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With the report on capacity utilization in the low 70%-range, investment spending is unlikely to increase significantly, a necessary ingredient for a return to typical economic growth. Perhaps of more concern is the University of Michigan report that the consumer sentiment index declined from 93.0 to 90.9. This raises questions as to how long the consumer can and will support the economy. If the consumer, already at record debt levels, should reduce spending, the economic recovery could be delayed further.
Recently, it appeared there was no need for an economic stimulus package. The economic data indicated a mild recovery appeared to be underway with perhaps a more robust recovery by late 2002 or 2003 as excess capacity in the economy was slowly worked off. With more recent data raising additional questions, expect Congress to revisit the stimulus package if the economic recovery is not evident by mid-year.
Long-term, the energy package has taken on new significance as relations with Saudi Arabia over the Palestinian issue have soured. Saudi Arabia is the major producer of oil within OPEC and the world. Their interests are for the price of oil to be well above the approximately $15 delivery cost to the US, preferably over $20 a barrel to help fund their economy. The US, as a major importer, would prefer prices below $20 a barrel. Saudi Arabia, by withholding oil from the world market would drive oil prices over $20 a barrel, disrupting the economic recovery.
US foreign policy confuses pro-Saudi and pro-Arab policies as being anti-American. Crown Prince Abdullah is going to act in what he perceives as the best interest of Saudi Arabia. This is very likely inconsistent with the interest of the US, especially as regards the Palestinian problem. As long as the US is tied to oil imports form Saudi Arabia and other Middle East countries and feels it must support Israel, there is bound to be conflict. In 1973 and again in the early 1980s Saudi Arabia withheld oil from the world markets, driving up the price of oil and causing an economic contraction in the US. Without greater energy independence the US economy will always face the risk of oil interruptions. By developing domestic sources of oil and developing technology to reduce the consumption of energy, the US’s foreign policy will be less dependent on domestic economic policy.
Stocks in the News
With the stock market adjusting to the weak economic news and reaction to accounting concerns, appealing investment opportunities have materialized. Companies have always hidden losses to meet profit expectations; taking loses in a quarter or a year when they could no longer meet investors’ expectations. Usually the accumulated losses were relatively small. In the 1990s the pressure to meet or exceed profit expectations (remember the whisper numbers) apparently encouraged management to take more accounting liberties than usual, hiding losses longer. Added to that was the “internet investments” now largely worthless. The results have been adjustment to reported profits. Even companies with consistent growth and profits are using this opportunity to ”fess up” to unreported or underreported losses.
Good and bad stocks have been driven down in response to concerns over accounting irregularities and profit adjustment. Even what are or were thought to be the best companies (consider IBM, JP Morgan and Tyco) are challenged about how they account for profits. Are these real concerns or just a temporary stumble in their profit growth? Picking the good quality stocks through this “adjustment period” will be a challenge but also offer the potential for rich rewards.
The controversy over the HP/Compaq merger continues. The supporting directors would like you to believe they independently analyzed the benefits of such a merger. The reality is that outside directors depend on management- provided information and analysis. Phil Condit, Boeing CEO, and Patricia Dunn, CEO of Global Investors, both board members of HP should be occupied with running their companies. Without outside staff support hired by and paid for by the board, an independent review of the merger is practically impossible. That’s not to say the merger is not good for both companies, but from the information I have seen the problems far outweigh the benefits.
The communications sector has been beaten down with no apparent recovery in site. This might be the time to do what is called bottom fishing, picking from among beaten-down stocks that have a chance for large gains in the future, keeping in mind that bankruptcy is a real possibility for some of these firms.
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