SO, you think Old Economy stocks are safe?
Investors over the last few weeks have come to understand that many so-called New Economy companies are nothing more than wishful thinking and hype. That’s largely the reason why the Nasdaq is suddenly in a bear market, and investors are being hard on all technology companies.
At least investors have learned something.
Now for the next lesson: The “safe” stocks aren’t safe either.
This isn’t just my opinion.
Alan Greenspan, for whatever that’s worth, has been urging investors to be cautious for the longest time. And this week the International Monetary Fund – again – warned that the U.S. stock market is overpriced and endangering the economic health of the world. And that was before the bad news that came out yesterday, which should have made investors extremely worried about the susceptibility of the Old Economy – but, of course, didn’t. Just so you understand the rules.
Wall Street doesn’t want you to keep your money in cash, because there are no fees in that. So when investors suddenly became skittish about the “new” Internet economy stocks Wall Street had to convince them that old, established companies were safer. And Wall Street has been successful in doing that. While the Dow and S&P indices have been roughed up a bit this week, they’ve been doing much better of late than the previously high-flying Nasdaq.
Yesterday, the Dow fell 201.58 while the Nasdaq lost 92.85. The S&P was also down, by 26.66.
But there’s a problem in this investment thinking that was becoming obvious even before yesterday’s big drop in the Dow – now down 5 percent for the year.
Yesterday morning, Washington reported that the Producer Price Index (PPI) for March rose 1 percent. That’s the second straight month of full percentage point gains. The apologists excused the number, because, they said, it was caused largely by rising energy prices.
But that’s precisely the point.
The established companies that Wall Street now likes are heavily dependent on oil. If the price of fuel increases, their profits decline.
The New Economy companies aren’t nearly as reliant on oil. It costs a lot less to, say, heat an office where technicians are keeping up an Internet Web site than it does to run a factory, make a real-life product and get that product to market.
Worse – as I’ve said in previous columns – Wall Street has incredibly high earnings expectations for established companies. And as the treatment of Motorola showed a couple days ago, investors have no patience with companies that can’t meet these high expectations.
As I’ve also said before, the inflation numbers coming out of Washington are completely unreliable. These bad inflation rates should have been showing up months ago, when the price of a barrel of oil soared past $30.
So the wholesale inflation that is only now being reported in the PPI is probably already affecting the costs that companies are incurring. There was another dangerous number that came out of Washington yesterday.
Even with the auto industry having a disappointing month, overall retail sales rose a strong 0.4 percent in March. If you exclude autos, the sales gain was 1.4 percent. And the government said sales in February were much stronger than previously believed.
That might be just a bunch of numbers to you. But to Greenspan the inflation and sales figures that came out yesterday translate into a mandatory interest rate increase at the Federal Reserve’s mid-May meeting.
And if it wasn’t for the fact that he is concerned about a possible collapse in the stock market, Greenspan might even risk a half-percentage-point increase in rates to offset inflation.
That’ll be five rate hikes in less than a year. And profits of those old line companies someday will start showing the effect of those higher borrowing costs.
In a way, the New Economy companies are more insulated from the effects of higher oil and rising borrowing costs than the established companies that are now being favored. Internet firms haven’t needed to borrow money at market rates. Up until very recently, most have just been tossed a satchel full of dough by excited investors.
Today could be a key day for the Dow and S&P establishment.
The government will report consumer prices this morning. Wall Street is expecting a rise of 0.5 percent. Any number even a little greater than that could make the flirtation that investors are having with established stocks very short lived.
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