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-----Original Message-----
From: John Stevenson <johnstev@xxxxxxxxxxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Date: Wednesday, June 10, 1998 5:18 PM
Subject: MKT - The "Big Picture"
>I think it's high time that ALL investors pull their noses out of their
>charts for a time, and take a REAL GOOD look at some fundamental questions:
>I would like to stimulate some discussion of these potentially
>earth-shaking matters in lieu of the usual formulae tweaking comments that
>are of interest in the micro arena, but may lead to tunnel vision in the
>macro arena.
>
>Anyone care to wade in. . .?
>
>A scientist un-accustomed to seeing Natural Law (if same is present in Mkts
>at all) re-written by ravingly optimistic ad copy. . .
>
>John D.Stevenson
My two pennies worth :
Investors are finally starting to come to the realization that earnings are
most likely not going to improve any time soon in the "leading sectors",
and will most likely deteriorate further (yes, earnings STILL matter). In
my opinion, Abby Cohen's "stair step theory" does not apply to this
"correction" - to quote Joe Granville : "In a bear market, the bears are
right" (contrarian indicators are no longer contrarian during the initial
phase).
>1. Do you believe in the so-called "New Paradigm"?
(If you do I think you're probably beyond help at this point, but how can
you justify a New Paradigm, and engage in technical analysis based on models
generated from the "Old Paradigm(s)"?)
Earnings still drive the market, but this is forgotten from time to time by
investors who do not believe that the good times will end until presented
with ample evidence in the form of earnings warnings such as we are seeing
now.
>2. What happens, based on historical empiricism, when prices rise, and
earnings fall?
I seem to remember something called "stagflation"....rising prices in a
stagnant economy.....yet right now inflation is nowhere in sight, and some
sectors are actually experiencing earnings growth (retail, for instance).
>3. If the "fundamentals" of the Economy can be reduced to "a low rate of
inflation" (as Bulls want us to believe), what about the other
"fundamentals" that tell a radically different story? (i.e.: balance of
trade, mkt internals, shrinking profits, chaos in foreign mkts, blazing GDP
growth. . .etc.)
This is exactly why the market is having a hard time finding a definite
direction - balance of payments, shrinking profits, etc DO MATTER...right
now it is a tug of war between diverging indicators....low inflation yet
shrinking earnings.....blazing U.S. GDP growth yet chaos and decreased
demand overseas...
4. Does laying off 1000's of workers really constitute an "increase in
productivity", or merely a short term boost to the bottom line (and the
stock price), to be inevitably followed at some indeterminate time by an
erosion of product and/or service quality? Is erosion of quality deferred
inflation?
This is particularly disturbing in my opinion....when all else fails,
companies squeeze productivity or merge to find economies of scale and
increase the bottom line...a point must ultimately be reached where
"restructuring" and merger activity leads to decreased, rather than
increased profits (diminishing returns)...and when productivity growth slows
and demand remains strong, the following scenario may occur :
The rate of Inflation increases as increased costs are passed on to the
consumer or wages are cut - but unemployment is at or near historical lows,
leading in my opinion ultimately to the former rather than the latter. The
Fed, being preemptive, would attempt to cut inflation off at the pass by
increasing interest rates - and we all know what that means for the market.
Of course, Cheaper imports could take the place of higher priced
domestically produced goods. Coupled with decreased demand for U. S goods
abroad, this could lead to decreased earnings (a situation we are now seeing
with many companies with overseas exposure) and ultimately a recession.
Since the dollar is strong, this is also a good possibility. Companies
would be shooting themselves in the foot if they tried to cut corners on
quality ( look at what happened to the U.S. auto industry when they did
this), so this is unlikely to occur.
This is why the Fed has not had to act as of yet (and may not have to) - the
Goldilocks economy (not too hot, not too cold). Allen should put the
printing presses on auto pilot to achieve a constant rate of money growth,
and then go fishing. Blazing U.S. GDP growth has been tempered by low
inflation and decreased demand abroad, capital and wage costs have been
relatively cheap for companies, and competition has put the pressure on U.S.
companies to increase productivity growth. Nobody knows what the outcome
will be just yet. Of course, the stock market has historically been a
leading indicator of the direction of the economy and investors are finally
starting to come around to the deteriorating earnings picture.
5. Do the PPI and CPI really measure inflation (defining same as: an
erosion of purchasing power due to an expansion of the money supply), or
have they become easily manipulated tickets to popularity for politicians,
and sales tools for Mutual Funds?
The correctness of the CPI and the PPI has been debated for some time (I
read somewhere that CPI actually overstates inflation). Inflation (or
deflation) can be caused by things other than the speed of the Fed printing
presses (wage pressure, productivity, competition)....it is easy in theory
for the fed to tighten or loosen the money supply, in practice, the hard
part is determining the "correct" money supply growth rate.
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