Profiles in Courage...By Alan Abelson (10/27/01)
"Wimps!"
That great tabloid headline said it all. Splashed over a big front-page photo of J. Dennis Hastert, Richard A. Gephard and other House of Representatives stalwarts scurrying down the steps of the Capitol after shuttering their chamber in response to the growing anthrax threat, it summed up perfectly the latest exhibition of profiles in courage, Potomac-style.
Richard Nixon was fond of saying that when the going gets tough, the tough get going. What that inspirational injunction obviously means to Messrs. Hastert, Gephard et al. is that when the going gets tough, the tough get going -- right out the door.
What made their action in so precipitously closing up shop and putting as much daylight as possible between themselves and any traces of anthrax appear all the more craven and weasely was that the letter containing the substance that triggered their stampede to the exits was sent not to any of the leading lights or dim bulbs of the House. Rather, the envelope was addressed to Tom Daschle, majority leader of the Senate -- but the Senate, in an unwonted show of gumption, chose to carry on.
The heartening message our beloved representatives sent to the nation was: "Don't panic -- we'll do it for you." The official excuse tossed out by the lean and jowly alike as they hustled to vacate the premises was that they were concerned for the safety of their staffs. Right.
As John McCain scornfully observed, with an eye on the retreating butts of his House colleagues, anthrax so far has claimed only a handful of cases, including one fatality. "More people," Senator McCain snorted, "have been struck by lightning in the past 10 days."
The senator went on to express the heretical notion that perhaps elected officials should "help people to get on top of their fear and channel it into something useful, rather than crossing that narrow line between fear and panic." Actually, John, you do your fellow legislators a terrible injustice: they weren't panicking. Quite the opposite: They were rushing along purposefully and with a clearly defined goal in mind -- to stock up on Cipro before their constituents could get their grimy paws on the stuff.
If it's any consolation to the honorable members of the House, the executive branch has not exactly displayed cool under fire. Attorney General Ashcroft has an interesting -- one might even say ground-breaking -- approach to calming the populace: get their mind off commerical airliners turned into cruise missiles and letters laden with anthrax by telling the folks there's worse to come, although not to worry because he hasn't a clue as to what it is.
And Tommy Thompson, charged with the awesome reponsibility of tending to the nation's health and human services (inhuman services is somebody else's bailiwick), early on demonstrated he was right on top of things by dismissing the first case of anthrax in Florida as an "isolated" instance. Maybe he meant it hadn't yet happened in Washington, D.C.
The Republic is truly fortunate that before the House decided to pack it in, members were able to partake of the wisdom dispensed by Alan Greenspan. Mr. Greenspan, whose last notable revelation was that the economy was on its way to recovery before September 11 -- that Old Economy's sure a fey and wily beast, managing to disguise that fact from virtually everyone but the sharp-eyed Mr. Greenspan -- had some fresh insights to pass along to the solons and the rest of us lesser beings in his testimony on Wednesday to the Joint Economic Committee of Congress (before, we repeat, representatives opted to blow the joint). Insights, frankly, we'd never have stumbled on left to our own lame faculties.
Like: The effect of the terrorist attack on the economy could have been worse. When you stop to think of it, he's absolutely, irrefutably right.
Nor was he even slightly nonplused by suggestions that the Fed's unprecedented eight rate cuts in a single year, totaling no less than four percentage points, seemed to have had just about zilch effect. He responded, just a tad huffily, in effect, that except for his agency's bold and forceful actions, the economy might well have all but vanished from the face of the earth. And if you're skeptical -- just try and prove it wouldn't have!
Mr. Greenspan also reaffirmed his unshakable faith in the durability of the sharp improvement in productivity registered during the brief but gaudy lifetime of the New Economy. Specifically, he voiced confidence that the impact of September 11 on productivity would be only transient and businesses were destined to again reap unstinting wonders in efficiency from computers and communications (the chairman has never been the same since getting a laptop and a cell phone as birthday presents a couple of years ago).
Perhaps there's a clause in Mr. G's employment contract that requires him to be upbeat. Or it could be that, despite a rather melancholy visage, he's innately optimistic. But even cursory reflection intimates that the added security at airports and office buildings as well as the more gingerly processing of ordinary mail, to say nothing of the commercial shipment of goods (all of which Mr. Greenspan alluded to in his testimony but in a most passing manner), to cite only a few of the profound changes in our quotidian existence that aren't likely to disappear tomorrow, are far more calculated to restrain than enhance productivity.
And -- talk about rotten luck -- wouldn't you know the very week the chairman was putting his cheerful spin on the outlook for productivity, McKinsey & Co., the management consulting outfit, released a study that came to a much less exuberant conclusion. Indeed, the study casts serious doubt on some of the most hallowed shibboleths about the productivity gains of the late 'Nineties held not only by Mr. Greenspan but by vast legions of New Economy fabulists.
For openers, McKinsey found that contrary to the conventional New Era wisdom, in the great leap forward of productivity in the 1995-2000 span to 2.5% growth from the 1.4% annual pace in the preceding 23 years, Information Technology was an important spur, but hardly the only one. Indeed, the study calls the relationship between Information Technology and productivity improvement "murky." More specifically, it recounted that while a half-dozen economic sectors generated over 60% of the overall gains in productivity racked up during the '95 to '00 stretch, the remaining 53 sectors in the survey, whose numbers included many that invested heavily in investment in IT, barely eked out any rise in productivity.
The six productivity "jumpers," as McKinsey dubs the sectors showing outsized gains were, in no particular order of importance, retail, wholesale, securities, telecommunications, computers and semiconductors. At least as critical to their performance as IT, it emerges, were such disparate influences as competition, deregulation, the stock market bubble, the vagaries of the business cycles and, not least, innovations unrelated to IT, not a few of those innovations of Old Economy vintage.
McKinsey's verdict on the impact of computers and all the rest of the familiar exotica that constitute Information Technology is this: " ... our case studies indicate that, except in rare cases, IT did not produce dramatic increases in labor productivity. Rather, IT behaved much like other forms of capital, improving labor productivity simply by giving workers and managers additional tools."
Doffing their research beanies and putting on their Merlin conehead chapeaux, the McKinsey folks are rather upbeat, but in a much more measured fashion than Mr. Greenspan. They see future productivity gains averaging somewhere between those aforementioned extremes of 1.4% and 2.5%.
Let's split the difference and settle on around 2% a year. Nice, but not the sort of thing that's apt to set the economy on fire. Or even ignite another blazing bull market.
And that's really the point. One needn't conjure up ghoulish comparisions with 1929 and its aftermath or even post-1990 Japan to envision a much more muted prospect for both the economy and the stock market than the sheer ebullience of the past decade. That's the sober legacy of the soaring 'Nineties and Wall Street's popped bubble, a legacy obviously made all the more burdensome by what happened on September 11.
Steve Leuthold, founder of the oddly named Leuthold Group, which puts out some pretty classy institutional research in partnership with Weeden & Co. (which also harbors the excellent fortnightly authored by our old sidekick, Kate Welling), has some interesting observations in his latest market commentary. Steve, whose indicators have more components than an old hound has fleas, after being skeptical as the bubble grew bigger and bigger, turned what we'd term selectively bullish earlier this year and has pretty much hewed to that position ever since.
Now he seems to be hedging his bets a bit. His dilemma, as he desribes it, is deciding whether this is a secular or a cyclical bear market. If cyclical, he says it should be in the process of bottoming out. If secular, it's a whole different -- and uglier -- story.
Should this turn out to be a secular bear market (as we are convinced it is), that would shape up, in Steve's view, as especially bad news for the capitalization market indexes like the S&P 500, the Russell 1000 and the Wilshire. For even though each of those venerable measures has taken a solid hit -- 30% or more from their all-time peaks -- they're still far from being on the bargain counter. And he isn't reassured by the fact that both S&P and Russell broke through their April 2000 lows before September 11.
Steve remembers -- "vividly," is his word -- and, we imagine, painfully as well, even after all these years (bad market calls can be like bad first dates -- you never forget them), the fall of 1973, when he turned prematurely bullish half-way through a horrendous bear market. "The market had fallen 25%," he rues, "when I reestablished equity holdings that fall, only to see the market roll over and resumed the decline."
Bad memories and warning indicators, we hasten to note, haven't abruptly transformed Steve back into a bear. Instead, his current market stance is neutral, and is likely to remain so until he can be confident that this is not the real thing -- a big, bad, secular bear market.
So far as we were concerned, a little company with the catchy monicker of Microsemi might as well have been operating on the moon until a friend kindly directed our attention to it. Not that it was born yesterday; to the contrary, it has been around for quite a spell. It's just that, in its present incarnation at least, it completely escaped our ken.
What's noteworthy about Microsemi are two things: 1) any stock even modestly connected with defense is in hot demand; and 2), not unrelatedly, reports of the death of speculation are proving vastly exaggerated. Micosemi's shares, which have had their sharp ups and downs in recent years, closed Friday a hair under 35. That's up from 9 and change earlier this year.
Goosing the stock, as intimated, is the company's stake as a supplier for what it calls aerospace/military. It claims something over a third of revenues as stemming from this business.
Now, no question, Microsemi does supply customers, notably Boeing, which, in turn, provide the essentials of modern warfare to Uncle Sam. One problem is that "aerospace/military" is one heck of a broad category, encompassing all manner of stuff, including satellites and jet commerical airliners, which, strictly speaking, either have little or nothing to do with defense.
Our friend reckons that no more than 15% of the company's revenues derive from what a dispassionate observer would identify as the military. Microsemi, to be sure, has publicly avowed that such sales are due to balloon to the point where they loom much, much larger in the corporate scheme of things. We won't quibble, except to say the only thing certain in dealing with Washington is that nothing's certain.
But let's grant Microsemi heady growth in defense orders -- even very heady growth. One can't help but wonder whether the present multiple on the stock -- something like 58 times trailing 12-month earnings and over 40 times the bulls' estimates for the year ending September 2002 -- doesn't discount everything but World War III. And maybe even that. |
