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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Bill Harmond who wrote (13997)	9/24/2002 10:51:43 AM
From: stockman_scott	Read Replies (1) \| Respond to of 57684

Harry Newton's Technology Investor: Harry Today 8:30 AM Tuesday, September 24, 2002: Deflation. We are hearing the word more often. Deflation is a decline in general price levels, often caused by a drop in the supply of money or credit, in turn caused by a drop in economic activity, in turn caused by a drop in total salaries caused by rising unemployment, in turn caused by the bursting of today's housing and consumer bubbles. Deflation is the opposite of inflation. In deflation, goods and services become cheaper. The value of money rises. Debt becomes more expensive to repay. Loans default. Businesses and consumers put off purchases in anticipation of further price declines. Economic activity slumps. The stockmarket falls steadily. Severe deflation was a feature of the Great Depression -- when prices fell by an average of 8 percent per year from 1929 (the year the stockmarket bubble burst) through 1933 (four years later). Concern about deflation has risen because our broadest price gauge, the G.D.P. price index, recorded a one percent annualized increase in the second quarter of 2002. That's the lowest inflation rate in 48 years. Prices of goods and structures — covering nearly half the economy — are already falling at an annual rate of 0.6 percent. In Sunday's New York Times, Stephen Roach, Morgan Stanley's chief economist "The hows and whys of America's deflationary perils will long be debated. Two sources seem most likely. First, the bubble-induced boom of business capital spending led to an overhang of new information technologies and other forms of capital equipment in the late 1990's. The result was excess supply, a textbook recipe for lower prices. Also at work ... globalization. The .. American economy now has a record exposure to global competition. In the second quarter of 2002, America imported a third as many goods as it produced, well in excess of the 20 percent ... at the onset of the last recovery in the early 1990's. Significantly, more and more of these goods are coming from highly competitive Asian producers who have much lower cost structures... History tells us that when major asset bubbles burst, deflation is often the result. That was true of the United States in the 1930's and Japan in the 1990's... Deflationary risks can never be taken lightly in a post-bubble economy." Predicting the economy is difficult for economists, impossible for us mere mortals. Several things are obvious to my tiny brain: + It will take three to five years for the biggest stockmarket bubble in 100 years to finally unravel. That means we'll continue to be treated to depressing news stories of corporate malfeasance (naughtiness), corporate financial woes and excessive greed. + Industrial production is falling. + Layoffs are continuing, and in some industries (e.g. financial) accelerating. + The retail investor (i.e. you and me) have thrown in the towel. We've all redeemed our mutual funds. We're not buying anything, except bonds. Markets are presently "enjoying" a record short position. This means more "investors" are short than ever before. A lot of people have made a lot of money in recent months -- at least on paper. Today, futures are down. BUT, today the Federal Reserve meets. There is a small -- perhaps 25% -- chance that the Fed will drop its rates. This would give the market a temporary boost. As a result, many traders are likely to close their short positions before the Fed announces at 2:15 PM today. And thus the market may rise today after a horrible opening. Longer term.... ? Barrons recently said in pre-election years since 1950 there was an average 50.2% gain from November 1 to April 30. The last time it went down in a pre-election year was in 1939. Long term... ? In January 2002's Business 2.0 magazine, Bob Norton wrote: "Nearly all of the disturbing symptoms exhibited by (today's) economy can be explained without recourse to any rare and scary economic diseases (e.g. deflation). It's a routine diagnosis: The nation is in a plain, old-fashioned recession, exacerbated by the effects of Sept. 11 and the nation's response to them. There's no reason to think that the sickness won't be cured by the routine economic medicine of lower interest rates, fiscal stimulus, and the passage of time." Reader Heurrea (whom I still haven't spoken with) writes me today, "Harry, there are over 300 companies that even today have gross margins of 60 to 68%. When you cut their research and development costs and cut their selling and administration expense, these companies are actually making more money. Once fresh orders and backlog build up, they will report an unexpected increase in earnings and will increase their forecasts. The shorts will cover and the analysts will upgrade the target price. The momentum players will pile in the mutual funds will buy because they see the coast is clear and don't want to miss the the rally. Believe me it will happen and it will be painful if you're short the wrong stock at the wrong time." Stay in cash. This is too difficult for my tiny brain. Our time will come. I often do what I write about in this column. If I recommend that you short stocks, I often am short those stocks or about to be short them. If I recommend going long on some stocks, I am often long or about go long on them. Today, my portfolio is basically in cash and triple-tax-free New York municipal bonds. I sincerely hope the information I provide in this column is rewarding to you, my readers. I provide this information for free as research for a book I'm writing called "In Search of the Perfect Investment." In return for my hard work, I'd be most grateful if you would send me your ideas and feedback. I'm new to this. I see this as a joint stumble along the road to investment enlightenment. If you want to learn more personally about me, visit harrynewton.com technologyinvestor.com