Hi Bob; Thanks.
Richnorth
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Taken from moneydaily.com (Wednesday Nov. 5th)
The top 10 things that could tank the market
By Michael Brush
Feeling pretty comfy now that the markets have had a
couple of quiet and even modestly positive trading
days? You shouldn't. Whether or not you believe stocks
are overvalued right now, a lot of other investors do
-- and that makes markets around the globe prone to
herd behavior and full-blown panic attacks like the
one that swept through last week.
With that in mind, and with the Halloween season and
several spooky movies still fresh in memory, we
queried some of the best market analysts around to
develop a list of the top ten events that could tank
this market. Here, with apologies to David Letterman,
are the doomsday scenarios they came up with, more or
less in reverse order of actual probability:
#10 War. Hey, we've been down that road once recently
with Iraq's Sadam Hussein -- and the Middle East isn't
the only trouble spot, as several analysts pointed
out. "If North Korea pulls the trigger and launches an
attack on South Korea, that would provoke a dramatic
market decline," says John Cleland, the chief
investment strategist at Security Benefit Group Inc.,
Topeka, Kansas.
#9 Oil Price Shock. In addition to tensions in the
Middle East, watch out for a pick up in growth in the
developed countries that would cause an increase in
the demand for energy, says Leila Heckman, of Smith
Barney. That could create shortages just as severe as
any cutback in supply.
#8 Economic Downturn. There remains the chance that
the U.S. economy could take a sharp dip in 1998, warns
Hugh Johnson, market strategist for First Albany Corp.
Look for early warnings like a surge in unemployment
insurance claims, or sharp declines in the purchasing
managers' index or the consumer confidence levels
reported by the University of Michigan.
#7 Breakdown in world trade. "One thing that has kept
inflation low has been globalization," notes Vernon
Winters, the chief investment officer of Mellon
Private Asset Management. "The low-wage economies have
been thrust on the developed world." Rising trade
barriers would not only shut down access to these
markets, but remove some of that downward pressure on
prices -- thus eliminating a key factor that has held
inflation at bay. Beware, for example, of a delay in
approval of the "fast track" trade negotiations in
Washington, D.C., or a further deterioration in the
recent shaky trade relations with Japan. Also keep in
mind that when currencies run into trouble, as many
Asian and Latin American currencies have lately,
people start pointing the finger at trade and apply
pressure on politicians to limit the exchange of
goods.
#6 Deflation. It may seem odd that, with all the fuss
about inflation, people could be worried that prices
might start going _down_ rather than up. But that
worry is real. The reason: Downward price pressure
from Southeast Asia. Lower prices may sound great to
shoppers, but for companies, they hammer earnings. Now
keep in mind that many reputable economists laugh at
the notion that deflation -- last seen here during the
Depression -- could recur today. But any sign that
prices really _are_ headed down could seriously spook
the markets. Here's one scenario, says Cleland:
Problems in Southeast Asia worsen and spark a
recession in Japan, or cause a series of beggar-thy-
neighbor devaluations in the region. Further downward
price pressure there on finished products pulls prices
down elsewhere in the world, and deflation is loosed
from Pandora's box.
#5 Inflation. Okay, we said this was a doomsday list,
right? And Federal Reserve Board Chairman Alan
Greenspan has emphasized several times that he is most
worried about wage pressure forcing a return to higher
prices. But First Albany's Johnson points out that
wage pressure is already here, and threatening to
create consumer inflation. "That would stir worries
about Federal Reserve policy, and that would be
surprising particularly after what has happened in
Asia," says Johnson. Few people actually believe the
Fed will raise interest rates soon, given the
deflationary effect of the Asian events. But growth
remains strong in the U.S., and signs that it is
picking up could put interest rate fears back in view.
#4 Profit margin erosion. "To me, this may be the
biggest problem," says Winters. "Companies have not
been able to raise prices, and the events in Southeast
Asia mean it is unlikely they are going to get any
pricing power in the future." Instead, firms have been
boosting margins by cutting costs and taking advantage
of things like lower tax and interest rates. "But you
can't keep cutting costs forever," says Winters. Yes,
spending on technology has improved productivity. But
companies may start to feel the pinch as they divert
more of their technology budgets to the so-called
"Year 2000" problem. Of course, profit margin erosion
would take awhile to develop. But any sign that we are
headed down that track would frighten investors. "Look
out for warnings from a major earnings momentum icon
that will have problems in the fourth quarter and
dimmer prospects for 1998," says Michael Metz, the
chief market
strategist for Oppenheimer.
#3 Currency crisis. The storm may not have passed.
Domestic inflation and trade-account deficits -- both
of which weaken currencies -- have prompted economists
to put Korea, Brazil, Poland and others on the watch
list. If those currencies devalue, that could send
another shock wave through Wall Street.
#2 More fallout from Southeast Asia. After all, no
one is quite sure how bad things will get. "You are
likely to see other companies like Fluor announce that
revenues or earnings will be lower because of what is
happening in that part of the world," says Johnson.
Watch for problems in banks with exposure to the
region, especially Japanese banks, and in particular:
Sanwa, Sumitomo, Fuji, and Dai-ichi Kangyo, he says.
Or keep an eye on Japanese bank indexes for early
signs that things are getting worse. On a broader
scale, Japanese exposure to Southeast Asian economic
problems -- through trade and bank loans -- could
spell trouble for that country, points out Neil
Hokanson, president of Hokanson Capital Management in
Encinitas, Calif. That would be bad for U.S. companies
because Japan remains a major U.S. trading partner. So
any sign that Japan is slipping into recession because
of problems in Southeast Asia could spark another
selloff in the U.S.
#1 Something completely different. So what's really
likely to spook the market? Heck, we don't know for
sure -- and neither do the analysts we talked to. The
world of financial affairs is too complicated to
foresee every event, and so the actual catastrophe
that -- maybe inevitably -- drives this market down is
apt to be missing even from a comprehensive disaster
list like this one. Consider, says Winters, the effect
on the markets of something as tragic as Alan
Greenspan getting hit by a bus. So our closing thought
is that we hope the Fed chief, and all readers of this
column, will continue to look both ways when they step
off that curb! |
