The Market In Review:
"Businesses must be willing to destroy
the old while it is still successful if they wish to build the new that
will become successful. If they don't destroy themselves, others will destroy
them." - Lester C. Thurow, MIT, June 1999
Not Everyone Agreed The Good Times were Here to Stay
Nearly a year ago, the Net was de rigeur
with investors. People were talking about how the economic cycle of boom
and bust brought to us by industrial corporations had vanished. The rules
had changed in the Information Age.
The dot.com companies were telling the industrial
giants - General Motors, Ford Motor Co., Toyota, and DaimlerChrysler -
what they should do to join in or get left behind in the dustbin of history,
like the buggy whip makers were.
The new economy seemed to have all the answers.
The dot.coms were attracting capital investment at a rate that incurred
both ire and envy from market traditionalists.
Dot.com millionaires were everywhere, with
wealth that apparently rivaled the early automotive barons, such as John
and Horace Dodge or even Henry Ford I.
Who would have thought things would turn out
the way they did?
To be sure, there were people who decided to
look beyond the economic landscape back in 1999 with the cold eye of pragmatism.
They didn't like what they saw.
"It was the dot.com companies telling
the industrial giants - General Motors, Ford Motor Co., Toyota, and DaimlerChrysler
- what they should do to join or get left behind in the dustbin of history,
like the buggy whip makers were."
I believe it appropriate to share the contents
of the November 8, 1999, story written for the Monday Morning News a widely
read industry trade publication.
The story began with a simple, thought-provoking
question. Here is that story in its entirety:
Analysts Debate Possible Market Correction
By Joseph Cabadas
Could the U.S. stock market be on the
verge of the crash of 1999?
That may seem like heresy, with the economy
having ridden high for so long, not to mention low unemployment,
record profits and auto executives from Ford Motor Co. CEO Jac Nasser
to General Motors Corp. CEO (and Chairman) Jack Smith predicting
car sales of up to 17 million units in 2000.
"On Nov. 8 or the ninth or 10th,
we are predicting the bottom will fall out of Internet stocks,"
said Myron Stokes, president of eMOTION! REPORTS.com. "Meanwhile,
we are predicting the (Dow Jones & Co. industrial average) will
begin falling to 8,800 points in near term and to 7,500 by spring.
This shouldnt be viewed as a Doomsday scenario, because the
Dow should be at 8,800 right now."
The recent rally in stock prices, since
the Dow index dropped temporarily below 10,000 in mid-October (1999),
has been the result of stock analysts, financial gurus and major
firms telling investors not to panic, what Stokes calls market manipulation.
"The Dow can be manipulated by increasing
or decreasing investor confidence," he added, pointing to the
way investors react to statements by Federal Reserve Chairman Alan
Greenspan as an example of market manipulation.
According to Stokes, an example of stock
market manipulation is in South Korea, where three Hyundai executives
were recently convicted in one of the worst cases in South Koreas
history of market manipulation.
There are four factors that will lead
to the Dows drop, according to eMOTION! REPORTS.com consultants and key economic indicators, Stokes said.
"In late September, we had projected
that the stage was set for the Dow to drop to 8,800 points in two
weeks," Stokes said. "While it did not drop to 8,800 at
that time, it did dip below 10,000 and sent shockwaves around the
Plus, there is an expectation that the
Federal Reserve will raise interest rates by a half point in the
very near future and, if Greenspan isnt satisfied with the
results, the Fed will probably hike interest rates by a total of
1.5 points by spring 2000.
"The next factor is that the Dows level cannot be sustained
anywhere near 11,000 points to begin with," Stokes continued.
"And last, this rally in the market began two years ago due
to the artificial manipulation of the Japanese yen to undervalue
it. This undervaluation is what caused Japanese investors and investors
dealing in yen to come into this market, and boosted it well beyond
7,000; contrary to all previous market analyst predictions."
Stokes view, however, runs counter
to the views of many in the auto industry.
G. Mustafa Mohatarem, General Motors
chief economist, said: "In my first year at (Denison University
in Ohio) I took a course on economist Milton Freeman who said, Show
me an economist that is forecasting what the stock market will do
and I will show you a quack. It is only after the fact (of
any downturn) that we will know if the stock valuations are justified
or not. There is no way to know whether they are correct beforehand.
Clearly, a lot of people feel they are appropriately valued."
Meanwhile, Steve Collins, president of
the Washington D.C.-based Automotive Trade Policy Council, said:
"Those who are predicting the market with certainty are making
lots of money on Wall Street, but few predicted that this year (1999)
would be as strong as it was."
Still, Collins added: "All bets
are off when it comes to predicting the direction of the U.S. economy
in the future."
The Automotive Trade Policy Council represents
General Motors Corp., Ford Motor Co., and DaimlerChrysler AG.
In the past, the U.S. economy has been
more cyclical, but it has remained strong and stable for six or
seven years, and Collins said no one sees signs of that changing.
"The auto industry always parallels
the U.S. general economic performance because cars are such a big
ticket item and this relates to consumer confidence, Collins
said. "When times are good, people purchase. When they have
anxieties, they stop purchasing big ticket items."
Mohatarem also thought the connection
between the devaluation of the yen in February 1997 an the rise
of the U.S. stock market is I think, a spurious relationship.
The Dow is doing well because the U.S. economy is doing well.
Still, both Collins and Mohatarem agreed
that the yens value had been artificially manipulated in 1997
by the Bank of Japan and the Japanese government - the yen-to-dollar
ration went from 105 yen to one U.S. dollar to a 140:1 value.
"As an economist at GM (the yens
drop in value) has been frustrating," Mohatarem said. "We
wanted to negotiate a trade agreement with Japan in 1995 to open
the Japanese market to car sales and parts exports. We did this
deal when the yen was trading around 95 yen per dollar and, subsequent
to that, the yen weakened substantially (by about 30 percent."
The weaker yen allowed the Japanese car
manufacturers, for instance, to sell cars at a higher profit in
the U.S., which is economics 101, Collins said.
Japan had a serious recession, so it
was understandable that the value of the yen would drop, Mohatarem
said, adding that it has returned back to the level it should be
at vs. the dollar - roughly at a 104:1 exchange rate.
Yet, for Japan, "the second largest
economy in the world, for it to manipulate its currency to promote
exports is simply inappropriate," Mohatarem said.
Although Mohatarem said that there was
a specious relationship between the U.S. stock market and the yens
value, Stokes said that the GM economists and Collins
statements clearly show there is a real relationship. So, as the
yens value rises, it will prompt Japanese investors to pull
out because their investment incentives in the U.S. will no longer
Next, there have been several announcement
of e-commerce initiatives within the past several weeks (in October
and November 1999) that certainly have bolstered investors
confidence in Internet stocks, such as Fords and GMs
announcements during the Specialty Equipment Manufacturers Association
(SEMA) show in Las Vegas the week of Nov. 1, Stokes observed.
Practically everyone acknowledges
that there is nothing to sustain the momentum of Internet stock
Wall Street is doing everything in its
power to prevent a correction of the market from occurring, but
at some point it will reach critical mass, Stokes said. "But,
would you rather have the market go down in a predictable and controlled
descent or in an uncontrolled descent?" he asked rhetorically.
Internet and technology companies are
the future, but the fall in their stock value is a self-fulfilling
prophecy, Stokes said.
"The word from Silicon Valley has
been to expect a significant drop in Internet/tech stocks in early
November (1999)," he said. "Practically everyone acknowledges
that there is nothing to sustain the momentum of Internet stock
values. The Internet stocks are the modern-day version of the emperors
new clothes and soon everyone will realize that the emperor has
An indicator of the weakness of Internet
stocks value is that the Magellan Fund dumped all of its Internet
stocks a couple months ago and replaced them with more traditional
communications stocks, Stokes noted.
Regarding all of the glowing predictions
of rosy car sales in 2000, if the market goes down by spring, it
will have a chilling effect on all sales, Stokes said.
Mohatarem does, however, expect a slowdown
in the American economy in 2000, but it will still be a good year.
The Bubble Bursts
It was the claim of Wall Street analysts and
others that we had broken away from the old cyclical economy; that the
New Economy was going to take over the world as we left the Industrial
Age behind to enter the Information Age.
It seems we hit a large pothole on the Information
superhighway; one that left us - in auto industry terms - with a blown
out tire and damaged power steering.
The overvaluation of the Internet stocks and
their cash-burning business model, seemed odd to some. Of course there
were economists who noted that a stock market crash was coming. But their
voices of alarm were drowned out.
As 2000 progressed, it seemed that the Internet
bubble wouldnt burst and additional warnings from a few responsible
analysts and journalists went largely ignored. But then, seemingly overnight,
the thinkable and predictable thing happened.
The economic bubble burst. One catalyst, of course, was the U.S. Federal
governments lawsuit launched against Microsoft, which, in the opinion
of some, started the tech stocks tumble. Meanwhile, Greenspans attempts
to slow the economy down from overheating started taking effect.
A roller coaster ride of Dow and NASDAQ movement
was the order of the day. But, again, those who manipulated the market
to artificially high levels kept advising people to stay the course. Buy
stocks when theyre cheap, was the advice. After all, they
didnt have anywhere else to put their money. Certainly, no one would
be foolish enough to re-invest in the old, established Blue Chip
stocks; why, that would be non-progressive.
In the course of these market gyrations, I
had the opportunity to interview Ford Chief Financial Officer Henry Wallace,
following a third quarter 2000 financials news conference, about the chances
of a post-presidential election recession. (Mind you, the bitter post-election
fight between George W. Bush and Al Gore had not occurred at this point).
Wallace responded that a recession wasnt likely, but did say that
2001 would seem slower, by comparison to 2000.
As of this writing, the U.S. and Japan economies
are in turmoil, perhaps in precursor to a crash. Moreover, Europe is not
immune, owing to ever-present global economic linkages that virtually
ensure that the health or illness of one correspondingly impacts the other.
It is doubtful that anything less than a recession can be avoided at this
point. And this despite expectations of yet another reduction in Federal
interest rates by Alan Greenspan this week.
Alan Greenspan is faced with two absolutes,
says e MOTION! REPORTS publisher Myron D. Stokes.
One, that the market must be allowed
to correct itself without further manipulation either by lower interest
rates for additional - and artificial - stimulus, or unsupportable claims
of market stability to calm investors; and two, the need to help stabilize
the Japanese economy teetering at the brink of collapse. He is quite aware
of the symbiotic relationship existing between the U.S and Japan dating
back to the fall of 1946 when the war-shattered economy of the latter
was rebuilt on the American model. Moreover, he is cognizant of the new
role of the Japanese as a core partner with the U.S. in the maintaining
of global economic stability. This inextricable linkage causes one to
share the fortune or misfortune of the other.
Greenspan will act on Tuesday in the
interest of stabilizing the Japanese economy, either through no further
reductions in interest rates or even a half point increase to accelerate
the rate of recovery.
Stokes says that Greenspan will act on Tuesday
in the interest of stabilizing the Japanese economy either through no
further reductions in interest rates or even a half point increase to
accelerate the rate of recovery. The only reason that he will lower
interest rates is if he comes under tremendous pressure - and I understand
that he is - from the White House. He, of course, has the option to refuse.
As we look back on the past 36 months
, it should be clear that the market does indeed give us warning signs
of difficulty or even impending disaster; but only if we have to courage
to look for them.
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