Time for a Reality Check
ISN'T IT TIME for a reality check? The Commerce Department reported last
week that gross domestic product grew a robust 5.8% for the first quarter. We've
won the war in Afghanistan, not counting Osama bin Laden. Consumers are spending at a
healthy rate. Federal Reserve policy remains expansive, and short-term rates are
at historic lows. Even with the telecom collapse, no new frauds on the scale of
Enron (ENRNQ) have emerged, at least not yet.
This should qualify as good news. Yet investors are in a funk, the market in a slump. As of Monday, it was in the most extended decline in 19 months, which, in case you've repressed the memory, covers some pretty bad times for the market, including the week after Sept. 11. The Nasdaq and S&P 500 are at levels last seen in October, when the anthrax threat was still raging.
This is why I try not to predict the future direction of the market, since to me, this makes no sense. But the Nasdaq is nearing my next buying target of 1600, Tuesday's rally notwithstanding, so I'm getting ready to buy. Did I say "buy"? Yes.
Some of you keep asking me when I'm going to throw in the towel and abandon the stock market. I can understand why many of you are discouraged. Who wouldn't be? The market's extended decline, interrupted by only brief rallies, has now lasted over two years, which puts it in the top five bear markets. We're well on our way toward a virtually unprecedented third consecutive year of a declining stock market. Just about no one predicted this. Are we on the brink of the next Great Depression, or a 1970's-style oil shock? I don't think so, but by historical measures, that's what the market is telling us.
Yet I look around, and the economy just doesn't look that bad. Even if last quarter's growth was inventory replenishment, somebody bought the inventory that had to be replaced, which means there's underlying demand. Real-estate prices have remained firm, which I take as a good barometer of underlying economic strength. And yet we have the spectacle of stocks like Tyco International (TYC), at $17 a share, or WorldCom (WCOM), grazing $2, or even General Electric (GE), at a pitiful $30. These are all way below their pre-Sept. 11 prices.
I've written at length about WorldCom, whose chairman, Bernard J. Ebbers, stepped down this week, a move that seems long overdue. Perhaps someday someone at WorldCom will explain to me why Bert Roberts remains its chairman; so far, no one has. But enough about WorldCom, which I would continue to shun unless I was by nature a bottom-fisher.
Tyco's situation is far more painful to me, since I have both recommended it and bought the stock. This is not a fashionable view, but I believe Chief Executive Dennis Kozlowski has been forthright with investors and that Tyco has survived intense press scrutiny, not to mention a prior Securities and Exchange Commission investigation, with only minor issues having been raised. But public perception has been terrible, which spilled over into the markets, dragging down its stock and its debt ratings. These are real problems, and they have lowered earnings projections and expectations. I think Tyco is right to reverse its breakup plan rather than sell into a hostile market at fire-sale prices. It's too bad, in fact, that the debt markets are forcing it to spin off CIT Financial. That may prove to be a very attractive public offering for investors, if not for Tyco. I'm holding my Tyco positions for now. For highly risk-tolerant investors — more risk-tolerant than I am — I'd be a buyer.
And if the Nasdaq hits my next buying target, I am going to buy some GE. I continue to see it as a well-managed company that, with its diversified businesses, is an excellent proxy for the economy as a whole. I love its exposure to the defense industry with its aircraft and engine operations; NBC should benefit from an improved advertising climate; and I believe it's addressing investor concerns about its balance sheet. At $30, it's nearing a 52-week low.
Given the breadth of the recent market decline, there's no shortage of candidates to buy. You don't even have to go near the radioactive telecom sector, though, as I said last week, I'm comfortable with SBC Communications (SBC) and Verizon Communications (VZ), despite their diminished forecasts. Real bargain hunters might want to look at some stocks hitting new 52-week lows recently: Amgen (AMGN), Chiron (CHIR) and a slew of biotechnology companies; Macrovision (MVSN), which I included in my "Ten Stocks for the Next Decade" recommendations; EMC (EMC), the big storage company; and Temple-Inland (TIN), a paper- and building-products company.
So, yes, in these dispiriting market times I continue to be a buyer. I believe the market will deliver superior returns over the long term, even if it takes some time to right the excesses of the late 1990s. There's a time to reap and a time to sow, and this is still the latter
