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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: RR who wrote (53723)	7/11/2002 9:03:09 PM
From: Sully-	Respond to of 65232

Stock Brief America's Brutal Efficiency [BRIEFING.COM - Gregory A. Jones] Amid a sea of pessimism, there is one reason for optimism - we live in a country that reallocates capital with brutal efficiency. The S&L Example In the late 1980s/early 1990s, both Japan and the US experienced banking system crises. The causes of these problems were not identical; Japan's problems were primarily the result of an asset price bubble, while the US crisis was the result of the bungled savings and loan industry deregulation. Despite the different causes, the effects were quite similar. In both countries, the supply of credit dried up and the economy suffered. But the policy responses could not have been more different. The US responded by aggressively closing failed institutions and selling their assets at auction. These asset sales were critical, as they quickly reset prices for key markets such as real estate and restored liquidity as a result. In Japan, the policy response was to support failing institutions and prevent the liquidation of assets. The banking system's bad loan woes escalated as a result, and liquidity in the real estate market dried up as investors waited for the inevitable sale of distressed properties by banks. Twelve years later, they are still waiting. That is an excellent example of America's tendency to embrace "creative destruction" - a hallmark of capitalism. That this embrace occurred at the government level in the S&L example is all the more impressive, as the government is the least likely segment of society to accept any kind of economic destruction. Market Brutality Though the government's aggressive response to the S&L crisis was impressive, the US private sector is even more adept at reallocating capital. Whether it's a commercial bank, mutual fund, individual investor, investment bank, or venture capital firm, US providers of capital are ruthless in punishing bad ideas and rewarding good ones. A recent example has been the telecom sector. This is an interesting case study, as it shatters any myth that the private sector always allocates capital correctly. It does not, and never will - mass psychology always has and always will lead investors badly astray at times, even professional investors. The key is that such mistakes are corrected quickly - failed companies cannot be propped up, and losses must be realized. The telecom sector has seen both. Bankruptcies of many large and small players have occurred without government intervention or any significant disruption to capital markets. The debt of these companies is written down as a result, and these losses have been absorbed by banks and investors with little damage to the economy. Most impressively, this destruction in the telecom sector has occurred without creating any capital crunch for legitimate companies and sectors. Corporate yields have even come down for higher quality names and for more reliable sectors such as railroads even as they have blown out for telecom. Instead of leading to a freeze of capital markets, a full-scale sector implosion is simply leading to a rapid reallocation of capital. A similar reallocation is now getting underway as a result of accounting concerns. Though it's difficult to determine who the next Enron might be, capital can be reallocated to sectors and stocks that have more credible accounting. This could include a respected CFO with a history of conservative accounting, greater financial disclosure, a simple capital structure, or a clear reluctance to "massage" earnings in the past. We have already seen where companies such as GE and IBM have been punished for past accounting. The complexity of GE Capital's accounting has long been a source of investor concern, and IBM results have benefited from pension fund gains and one-time asset sales. In contrast, Warren Buffett's Berkshire Hathaway (BRK.A), a man and a company that are virtually synonymous with clean accounting, has traded sharply higher since the market peak in March 2000. Creative Destruction Is Two Words Any period of dramatic creative destruction is grim - the destruction is focused while the creation is dispersed, thus producing greater visibility and more headlines for the destruction. That was the case with the resolution of the S&L crisis and is certainly the case with the current pain being inflicted on the telecom sector and any company or sector with accounting uncertainty. While the creation process is less visible, it is occurring and will ultimately bear fruit. This realization does not help in identifying a short-term bottom in the stock market, but it does help to keep the bad news in perspective. While media types are starting to warn that we may be in for a repeat of the 1966-82 bear market, they do so solely on the basis of the negativity in the market rather than on the basis of similarities between the periods. A key difference is that capital markets have become far more efficient in this country over the past 30 years, tending to increase the pace of a downturn and bring forward the onset of recovery. The destruction underway is a necessary precursor to rebuilding. It would be far more worrisome if the market were not punishing the sins of the telecom sector and those with lax accounting. Capitalism at work is not always pretty, but the results are. Greg Jones - gjones@briefing.com

To: RR who wrote (53723)	7/11/2002 9:26:41 PM
From: RR	Read Replies (1) \| Respond to of 65232

Opportunities.... JDSU has gone up 76% in 10 trading days. Its ATM July option went up almost 10 fold in that time. (low to high) Yep, opportunities, even in this market. RR