Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Monday, April 25, 2005: Conference
calls I've listened to in recent days talk of "challenging times."
The overarching problem remains too much money chasing too few good
deals, and the resulting desperation. Banks talk of the ease of making bad
loans. Real estate companies talk of pricier deals, with little upside.
Investment professionals talk about the pressure on pension funds: "Yields
are lower than what many institutions have assumed for their portfolios."
Bond professionals talk about continuing low yields, despite rising short-term
rates. In this tough world, cash, diversification, discipline and patience
are key. Panic, which I suffer from, is not good.
Commenting on the recent stockmarket tumble, the weekend's Economist
magazine asked the question: "Why are investors so jittery?"
And it answered:
LIKE a mob of
meerkats alert to any approaching danger,
investors in American shares take fright easily these days. Spooked by mixed
economic and company news last week, they fled stocks for bonds, pushing down
the big share-price indices to their lowest in five months and dragging markets
in Europe and Japan with them (see chart). Spirits revived a bit this week,
despite the first-quarter loss of $1.1 billion announced by General Motors
on April 19th. But the little creatures turned tail again the next day, when
unexpectedly high inflation and low fuel supplies sent share and bond prices
down and oil prices up. Are investors right to be so nervous?
It is true that
the domestic economic news is beginning to point to an unhappy combination
of lower growth and higher inflation. Four big sets of statistics for March
employment, retail sales, manufacturing production and housing starts
suggest that the American economy is losing momentum. This week's inflation
data were surprisingly bad: consumer prices rose by 0.6% in March alone; the
core index (which excludes volatile food and fuel prices) rose by 0.4%. Core
inflation in the first three months of the year was 3.3% at an annualized
rate, well above the Federal Reserve's comfort zone. Some now think that the
Fed may speed up its recent step-by-step increases in interest rates.
This adds to
the stockmarket's fear that the American consumer, on whose shoulders the
world's economic growth now rests, is buckling as interest rates and oil prices
rise. A weaker housing market could complete the consumer's undoing: prices
have climbed by 65% across the nation since 1997 and by much
more in some areas, and the boom has helped to fuel an increase in household
debt and consumption. A reported drop of almost four points to 88.7
in the University of Michigan's April consumer-sentiment index added to this
week's chill. Amid talk of stagflation, the S&P 500 share
index headed down again, closing on April 20th at 1,137.5, 4.2% lower
than on April 12th, when the most recent slide began, and 6.1% lower
than at the start of the year.
background, first-quarter corporate earnings have not been especially solid.
There are plenty of stars Apple, Yahoo!, Intel, Caterpillar, General
Electric, Bank of America, Wachovia but plenty of weak spots too
not least IBM, whose disappointing earnings gave investors the jitters last
week, Coca-Cola and virtually anything that moves (General Motors, Ford, Continental
Airlines). Though lower than last year's, forecasts of growth in corporate
profits in 2005 have increased since the year began, according to Thomson
First Call, a research firm that tabulates brokers' estimates. In that, however,
they seem not to reflect investors' sentiments.
measures of investor confidence now indicate a sharp reversal of mood.
In March, of the 324 global fund managers (with more than $1 trillion in assets
among them) that Merrill Lynch surveys each month, 11% more believed
that economic growth would increase than that it would decrease. In April,
their views were the opposite: 20% more thought that growth would fall
than that it would rise. The survey found a similar shift in beliefs about
an increase in corporate profits, and the fund managers' assumption of higher
inflation continued. An index compiled by State Street Global Markets shows
that investors are reallocating assets away from the riskier ones, in expectation
of hard times to come.
All this nervousness
might look a little odd. After all, corporate America has emerged from the
dark days of 2000-02 with increased productivity, strengthened balance sheets
and mostly huge profits. The economic news is not catastrophic, merely intermittently
depressing. So why this rumbling unease that reveals itself whenever a fact
or figure disconcerts?
answer comes from Rochdale Research, part of a boutique broker-dealer in New
York. Nicholas Colas, head of research there, suggests that firms have achieved
their strong balance sheets and impressive cash balances (at non-financial
firms in the S&P 500, equal to 14% of total assets at the end of
2004) by underinvesting in their operations, despite the good global growth
of recent years. They have tended to their financial ratios and paid out huge
dollops of cash to shareholders through dividends, special repayments (Microsoft)
and share repurchases (Citigroup, Merrill Lynch, Dell, and many others in
the S&P 500). What they have not done is place bold bets on their own
future growth, despite a recent uptick in mergers and acquisitions in
which private-equity firms make much of the running. Since companies have
done little to generate growth internally, they are unusually dependent on
macroeconomic trends for it.
This makes sense.
As the chart above shows, American firms are taking in more cash than they
know what to do with. The return on non-financial S&P firms' capital
employed has been rising, reflecting healthy profitability; the rate of growth
of capital employed, having dropped sharply in 2002-03, has picked up only
slightly, reflecting the reluctance to invest.
In part, this
is a function of size. The bigger a company gets, the harder it is to manage
what it has, still less to come up with something new. Citigroup is in divesting
mode (it announced the sale of its Travelers life-insurance business to MetLife
in January), at least for the moment. Microsoft, though energetic, has not
found a way to compensate for what seems to be the natural diminution of its
business through the growth of open-source software and computing alternatives
to the PC.
In part it is
also a function of a shift in corporate power in America to stronger, mainly
institutional, shareholders from chief executives weakened by a climate of
muddle and outright scandal. There is no harm in a company returning to shareholders
cash for which it has no profitable use: that is what responsible stewardship
would dictate. But it is also possible that powerful shareholders' own short-termism
influences the decision: it is harder to estimate the eventual long-run profits
from business expansion than it is to see the immediate gap between the return
on shares (3.3% total trailing annual return for the S&P 500 as a whole)
and the lower reward available on the cash it takes to buy them back.
And what of
other stockmarkets, wrestling especially in continental Europe and
Japan with their own economic demons as well as with America's? Markets
in Britain, France and Germany all fell this week, though the British and
French indices are still higher than at the start of the year. On April 20th,
Japan's Nikkei rose, heartened by Intel's strong performance, before falling
again on America's renewed gloom. It is all in the eye of the beholder.
you sign non-disclosure agreements? Companies
pitching you to invest often want you to sign a non-disclosure agreement. I've
always hesitated because it gives the company the power to sue you and there
are very few real secrets. Signing a non-disclosure agreement impugns your honesty.
If I chose to blab, all the damage would be done. And the lawsuit would almost
be an afterthought. In short, be wary.
DSL lines from your local phone company:
The computer industry pushes standards to increase its
markets. The phone industry pushes "standards" to protect its markets.
It's a different mentality. A couple of months ago my country phone company
swapped out its switching equipment, messing up my DSL lines. Solution: new
DSL modem and new settings. The big settings change -- activate PPPoE. This
change in turn messed up my Linksys wireless router. The fix for that:
Download the file NetSet Assistant software. Run it and follow the bouncing
ball. You don't have to remember any of this. Just know that the information
is here. It might save you the hours I wasted. If all else fails, the help numbers
for Linksys are 1-800-326-7114 (first level technician) and 1-866-870-5819
(second level technician). Linksys (a sub of Cisco) has superb customer help.
Cell phones on cruise ships. A Norwegian
company called Maritime Communications Partner (MCP) puts equipment on cruise
ships that lets you use your cell phone and your BlackBerry while at sea. They
link their shipborne cell radio networks with public networks around the world
via satellite. Neat idea. For more, click
Community action works: The
world's biggest cement company wanted to build a huge cement plant in Hudson,
NY. It would have sprayed me (20 miles north east) and everyone else with the
most horrible pollutants. Several thousand people in the Hudson Valley came
together, raised money, hired lawyers, engineers and lobbyists. Last night the
company, after spending $56 million, officially withdrew its 6 1/2 year quest
to build the plant. The system works.
What if these people had had Jewish mothers?
LISA'S JEWISH MOTHER:
"This you call a smile, after all the money your father and I spent on
"I don't care what you've discovered, you still should have written."
"Why can't you paint on walls like other children? Do you know how hard
it is to get schmutz off of the ceiling?"
"All right, if you're not hiding your report card inside your jacket, take
your hand out of there and show me!"
"Again with the hat! Why can't you wear a baseball cap like the other kids?"
"Of course I'm proud that you invented the electric light bulb. Now turn
it off and go to sleep!"
"But it's your senior photograph! Couldn't you have done something with
"That's a good story! Now tell me where you've really been for the last
"At least, she was a nice Jewish girl!
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.