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To: chaz who wrote (49370)	12/7/2001 2:58:37 PM
From: Thomas Tam	Respond to of 54805

However, this recession is not due to a decrease in consumer spending (debt or otherwise), but to a lack of business profit due to a lack of business spending. As profits return, won't that reduce the S&P P/E sufficiently to keep stocks attractive? Compared to the interest on cash savings, isn't business investment a better return on capital than anything else? Comments anyone? I would agree that businesses are spending less, but is this not a function of demand for their products to justify investment in capital equipment? So if demand is slack then why would most businesses to continue to spend. You could expand the telecomm overbuild to almost everything else in terms of sectors. This is a natural business cycle that results in consolidation of businesses until the marginal people are out. This includes laying people off. Then as supply is removed, and demand remains either same or increases, then profit margins increase, which can justify expansion again. The difficult part is determining when demand will pick up and when excess supply is removed. I just think the market has jumped early and a lot of liquidity has driven up stock prices. Question for those out there? Can liquidity be removed from the financial system without a change in interest rates? My initial thought is that liquidity can be removed without raising rates, and if that is so, will the market head back south?

To: chaz who wrote (49370)	12/7/2001 3:58:34 PM
From: Pirah Naman	Respond to of 54805

Chaz: If interest rates are low, is that not an incentive to take on debt? Yes, it is an incentive, but the strength of that incentive depends upon the potential for applying that money. If an individual or corporations wants to buy something, or anticipates such a desire, and said individual or corporation lacks the funds, then a reduction in interest rate may shift the balance. Even then, there is the question of sensitivity to rates. If rates are already quite low, further reductions should not be expected to have a strong affect. this recession is not due to a decrease in consumer spending (debt or otherwise), but to a lack of business profit due to a lack of business spending. I guess it depends on which end of the worm you are pushing. I would say the lack of business spending is a normal reaction to already having spent more than usual. This is really classical cyclical behavior. Over the years it was easy to see a pattern with the producers of commodity and big ticket capital goods - whenever they invested heavily in new capacity, a negative turnaround in their fortunes was just over the horizon. As profits return, won't that reduce the S&P P/E sufficiently to keep stocks attractive? That depends upon what market participants do to prices in the process. :-) Compared to the interest on cash savings, isn't business investment a better return on capital than anything else? I don't think that is really the issue here. Rather, there are two issues I see. One, additional investment is only good to some point, i.e., even in the best of circumstances, only so much money can be deployed where it will earn a good return. Two, it isn't that business investment is not taking place. It is simply taking place at a lower rate than a recent peak, but at a higher rate than that of several years ago. - Pirah

To: chaz who wrote (49370)	12/7/2001 4:29:42 PM
From: Stock Farmer	Read Replies (3) \| Respond to of 54805

chaz - great questions with complex interlinkages ? If interest rates are low, is that not an incentive to take on debt? Short answer is yes. But to inject some objective reality, I just turn to Enron as an extreme example. Their implosion was based on their ability to satisfy existing obligations. No amount of incremental debt will save them (and it seems a least they will have difficulty attracting lenders at this stage). Business exists in balance. Borrowing more than you can afford to carry is a recipe for disaster, regardless of the cost of carrying more debt. Which leads to: However, this recession is not due to a decrease in consumer spending (debt or otherwise), but to a lack of business profit due to a lack of business spending. This begs the question "why is there a lack of business spending". It's not because consumers reduced their spending, it's because consumers didn't increase their spending enough to make businesses profitable!!! Business geared itself up in anticipation of profitable enterprise that never materialized. A great information superhighway with no on-ramps to the last mile, for example. "Eyeballs" that failed to glance at their wallets. And so on. For whatever host of reasons, the profits haven't materialized because the consumers haven't spent. And it no longer seems likely that they will spend. And so now these businesses are retrenching. Laying off employees (who are, indirectly, each others' consumers) and further exacerbating the problem. The credit card companies haven't done much to reduce their rates and because credit card debt is such a large fraction of the US consumer's spending power (and savings are so low), the consumer's perceived cost of capital hasn't changed much. Unless actual consumer spending changes to the upside, further business retrenchment is quite likely. Which increases the consumer spending gap, which stimulates further retrenchment... This is the flip-side to the tornado. Maybe we call it the whirlpool (as in the thing that forms when you pull the bung out of the tub). Same coriolis force and feedback cycle. Just in the opposite direction. Compared to the interest on cash savings, isn't business investment a better return on capital than anything else? Not necessarily. If a business is undersized and growing, and the opportunity cost of business investment outweighs the risk weighted return, then yes. But a business that is over-sized represents under-performing assets. Adding to a pile of under-performing assets (business investment) is often a recipe for accelerated depreciation. No amount of throwing new satellites into the air is going to increase the profitability of Globalstar, for example. At some point the balance can even tip over. A potential return of $0.102 on the dollar is unattractive, compared to leaving it in cash and getting $1.02 Which leads to an element you did not raise as a question but which begs an answer: that of risk. Seems to me that one is certain to return something close to zero (but not negative) on cash. We are now entering the phase of the market where billions evaporate spontaneously - almost overnight. Vis-a-vis Enron. Or ATHM. Or Polaroid. These aren't mere doomed.bomb crackpot business models. I bet they aren't the last of their ilk either. Even if I'm not allowed to wander so far afield from the Gorillas and Kings. They are not immune from risk. Sure, they do not face risk of failure. BUT: their prices have been bid up in anticipation of much higher than average returns. Their risk isn't that they file for Chapter 11, it's that they fail to achieve astronomical growth of profits. My only point here is that there is RISK in business investment that is not present in cash savings. Which is the invisible element stacked up against the return potential. It is not at all clear that the risk weighted return from business investment is sufficiently higher than zero to warrant cash balance transfer. My personal thinking is along these lines. Not just theory-blabber. As of Nov 30 statement, my investment portfolio distribution was 18.44% cash & t-bill money market, 48.07% fixed income (mostly long gov't bonds), 19.96% preferred shares, 9.38% common shares (sorry, no gorillas - mostly blue chips), 3.75% mutual funds and 0.40% other. Zero debt. About 98% of my holdings generate cash in some form or another, and the majority (>60%) at very good LIQUID rates of return (~6%) considering the level of risk (~0%). Forget any unrealized capital appreciation that Greenspan has delivered to me in the meantime. I would need stocks with Price to Real Earnings ratio of about 17 or less and a Growth:Risk ratio of 1.0 to compete. There aren't many of those. So in short, there may be circumstances where (in one's judgement) it is preferable to remain "in cash" rather than invest in businesses. At the moment, that is.

To: chaz who wrote (49370)	12/8/2001 3:18:20 PM
From: Wyätt Gwyön	Respond to of 54805

hi chaz, good observations and questions; looks like you started some interesting discussion... If interest rates are low, is that not an incentive to take on debt? Many may do so...ala Ford Credit lending to less and less qualified borrowers. (all the following in my humble opinion) one must distinguish a bit between the "headline" interest rates bandied about on Bubblevision, and the actual interest rates experienced by businesses. Ford's zero-interest rate offer to consumers is a total moneyloser which loses profit up front and cannibalizes their future sales. the moneylosing aspect of this was revealed by Ford's warning this past week for a worse-than-expected horrendous quarter (despite record sales). i can only think that they ran the numbers, and decided it would be even worse if they didn't offer zero-interest plus incentives and ended up with many months of inventory on hand as well as idled capacity. (well, that and the fact that GM was doing it so they had no choice but to match offers.) whatever the particular factors that led to their decision, a low cost of capital for themselves was not among them. despite the record fall in the Funds rate over the past year, Ford's cost of capital is not going down. Ford's recently issued debt carries a higher absolute yield than debt it issued more than six months ago--despite Greenspan's dropping the Fed funds rate 300 bp in the interim. businesses do not borrow at the rate set by Greenspan; they borrow at the rate the market sets for them. what's happening is market rates on corporate debt are separating from Treasury levels (widening spreads), even as Treasurys separate from the Fed rate. (as i pointed out on another thread, average yield on telecom debt has risen from 8.9% at the peak of the bubble to around 17% now--meaning that cos. with low credit ratings would face rates too high to issue more debt.) this is the market making capital more expensive. at the same time, companies are becoming less qualified to take on low-cost debt. viz, increasing numbers of cos like Lucent who have to roll their commercial paper into higher-cost bonds because no one will buy their CP. the situation is even worse when you get to the private market, where banks are tightening the screws on credit lines to private companies. banks are doing this to make up for their own mistakes in overlending to lousy companies during the bubble years. one of the undesirable after-effects of a bubble, in addition to excess capacity that takes years to work off, is a "credit hangover". reduced access to credit lines forces private companies to cut costs and employees. this of course further reduces demand in the economy as a whole, and may lead to more business failures. Greenspan, whose main concern these past few years has been to keep the bubble going (despite what the misinformed think about Gspan "popping the bubble" as if March 2000 was a normal market), has tried desperately this year to reduce rates and "reliquefy" the economy. this effort culminated in the pathetic attempt by the Treasury to goose the long bond by announcing the 30-yr was going extinct. this sophomoric manipulation lasted all of two weeks before Mr. Market bitchslapped Greenspan and the Treasury something awful. now the long bonds are leaking badly, and the Bubbleonians who previously argued that equity prices were justified by low interest rates have one less leg to stand on.* However, this recession is not due to a decrease in consumer spending (debt or otherwise), but to a lack of business profit due to a lack of business spending consumer spending is the main element of GDP. now that businesses are laying off consumers like there's no tomorrow, consumer spending is likely to go down. this should further weaken business demand, leading to further layoffs in a vicious cycle (John's whirlpool metaphor captures this nicely). As profits return, won't that reduce the S&P P/E sufficiently to keep stocks attractive? this all depends on how much they return, and how quickly. in any case, with the current S&P PE quite high, one must suppose a profit rebound has been priced in to a considerable degree. Compared to the interest on cash savings, isn't business investment a better return on capital than anything else? this all depends on demand, no? the problem after a bubble is that a double whammy occurs: high capacity (current capacity utilization is extremely low) and low demand (as businesses [soon to be joined by consumers, presumably] retrench). * ever see a legless Bubbleonian? just tune into CNBS any day of the week. they ain't called Talking Heads for nuthin.