Issue #47 - 3/01

FOR WHAT IT’S WORTH

*“Do as I Say, Not as I Do”*		Issue 47
By: Ron Brounes		March 2001

What a difference a year makes. For those of you with short memories, go to your “For What It’s Worth” file and re-read the March 2000 issue entitled “Irrational Exuberance.” If you “misplaced” that file (or were not “lucky” enough to be on the mailing list back then), let me remind you of some prophetic (not pathetic) quotes from that issue. “In many cases, investing has become sheer speculation. The tide will turn one day; it may get ugly.” “Often, they [analysts] disregard ancient valuation methods like PE ratios and show little concern when they see companies with no near-term profit expectations trading with billion dollar market caps.” “I am quite concerned that the market has become a self-fulfilling prophesy, a trend that may one day be reversed.” At the writing of that newsletter, (March 10, 2000) the tech-heavy NASDAQ index was trading at 5048; by the writing of this newsletter, it had plummeted below 2000.

Well, before you start kicking yourself for not listening to the “genius” who warned you about the correction, let me share with you some of the results of my own portfolio stocks these past 12 months. After all, I realize that “misery loves company.” (Bear in mind, I did note in the newsletter that “…like many others, my portfolio is too heavily weighted in tech issues.”) Dell computer was trading at over $51/share (on its way to $59); it’s now hovering around $22. On a split adjusted basis, Intel had moved beyond $60 (and ultimately passed $70); recently, management warned of a revenue shortfall and the stock price has fallen below $28. Local favorite, Bindview, had surpassed $40; today, it’s barely treading water at $3. Unfortunately, I can go on.

SELF-FULFILLING (IN REVERSE)

Just over a year ago, business execs and consumers alike were quite optimistic about the economic prospects for the future. Companies were investing heavily in technology and other aspects of their business operations. They rewarded employees with high compensation packages, often tied to stock options and other incentives. Individuals found themselves in hot demand as the job market was the strongest in a generation. They confidently spent their hard earned income in the malls, on vacations, and on investments such as stocks and real estate. The more money they spent, the greater the revenue prospects for many businesses. The greater the prospects for business, the higher their stock prices would rise. The higher the stock prices, the more money the “new” investors made and spent. And so, the cycle continued with no end in sight. Analysts joined the fray by recommending virtually anything and everything technology related. (A “.com” or “e” in its name always helped.) The stronger the recommendations, the greater the demand for the stocks and the higher their prices would go. Occasionally a perceived “naysayer” like Alan Greenspan (or my Uncle Isaac) would warn of over-inflated prices, but few investors listened.

Seemingly all at once, the Internet euphoria came to a “crashing” halt. Microsoft lost its case with the Justice Department. An unpopular analyst or two questioned valuations of some “.com darlings.” A few of these companies revealed that, contrary to popular belief, they were actually strapped for cash and would not be able to exist without additional capital. Layoff announcements ensued across various industry sectors. Businesses issued earnings warnings and then missed even those lower projections. Employees grew worried about their job security and their elevated costs of living. Those popular stock options were less and less valuable (or even worthless). Consumers refrained from purchasing that new house, new car, new VCR, or even eating at the new posh restaurant. As consumer spending greatly subsided, businesses were further impacted. Difficulties faced at one company often foreshadowed (or lead to) problems at many others. Weaker computer sales meant fewer memory chips and less software would be needed. Additional spending cuts were implemented which meant less business investment in technology. Analysts who had been praising the merits of now defunct management teams and business plans (while padding their own pocketbooks with outrageous bonuses) were lowering some of their “buy” recommendations in order to save face. And the stock market plummeted and plummeted and plummeted some more.

The consumer drives the economy and the economy drives the stock market. Right now, consumer confidence has been shattered. The optimism of a year ago has been replaced by pessimism and fear. The negative reports from business execs, the press, and even politicians seem to be adding fuel to the fire. “Market watch” programs which were initiated over the past few years to reveal good news to “savvy” investors now seem to be spreading “gloom and doom” to the few who are still watching. Investment oriented Internet chat rooms and bulletin boards are often filled with misinformation in an attempt to manipulate the markets even more. While proposed tax cuts (phased in over 10 years) may indeed help the economy over the long haul, they should never be used as a scare tactic or portrayed as the panacea to avoid a pending recession. When the consumer/investor tries to weed through all of the rhetoric, more uncertainty and lack of confidence are the byproducts. Ironically, Greenspan has emerged as the eternal optimist these days, attempting to convince the public that the economy is not as bad as may be perceived.

WHAT’S NEXT???

Because of the technological developments of the past few years, economic cycles move faster than ever before. The once strong economy came to an abrupt halt virtually overnight. And yet, not much has truly changed. The unemployment rate still hovers around historically low levels. Technology is still advancing at a rapid pace, enhancing the productivity of both so-called “old” and “new” economy companies. Venders, suppliers, shippers, manufacturers, salespeople, and consumers all have the ability to communicate with each other faster and more efficiently. Businesses instantly receive information about real sales, inventory buildup, and other aspects of their ongoing operations, and are able to increase production (when positive) or slam on the brakes (when negative) at a moment’s notice. Likewise, consumers have greater access to information and are actually smarter and more knowledgeable than in the past. A short time ago, few of us even knew who Alan Greenspan was. Now, his policies are standard office water cooler conversation.

With that said, the economy can regain steam, perhaps as quickly as it lost it. When the stock market returns to favor (one day), investors should be wiser following the lessons learned from the devastation they have endured. Hopefully, investors will once again become “investors,” buying stocks because of their long-term profit potential and not because of some “get rich quick” attitude that evolved over the years. Before any self-fulfilling prophesy can reverse its course (again), the consumer must first regain that lost confidence. (Judging by the market this week, that’s easier said than done.) And before I proclaim that the end of these tough times are drawing near, I need to check with Uncle Isaac. I’ll keep you posted so you can “do as I say, but not as I do.”

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