their old flame, the once incredibly attractive technology stocks.
The truth is that just because Greenspan cut rates, don't look for miracles. The economy is stuck in the rough and the biggest problem for Wall Street is that this year's corporate earnings will be the poorest in a decade.
Let's shatter other illusions.
Greenspan and his central bankers don't have a magic wand. The mere fact that they chopped rates by a whopping 2.5 percentage points since the start of the year will not be a cure-all.
Sure, monetary policy is the best way to steer the world's biggest economy, but it is a long, drawn-out process. The stimulative effects of cheaper money can take up to a year to filter through the economy.
The Fed is again expected to lower rates at a two-day policy-setting meeting on June 26-27.
What Greenspan's easy money policy did was reset the interest-rate clock to 1999-2000. Back then, he raised interest rates six times to slow the economy's fast growth and head off inflation, which was advancing at a 3.4 percent annual rate in 2000.
The backwash from the raising spree has stunned the economy. The ongoing life-saving effort to spur growth by lowering the cost of borrowing money may not be timely enough to prevent two or more successive quarters of no growth, the classic definition of a recession.
Some experts expect 2001 to be a recession year. The economy may be in better shape by the first quarter of 2002 when excess business inventories, notably in technology, should be worked off.
Then, the recovery will depend on how fast corporations pour money into fancier technology. The explosion in technology had been the main source of strength for the economy during the record expansion, propelling workers' productivity to new highs.
What's happening is the meltdown of that key sector has put extreme pressure on the overall stock market and the economy.
The United States is also facing the end of an intoxicating investment fiesta in technology, which has brought the customary hangover of excess production and massive job losses. The same thing happened during the 19th-century boom in the railroad industry. At the height of that mania, there were 50 railroad companies, and the number has shrunk to seven. Later, came the build-out of the car industry, with nearly 200 companies. Today, Detroit has 2-1/2 car companies -- General Motors, (GM.N) Ford Motor Co. (NYSE: F.N) and U.S.-German-owned DaimlerChrysler AG .
"The Wall Street sectors that were radical at one time, like railroads, electricity and radios, are now mostly considered widows-and-orphan stocks," says Richard Salsman, chief market strategist for InterMarket Forecasting Inc.
"They were growth stocks at the beginning and everyone wanted to own them and get rich, much like the Internet stocks," he says. "Eventually, the companies were consolidated and some failed because after the experimental stage, they all needed huge production plants and big capital investments."
For now, there are few signs of life in the tech business. Corporate profit margins continue to be pinched by pricing pressures and depressed by flat sales. Making matters worse is that some tech companies have lost their ability to project business activity beyond the next quarter.
"THIS WASN'T SUPPOSED TO HAPPEN" SCENARIO
A week ago, Canada's Nortel Networks (NYSE:NT)(TSE:NT.) faced another "this wasn't supposed to happen" scenario as it surprised Wall Street with a warning -- the second in six months -- that the second quarter will bring an astonishing loss of $19.2 billion because of falling demand for its communications equipment.
Former high-flyer Lucent Technologies, (NYSE: LU) another tech company that was once viewed by many as one of the greatest New Economy companies on the face of the earth, had its bond rating slashed to junk status by Standard & Poor's, heightening speculation that it will need to find a buyer to keep it afloat.
Nortel's and Lucent's stocks are down an unbelievable 90 percent from last year's highs and their slide may not be over.
Experts say capital spending on tech equipment, which grew by 25 percent, or nearly twice the historical average over the last couple of years, was not sustainable.
Historically, corporate spending slowdowns can last up to five quarters, says Kathleen Camilli, director of research for Tucker Anthony, a Wall Street house.
"Given the comments by the CEOs of some major Fortune 500 corporations, we don't expect any upturn in this sector of the economy until at the earliest early 2002 or whenever the next generation of IT (information technology) equipment is released," she says.
The tech companies' earnings are expected to be down 40 percent this year and the Street's forecast for a huge 50 percent increase next year is just a wild guess. Reason: The companies themselves have no clues what the next few quarters hold.
"Each and every recession is unique as is every expansion," says Camilli. "The current one is unusual because it was led by a downturn in capital spending and may be followed by a downturn in consumer spending instead of vice versa."
Making this slowdown even stranger, she says, is that consumer spending is turning down in the back of the recession instead of in the front of the recession, as usually happens.
What caused things to unravel was an investment bust that came on the heels of an investment boom.
While she expects consumer spending to diminish this year, Camilli reckons it will nevertheless stay positive, with housing and car sales holding up well, thanks to lower interest rates.
"One of the unique characteristics of this recession will be the very modest rise in the unemployment rate to a level formerly considered to be 'full' employment -- 5 percent," she says.
NEW BREED CHIEF EXECUTIVES DON'T KNOW TOUGH TIMES
A lot of the new breed New Economy CEOs over the last two years couldn't believe what they were seeing as their stocks self-destructed. Now a lot of them who have never experienced tough business conditions are just frozen and they have no confidence in predicting when demand for their products will improve and their earnings will climb out of a deep hole.
Even if Corporate America's spending faucet flows again next year, tech companies will still be looking at saturated markets, which will make it harder for them to work down surplus capacity.
Nortel's CEO John Roth, whose base pay is nearly $7 million in addition to the $135 million from cashing in Nortel's shares just as they crashed from $90 to $9, thinks that business will get better late in 2002.
Be warned. Roth, who has a bad record in hitting bull's eyes, having missed the barn by a country mile for the last six months, won't be around to take the blame in 2002. He plans to retire next spring.
The stock market's performance will be determined by what the companies say about their future earnings. But because the companies have lost their so-called "visibility," it leaves investors to guess about how to price stocks.
In other words, the discount factor has gone out the window, which explains why some stocks are trading 90 percent below their highs.
Tech stocks will eventually recover but it will be more a function of people finding that comparisons just don't look as bad. The easier year-on-year numbers could be the fuel that will pull the sector out of the wreck.
Camilli believes that the economy's growth streak ran out in December 2000 or January 2001 and the trough will be dated in the fourth quarter of 2001.
"A new economic expansion will begin sometime in the first half of 2002 and given the length of expansion in the last 30 years, the next one should run about eight years until 2010, barring of course any unforeseen or man-made disasters," she says.
For the week, the Dow Jones industrial average slipped 19 points to 10,604. The Nasdaq composite index edged up 6 points to 2,034 and the Standard & Poor's 500 index was up 11 at 1,225. |
