YA GOTTA BELIEVE!

As a young New York Mets fan I was enthralled, as was America, with the 1969 version of the "Miracle Mets," the one-time stumblebums who went from rags to riches to win the World Series. Relatively forgotten in comparison is the 1973 Mets team which, in spite of barely managing a record over .500, managed to go to the World Series again and take the mighty Oakland Athletics to seven games before capitulating.

Perhaps the most colorful member on this team was relief pitcher Tug McGraw, who single-handedly rallied his teammates as well as Mets fans with his classic rallying cry, "Ya Gotta Believe!" By the sheer force of his will, McGraw carried a team that didn't belong there to within one game of its second World Championship.

McGraw’s heroics and motivation was just the latest proof at that time that man is quite capable of talking himself into performing feats which, on paper and according to all logic, are impossible. At the time, the lefty’s magic carried one baseball team and a few million fans. Today, that same will is needed by some 270 million Americans--consumers and investors--who the powers that be pray will "motivate" themselves out of their current funk. Without this rebirth of investor and consumer optimism that marked most of the decade just concluded, all of Alan Greenspan's horses and all of President George W. Bush's men will be unable to turn around either the economy or Wall Street.

Although some areas of the economy continue to show strength, consumers are nevertheless slipping into a deeper funk. The University of Michigan's consumer sentiment index has fallen sharply over the past three months--by a magnitude not seen since the outset of the last recession in 1990--as mass layoffs, stagnant manufacturing, the failure of the stock market to mount a sustained rally and more have slammed consumers’ optimism. The index now stands at a seven year low, as does a similar measure of consumer confidence published by the Conference Board. In the wake of these latest reports, economists of varying stripes were almost unanimous in calling on the Federal Reserve to continue its aggressive easing of monetary policy, if for no other reason to cheer up consumers and get them borrowing and spending again. Such moves, it is believed, would also serve eventually to get investors in a better mood.

Trying valiantly to do his part to make investors (primarily) "believe," Alan Greenspan has gone out of his way in his attempts to talk the economy--and, by extension, Wall Street--back to some relative health. In his most recent testimony to the Senate Banking Committee, the Fed chairman actually waxed bullish about the longer-term prospects for the economy. "The longer-term outlook, as I've reiterated many times, in my judgment is undiminished in the sense that in any measure that I can see, we are only partly way through one of these remarkable periods of technological advance which is crucial to productivity growth," Greenspan testified.

He added that, in spite of concerns related to inventory build-ups and lagging orders where the near-term economic picture was concerned, both he and business expected the current weakness to be fleeting.

Greenspan has been conspicuously joined of late by other Fed governors as well as regional bank presidents, who have almost unanimously been singing the same tune. The most prominent among this lot recently was New York Fed President William McDonough, who told a group of reporters in Thailand on February 5 that the U.S. economy would begin to rebound by the second quarter and would be exhibiting "quite strong" growth by the second half of the year.

McDonough also suggested that the U.S. needed to maintain a reasonably strong dollar to attract capital inflows and finance the burgeoning current account deficit, implying that without this ingredient the economy might not do as he predicted.

One rather humorous addition to the positive therapy the Fed is employing came recently from the Dallas bank President, Robert McTeer, who quipped that the new economy ". . .may have a hangover. It may have the blues. But it isn't dead." He added that there's nothing wrong that couldn't be fixed with more consumer spending. "If we all join hands together and buy a new SUV, everything will be okay" he said.

As part of the Fed’s own "Ya Gotta Believe" campaign, Greenspan and crew have demonstrated that they are willing to provide all the liquidity necessary, in addition to the feel-good rhetoric. The Fed has now cut rates twice by 50 basis points each time, and will undoubtedly do so again at its late March meeting, if not sooner--especially if the Nasdaq begins sinking like a rock once again. Without a doubt the liquidity situation in the financial markets has indeed improved in recent weeks as the issuance of new corporate debt--even of the junk variety--soared to a total of $90 billion worth of new paper in the month of January alone. In fact, it is apparent that investment bankers are "believing" since January's junk bond issuance alone, at a healthy $14 billion, represented one-third of what was issued in all of 2000.

Wall Street pundits are similarly joining the positive thinking crowd. Lehman Brothers’ Jeff Applegate recently opined that the S&P 500--currently trading at about 23 times this year’s expected earnings--would rise to trade at a P.E. of 26 by year's end. Goldman Sachs’ Abby Cohen is a bit more optimistic, suggesting that the S&P 500 will manage to trade at 28 times earnings by year's end. These forecasts suggest a 2001 closing level around 1600, or a healthy 25 percent gain from current levels.

While these gurus and a few other ones have fortunately had the sense, as far as I know, not to try to similarly handicap the Nasdaq (whose P.E. at the moment is around 100), they're prognostications nevertheless are fantasy even in our present "Ya Gotta Believe" world. For starters, they assume that, at least for the S&P, the Fed's monetary stimulus must result in higher stock prices. As I discussed in January's issue, this is not an automatic. In any event, for those of you who believe otherwise, ask Japanese officials why ten years’ worth of an easier monetary policy has not created a new bull market in Japan, or resulted in a sustained economic recovery.

I also continue to believe that most of the earnings projections on which some are basing their hopes of a meaningful second half turnaround are unrealistic. As I mention elsewhere in this issue, corporate earnings in many sectors are being crushed by high energy costs. I should add here also that, although Greenspan insists otherwise, it is intensifying inflationary components in health care costs, wages and more that are similarly doing in many companies' bottom lines. As one more sober pundit pointed out recently in refuting the perhaps necessarily Pollyannish views of the positive thinking crowd, corporate earnings are in fact deteriorating at a far more rapid clip than the Fed is easing monetary policy. Further, I cannot help but believe that there are at least two truths in this area with which investors have not fully come to grips: that is that the earnings bad news is not nearly over, and that the "profits recession" we are now in is likely to last at least through 2001, generally. If I’m right, especially on the second count, earnings projections such as those on the front page will be blown to smithereens before long, and stocks in general will again appear something other than "cheap."

WHY BUY NOW?

Investors seem to have at least some clue of this, and--with the exception of a strong buying spurt during the first half of January--have not stepped up to the plate to buy stocks as quickly as had been expected. The Chinese water torture of one bad earnings report and/or future warning after another is taking its toll, and has caused investors to more seriously question the "Ya Gotta Believe" Fed. Such legitimate and genuine concerns resulted in the quick aborting of January's rally, most of the profits of which we were able to lock up before tech stocks (in particular) gave them all back. Although there are regularly pundits on CNBC and elsewhere who are trying to make the case that stocks are cheap right now, investors in increasing numbers seem to be asking themselves the question, "Why buy now?"

For stocks in general, in fact, investors--uncharacteristically so, when compared to their behavior of recent years--are not as quick right now to buy on the dips, preferring to wait until there is more than talk that suggests we are not going into a recession. While this suggests to me that most of the staple "Old Economy" stocks have virtually little downside risk, it also suggests they won't be going up much soon, either.

Where technology stocks are concerned, however, an interesting phenomenon seems to be taking place. In spite of all of the "Ya Gotta Believe" cheerleading coming from the Fed, Wall Street analysts and elsewhere, investors might at long last be waking up to the realization that in general, technology shares are doomed for some time to come. Many of these people have discovered how "cheap" technology bellwethers such as Cisco Systems, Dell Computer, Intel, Yahoo and--as I discuss elsewhere--Lucent Technologies were mere weeks ago. All have become much cheaper. Most, if not all, will become cheaper still.

By far, the best anecdote I've heard recently regarding the practice of investors throwing money joyfully--and indiscriminately--at tech stocks in recent years, came from Donald Coxe when he was interviewed on CNBC Friday, February 9. Coxe, who is the chairman and chief strategist at Harris Investment Management, likened the Nasdaq as a whole to a "gigantic masked ball." At this "ball" investors have been attracted to any number of participants whose costumes were too tantalizing to ignore. However, as midnight strikes and the masks are removed, Coxe quipped, "All of a sudden some of them aren't as attractive as you thought."

Coxe suggests--and I concur--that where technology stocks are concerned, we have started to go through a "process of disillusionment." It is going to take some time for investors to sort out "what is real" at this ball; those who do, and end up with a company or companies of genuine beauty, will enjoy investment bliss. Many more, unfortunately, will end up with the ugly ducklings who far outnumbered the former.

Thus, by all accounts, it appears that we are in for a much longer period of aimlessness--with a continuing bias to the downside--for stocks than many want to contemplate. It will continue to be a trader’s market, punctuated by occasional rallies, most of which will be spawned by Federal Reserve moves to soften monetary policy, and otherwise get us all to "believe."

For many companies--and the market generally--however, the fundamentals won’t be on stocks’ side for some time. This will necessitate all the positive thinking that Greenspan and Company can instill in investors. This environment, together with the fact that investors are somewhat standoffish at the moment (even though most "analysts" are helping to lead the cheers for stocks) prompted Paine Webber’s Art Cashin to quip just the other day that, "I don’t care if it’s irrational--just give me some exuberance!"

to Home