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Strategies & Market Trends : Trader J's Inner Circle -- Ignore unavailable to you. Want to Upgrade?

To: LTK007 who wrote (45770)	8/12/2001 1:55:42 PM
From: LTK007	Respond to of 56532

What Can Rate Cuts Do for 'New' Economy? Reuters Finance News Aug 12 12:10pm ET By Andrew Priest NEW YORK (Reuters) - Although financial markets may be clamoring for more Federal Reserve rate cuts to jump-start the stalled U.S. economy, the high-tech nature of this downturn may require some very low-tech government tinkering to get it moving again. Deregulation and government spending programs rather than cheaper credit may provide the needed catalyst, economists said. For now, receding hopes for a U.S. economic recovery are yanking yields on short-dated Treasuries to levels last seen in the wake of the early 1990s recession. As good news becomes scarce, markets are moving to price in more Fed cuts. Some Wall Street firms expect the key overnight federal funds rate to dip another full percentage point to 2.75 percent by early next year to reach its lowest level since the early 1960s. Wayne Angell, chief economist at Bear, Stearns & Co, said on Thursday the Fed would likely keep cutting rates until the end of the first quarter of 2002 as economic growth remains entrenched in a downturn that began around a year ago. But other economists say the Fed's interest rate wand may not be able to work its magic on this "new economy" downturn, which has been focused in a rapid deceleration of spending by firms on high technology investment. Fed rate cuts work best on interest rate-sensitive parts of the economy such as auto and home sales. But these sectors have held up robustly in the face of the economic downturn. Business investment spending, in contrast, may need a more direct remedy to cure its ills, they said. "The fact you are starting from high levels in housing and consumer spending makes it harder to get growth going there and know that business equipment investment is not all that interest rate-sensitive," said Jan Hatzius, economist at Goldman Sachs in New York. RATE CUTS HAVE LIMITED POWER, ATLANTA FED CHIEF ADMITS Federal Reserve Bank of Atlanta President Jack Guynn acknowledged in a Reuters interview that lower interest rates have limited power to turn the economy around. "Some people seem to get the view that we have this magic we can work to take all of these ills away," he said. "I worry about those that put so much emphasis on what we will do at the next meeting," said Guynn, who is currently not a voting member on the Fed's policymaking panel. "I think that, while it's certainly important, it perhaps gives too much emphasis to the role of policy even in the short term." Despite Fed rate cuts and $38 billion in tax rebate checks dropping into Americans' mailboxes, reports of falling hotel occupancy in Manhattan, stores discounting to attract penny-pinching customers and record levels of job layoff announcements are keeping financial markets edgy. One area where lawmakers may be using fiscal measures to spur growth is in the farming sector. The $73.5 billion farm bill that would automatically funnel more money to growers when prices fall may be debated by U.S. House of Representatives in early September. "Will farm equipment lead the economic recovery? I can't think of an alternative sector right now," said David Hale, chief economist at Zurich Financial Services in Chicago. Under the legislation, grain, cotton and soybean growers would see $45 billion over 10 years in guaranteed annual payments plus an estimated $37 billion in payments triggered by "target prices" when receipts from market prices and subsidies fall below the goal set by Congress. Legislation to deregulate the vast telecom market also could help reverse a business investment glut that hit high technology and telecom firms hard, economists said. ACTION NEEDED TO SPUR BROADBAND DEVELOPMENT One such proposal, sponsored by Sen. John Rockefeller, a West Virginia Democrat, is to give a tax credit to promote development of high-speed networks. Millions of miles of fiber-optic cables were laid in the late 1990s, paid for by massive corporate borrowing, in anticipation that growing Internet usage would soon repay the huge investment. But estimates of current usage of these networks varies from 3-5 percent. "There is big pent-up demand for broadband. But because of the regulatory conflicts between the regional telephone firms and cable companies nothing is going to happen without the (Bush) administration doing something," Hale said. failure to make broadband a reality is going crack the whole floor--my view way back was that broadband was heading for a brickwall,and we see that it has--max Wednesday's beige book, produced by the Federal Reserve regional banks eight times a year and used by Fed policymakers to guide their discussions on interest rates, painted a dour economic picture, bruising stocks and lifting bonds. Many of the regional banks quoted in the book are scaling back their expectations for a recovery by the end of the year and looking instead to 2002 for an upturn. "Hope springs eternal, but I think people may be still saying that in six months time," said Vincent Verterano, head of government bond trading at Nomura Securities in New York.

To: LTK007 who wrote (45770)	8/12/2001 2:51:42 PM
From: Londo	Respond to of 56532

Thanks for the article LTK. I still remember when the Motley Fool was a semi-decent publication, they'd always hammer the point "buy into companies with PEG's of 1 or less", and I'd always consider this valid advice ASSUMING the company can still keep up the same growth rate in the FUTURE. Obviously if you're dealing with a $10B company (CSCO about 4 years ago was this), and you expect 40% growth out of them each year, they'd still have to grow 40% out of their current revenue base. Which of course is impossible. At a 5% interest rate environment, a P/E of 20 is only acceptable if you assume that the company's earnings will never drop below what they did in the past 12 months. Since of course there are no guarantees of achieving that, people have to allocate risk parameters: either they assume that the worst case is more probable (thus lowering the trading P/E of the company), or they assume that the expected income growth in the future is going to be higher, at the risk of it being lower. (which won't hammer the stock, but increases the expectations).. The funny thing about these calculations, however, is that nobody does them. And for some industries (biotechs at the discovery/clinical stage, for example), you have to come up with totally different metrics to value those companies properly. I only like the PEG ratio in terms of a static variable: it quickly loses accuracy forward-looking, however. And the higher that the "G" is in growth, the more useless PEG is. :)