To: michael r potter who wrote (1773 ) 10/11/1998 1:05:00 AM From: michael r potter Read Replies (1) | Respond to
Bear case: The above buy recommendation assumes that the future will be similar to the past. There is growing evidence that the next couple of years will not be like the last few. What is different is deflation on a general and pervasive scale. Two years ago, over 20% of companies were having to lower prices. In the latest survey earlier this year, over 40% were having to lower prices. This occurred despite a vigorous economic expansion accompanied by low unemployment, near record consumer confidence, soaring stock prices, and a large expansion of credit by consumers. Business capital expansion has been robust. In this environment of high demand for goods and services, ever more companies are having to lower prices. Because of the overseas debacles and events in our country the past two months, many of these positive economic drivers will be reversed. A credit crunch/contraction is beginning. Consumer confidence is falling. Business capital expansion is likely to slow dramatically. Two thirds of the economy is consumers of which almost half now have $ in the stock market. The wealth effect is over and is probably on the verge of reversing. In this environment companies will increasingly have to lower prices to generate sales. Costs will not go down quickly as corporations are already lean. The number one cost is labor and for some time, that market will remain tight. Wage concessions will not begin to contract enough to keep profit margins intact. Deflationary psychology, already present to some extent will intensify as worried consumers defer purchases to get a clearer picture of the economy and to take advantage of lower prices later. Why buy now when it will cost less in six months. The cycle feeds on itself as corporations shed workers in an effort to cut expenses. The unemployment rate goes up further dampening consumer confidence. Meanwhile the Federal Reserve, ever late to the party, continues lowering rates to 3 1/2% by the summer of '99 in a belated and desperate attempt to fight deflation and credit contraction both world wide and now imported to the U.S. The stock market, after an explosive relief rally beginning in November '98 turns lower as '99 progresses. Y2K concerns mount as the date looms near. The good news is that many stocks are already discounting the above scenario in the crash that has cut them to 1/4 of their former prices. Many of the large cap. stocks have not discounted '99. At the least, the upcoming relief rally will be a great trading opportunity as many stocks are terribly oversold. Greenspan will never again utter " irrational exuberance'' and will leave office under a cloud that will forever tarnish his legacy. Food for thought To gloomy? Possibly, but it always pays to look at the bear and bull case, forget about what we want to happen, and come to our own conclusions. One thing is for sure, the management and workers of companies we own have stock, feel the pain, and will be there first thing Monday morning trying to build an ever better and more profitable company so that we all realize higher values in the future. Will this be enough to offset the macro economic forces? Time will tell. Mike
