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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (2601)	7/19/2002 11:14:45 AM
From: stockman_scott	Respond to of 89467

Wells Fargo's Sohn: "What If Stocks Don't Recover?" 7/22/02 *** Complete report at this link... drsohn.com Dr. Sung Won Sohn Wells Fargo & Co. (612) 667-7498 July 22, 2002 Economy: What If Stocks Don't Recover? • How would the economy fare if the stock market fails to recover from the current level? ...Better than you think according to econometric model simulations! ... The negative wealth effect is the primary channel through which the stock market influences the economy. ... Both consumer and business spending are hurt by it. ... However, lower bond yields and accommodative monetary policy provide a significant cushion. ........ For example, mortgage and consumer loan rates remain low. ........ Businesses raise capital in the bond market at very attractive rates. ........ The net effect is that economic growth is down by about 1.5 percentage points during the next twelve months, but the economy still grows at an annual rate of 2.5 percent. • The relatively rosy economic outlook assumes that capital spending on everything from computers to pick-up trucks will gain strength. So far consumer spending, inventories and housing have kept the economic ship afloat. In coming months the importance of these sectors on the economy will diminish (chart 1). Therefore, capital spending must materialize to pick up the slack. Fortunately, capital spending---outside of telecom, aircraft and buildings---has begun to rise already. Two-thirds of capital spending come from replacement demand. The replacement cycle for high-tech goods is especially short. Bonds: Tax-exempts As a Safe Haven • Treasuries outperformed most fixed income assets (chart 3). Corporate shenanigans punished Corporates badly. Safe havens, including Tax-exempts and Agencies, fared relatively well. If the crisis of confidence stabilizes, the strong economic fundamentals will push bond yields up. Chairman Greenspan's positive comments on the economy last week raised Treasury yields. After the terrorist attacks, a similar spike in bond yields occurred. • Tax-exempts have been another safe haven yielding healthy returns. During periods of uncertainties, investors tend to flock to municipal bonds. And, the tax-exempt yields on tax equivalent basis are very attractive (charts 3, 4). Once the crisis passes, however, the demand for them tends to wane. The ongoing budget problems at state and local governments also create a risk. Low interest rates are encouraging new issues, increasing supplies. With economic growth, tighter monetary policy will hike bond yields lowering the value of tax-exempts. Stocks: Nearing the Bottom? • Does the market know something we don't? Nobel laureate Paul Samuelson said, " The stock market predicted nine out of the last five recessions.” Historically, the stock market has often been a lagging indicator. ... For example, the economy rebounded before the stock market did in 1982-83. ... It is clear that the economy is expanding nicely. ... In addition, the traditional indicators of the market bottom--- epressed profits, low valuations (outside of tech and telecom), poor investor psychology, easy monetary policy, etc.---are in place. ... The upcoming earnings announcements for the second quarter will be important in reconnecting the stock market and the economy. ........ Fortunately, recent reports have exceeded expectations. ........ Earnings will jump at double-digit rates during the second half of the year. ........ Hopefully, it will draw attention away from accounting irregularities. It is too late to sell. • But can we trust those earnings? Time and patience are needed. History shows that it takes years and sometimes decades for the market to rebound after major market peaks (chart 5). Would new rules or conventions, like the expensing of stock options, depress earnings? The efficient market already should have taken these factors into consideration. In early 1990s, FAS 106 and 109 ---regarding retiree health care and pension benefits--- were adopted forcing companies to take billions in charges. Afterwards, both stock prices and the price-earnings ratio rose. The market is efficient and smart.

To: Jim Willie CB who wrote (2601)	7/19/2002 12:25:43 PM
From: stockman_scott	Read Replies (2) \| Respond to of 89467

Economic reality bites back By MARIANNE MEANS SYNDICATED COLUMNIST Friday, July 19, 2002 WASHINGTON -- Former House Speaker Newt Gingrich, the right-wing firebrand whose Contract With America championed the business deregulation that encouraged today's corporate corruption, later acknowledged, "It is always dangerous to try to impose your will on reality because reality has a terrible way of biting back." Indeed, as President Bush was delivering another sermon preaching economic optimism and business glory, a panicky stock market bit back. Stocks tumbled into the financial basement, from which they recovered only at the last minute, and then they fell again. Not even the choir was listening to the guy at the podium. The best that can be said about the president is that, in the corporate-sleaze crisis, he is becoming irrelevant. In truth, he is part of the problem rather than part of the solution. Things are so bad that the name of Herbert Hoover is suddenly being invoked as a Bush economic role model. Bush will sign whatever reform bill Congress sends to him, but he has not been influential in shaping it. He spends as much time promoting his increasingly outmoded agenda -- such as making his huge tax cuts permanent and curtailing government spending -- as he does addressing the real subject. That subject is how to restore public trust in what is now a corrupt business culture that rewards insiders such as the president but punishes ordinary people. What can Bush do, belatedly, to take command, enforce decent corporate ethics and rescue the national economy from this crisis of confidence? He can't change the subject, although he has tried, without doing something dangerous like starting a war with Iraq, which is not a good idea. But he can take several bold steps. He can display some repentance for his own past business dealings and order the Securities and Exchange Commission to release the full records of its investigation of his insider loans and his delay in filing stock sale documents while he was a director at the Harken Energy Corp. Telling reporters to look up company minutes, which they have been forbidden to see, is an affront, not the act of a man with nothing to hide. He should praise companies that voluntarily undertake their own financial reforms, such as Coca-Cola, which announced it would henceforth count stock options as an expense. (Disclosure: This columnist owns some Coke stock.) Bush, however, has opposed that reform, which many experts think is essential to avoid artificially elevating reported profits. The president should dump SEC Chairman Harvey Pitt, who critics claim is too close to the companies he is supposed to be monitoring. Lacking credibility at the top, the SEC can never convince the public it is serious about cleaning up corporate corruption. That is particularly important when the individuals under scrutiny are close to the White House. Bush should revise his economic approach, which is so skewed toward business interests that it favors the rich and well-connected without regard to public needs. Finally, an important step he could take to restore public confidence would be to send Vice President Dick Cheney into retirement. This would not be as politically and legally difficult as you might imagine. The man who was once regarded as the most influential figure in the Bush circle is now a liability. His advice about handling the economy has been self-serving and counterproductive. More than anyone else in the Bush inner circle, it was Cheney who insisted that it would harm the economy to seriously reform the corporate culture from which both he and the president had hugely benefited. This advice led the president to make the mistake of sticking to useless platitudes and cosmetic proposals on corporate corruption -- just as Hoover did during the Great Depression of the '30s. The SEC is investigating accounting practices related to cost overruns at Halliburton Co., the energy-services firm that Cheney headed. Unlike Bush, who can claim ignorance about financial hanky-panky as a director of Harken a decade ago, Cheney was the boss right up to his selection as Bush's running mate in 2000. With his reputation as a tough, well-informed manager, it is impossible to believe that he was not aware of the way his company handled the books or the misleading accounting changes made while he was in charge. Cheney made a profit of $18.5 million when he sold his shares to join the Bush ticket, bailing out only 60 days before the company acknowledged its heavy losses and the SEC was snooping around. In fact, the White House is already moving Cheney to the sidelines. The vice president has been silent during the debate over corporate behavior and he has been absent during several presidential appearances that he might normally have been expected to attend. Full disclosure of Cheney's role at Halliburton as the investigation continues is the only way to keep a potential scandal at bay and protect the presidency. To judge by Cheney's secrecy about the makeup of his energy task force and his ferocious pursuit of unwanted media leaks, however, he is not likely to be forthcoming. But the SEC and a private law suit alleging that investors were defrauded may force him to testify in court about the accounting questions. It is inconceivable that a vice president of the United States could take the Fifth Amendment and survive politically. This does not bode well for the Bush ticket in 2004. Cheney's health may offer a plausible way out. Although he seems fit now, he has had at least four heart attacks. A conveniently timed diplomatic ailment would permit him to step down well in advance of the race for a second term if Bush wanted to ease him out. ------------------------------------------------ Marianne Means is a Washington, D.C., columnist with Hearst Newspapers. seattlepi.nwsource.com