Wall Street fecha semana sem rumo. Grandes tecnológicas pressionam

[Dwer]

Don't Confuse Cyclical Change With Secular Change -- By Tobin Smith

Man it feels good to have 2002 as a distant memory. I've never forgotten a year so fast. With my limited short-term memory wiped clean, I now have room for some new data.

There is basically ONE overwhelming reason to continue to dedicate a good portion of your LONG-TERM money (funds you wont need for five years or more) to stocks: bonds are so incredibly expensive.

I love this stat from Ned Davis Research: If by the end of this DECADE (my emphasis) the S&P 500 just gets back to where it was in 2000 (around 1,400), you will get a 7% return on your money. Add in another 2% for dividends and you've got a 9% pre-tax return over the next seven years. Reinvest those dividends along the way and your growth is over 10%. At 10%, your money doubles every 7.2 years.

To put this into relative context, in order for you to achieve a 10% pre-tax return from bonds (other than high-yield bonds) from here you would need interest rates to FALL almost 40% over the next seven years. The ONLY way that happens is the worst-case deflation scenario that some are obsessing about these days.

If you are in the deflation worrier camp, I think you are confusing secular economic trends (long-term trends that are not business cycle related) and cyclical trends--the kinds of economic things that ARE part of the boom-bust cycle of business life.

Don't make this mistake or you are destined to lose more money in your "safe" bonds than you lost in your "safe" blue chip stocks this year.

The first thing you need to understand is deflation. There are two kinds--benign and malign. Benign deflation is falling prices because of increased productivity or efficiency. Malign deflation is when prices are falling because of lack of demand.

Equity investors are deathly afraid of malign deflation as it sucks earnings power out of business and compounds the cost of borrowed money. In other words, if the value of your house is going down but your mortgage obligation does not, the equity you have in your house shrinks.

The manufacturing and information technology worlds have taught us that they can maintain and even increase profits in the benign deflationary world of manufacturing where rising productivity and falling component costs combine to maintain profit margins.

Japan is the poster child for malign deflation. The sclerotic malaise of its insane form of capitalism (i.e. pretending that failed business loans are not really bad and preserving bankrupt companies in the name of saving honor) is thankfully a Japan-centric psychosis.

In Japan, Enron would still be in business and United Airlines would have just borrowed another unsecured $10 billion in money at 0.5% interest. The propping up of zombie companies and institutions KILLS demand as those on life-support do not grow. In free market capitalism, the death of one company frees labor, risk capital and lending capacity to be allocated to where it is best rewarded--growing companies with relative economic health.

Yes, we have an economy that is stuck in the normal business cycle shift from the early base building phase to the sharper "up" leg of the middle high-growth phase.

And yes, there are secular economic trends that ARE NOT going away
soon:

1) Overcapacity: The binge of spending on plants, equipment, IT, new retail stores, etc., fueled by the 1995-2000 capital investment orgy is nowhere near worked off. I gauge the amount of overcapacity by industrial capacity utilization numbers--and we have another 15%-20% of improvement to go. As long as we have more than 25% of our industrial capacity standing fallow, no rational manager will proceed with additional capacity investment.

But opposed to the Japanese or European version of capitalism that keeps zombie plants alive, our system is VERY actively closing down excess capacity via sales, mergers and literal mothballing of unused capacity. (Have you flown over the Arizona desert recently? The fleet of dormant jet planes on the ground there looks like a Stephen King novel about jets that can clone themselves.)

2) Terrorism--which is overrated in its impact to economic growth: We've had very dynamic economies operate with simultaneous terrorism--Israel from 1991-2000 grew its economy over 5% a year. Terrorism is going to be with us for the rest of most of our lives--and just like the Cold War threat of instant annihilation, we'll adjust and get on with our lives and our economic growth.

But let's not forget the other secular change working through our economy is high relative rates of productivity growth. The missing ingredient in Japan is productivity growth--more goods and services per hour. The price of maintaining so many zombie companies is poor productivity and very low return on capital. It is no wonder that Japan leads the world in lack of productivity growth and poor return on invested capital.

The continued Darwinian removal of capacity in our economy and the growth of U.S. productivity at the same time will boost corporate profits and growth in personal income. These are the two of the three keys to keeping us out of malign deflation. The third key is a Fed that is dedicated to keeping monetary policy easy enough to keep demand from contracting.

Add in the demand and profit growth triggers of:

* 25% lower energy costs post-Iraq;
* Real tax relief from Washington;
* Real population growth in the U.S. in 2003; and
* Real inventory replacement to normal levels

and you have in place an economy that can grow 3% in 2003 and up to 4% in 2004 without inflation and with earnings growth.

Toby