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Technology Stocks : Novell (NOVL) dirt cheap, good buy? -- Ignore unavailable to you. Want to Upgrade?

To: dwight vickers who wrote (21930)	5/9/1998 7:47:00 AM
From: EPS	Read Replies (2) \| Respond to of 42771

Hi Dwight, Here for some good old fashion debate Victor Editor's Letter: It Can't Get Any Better? Maybe It Can By Dave Kansas Editor-in-Chief 5/8/98 8:05 PM ET How the bubble economy advocates must be fuming today. Sharply lower unemployment, decent wage gains ... and the stock market just couldn't get enough of the news. Stocks headed higher, led by the technology stocks, including bellwethers Microsoft and Intel. It was, to say the least, an intriguing session. In the morning, following the jobs report, you could almost hear the stares around the trading rooms as folks tried to figure this one out. The Nairu (the non-accelerating inflation rate of unemployment) believers would have to be screaming that roaring inflation is right around the corner with the monthly unemployment rate at an absurdly low 4.3%. To top it off, wage gains showed some oomph. But, at the end of the day, that once-deadly combination contributed to higher stock prices and only a modest drop in the bond market. What is the stock market telling us? The stock market, with all its collective might, is doing its best to make the New Era argument. Investors believe that the massive impact of new technology has altered the pricing and productivity environment in ways that we as yet can't fully comprehend. Internet commerce is slashing costs, new computing power is improving productivity and corporations, faced with this tough environment, are still wringing profits from the system. I recall Jack Welch, head of General Electric, giving an interview earlier this year on CNBC. When he would give his marching orders to his staff, he started with one bedrock assumption: no pricing power (i.e., an inability to contribute to inflation). Still, even with that presumption, Welch said he expected to continue knocking down strong profit gains. GE has done exactly that, and it is not alone. Mighty corporations like GE have no pricing power, and that underscores how tough it is for inflation to take root in this environment. The New Era argument is that the U.S. is in a steady, slow, noninflationary growth phase. In such a world, stocks accrue higher valuations since earnings growth continues deeper into the future. The cyclical trough is not discernible. Certainly valuations are not cheap, and the stock market is reflecting confidence well into the future. But there is that confidence in the future production of earnings. In order for that to continue, companies will require still greater productivity gains. Productivity is the great linchpin of the New Era, and that is part of the dark side to all of this thinking. If the New Era unravels, it will not come from increased inflation. No, instead it will come from the inevitable squeeze on profitability. If corporations are unable to find anyone to hire, save at exorbitant costs, then profits will squeeze. It's already crystal clear that these companies can't pass on price increases to support these higher wages. Therefore, with unemployment at such a low level, the true test of the New Era ideal is ahead of us. Either productivity keeps improving, or profits start to skimp along. That debate will make for an interesting year ahead of us. *****