dailynews.yahoo.com
Saturday June 23 6:48 AM ET
Stocks: Get In, Get Out or Get Smart?
By Pierre Belec
NEW YORK (Reuters) - Don't hold your breath waiting for Alan
Greenspan (news - web sites) to hand you a pot of gold.
Have things gotten better since the Federal Reserve (news - web sites)
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, (NYSE:GM - news) Ford Motor Co. (NYSE: F.N)
and U.S.-German-owned DaimlerChrysler AG (NYSE:DCX - news).
``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.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com.)
KJC |
