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Articles
Blood
On The Streets
Our
Economy Adrift, Our Country At War—But We Will Survive
by Jason Kelly
9/14/2001
The S&P
500 lost 6.25 percent last month and is down 13.39 percent
so far this year. The Nasdaq lost 10.94 percent last month
and is down 26.92 percent for the year.
The
United States was attacked by terrorists on Tuesday, September
11, 2001. They destroyed the World Trade Center and a wing
of the Pentagon. The country is preparing for a sustained
war against terrorism around the globe, enlisting our allies
and making note of who doesn't link arms to help.
The
stock markets of the United States did not open Tuesday and
remained closed throughout the rest of the week. This is the
longest closure the markets have experienced since World War
I. As of this writing on Friday, September 14, 2001, the markets
are scheduled to reopen on Monday.
The
face of airline travel will be changed forever, with heightened
security causing already congested airports to slow even further.
The U.S. Postal Service is not sending mail by plane for the
time being. Everything is being driven on trucks.
A
Personal Commentary
As somebody
who makes a living writing books and watching markets, I know
New York City well. I've been to the former World Trade Center
on several occasions, gazed up at the towers, held a booksigning
at the Border's Books that used to be on the ground floor.
As a matter of fact, my single biggest booksigning ever was
held there. My investor friends, publishing friends, and just
plain old New Yorker friends joined me that day. It was a
thrilling moment, to take the subway from my hotel in midtown
to the financial district in downtown, walk past the towers,
and enter a crowded room in my suit to speak.
As
you can imagine, news of the calamity hit me rather hard.
I found myself holding an old postcard of New York, looking
at the two towers rising to the sky behind the Statue of Liberty.
I remembered buying the postcard on the street along with
a bag of candied peanuts and, later, a Sabrett hot dog. Now,
when I see the new New York, it doesn't look like downtown.
Phone
calls began to stream in on my toll-free line asking about
money and the markets. But that topic lasted a mere handful
of seconds before callers could detect my lack of interest
and, rather than becoming angry with me, switch gears to share
their own feelings.
It
was a help for the emotional side of our finances that markets
were closed. We were spared an immediate downward spiral at
a time when it would have been awfully hard to take. By Monday's
reopening, global markets will have settled and whatever volatility
still ensues here in the U.S. should be tempered significantly.
That took some of the burden off of me, and other financial
advisors who were naturally sought out for commentary. When
the heart of the global financial markets is literally destroyed,
investors can't help but grieve for their money as well as
the victims.
Because
this is your investment newsletter, I have an obligation to
address the investments I've chosen in light of any and all
circumstances, terrorist attacks included. I will do so.
But
I wanted to take a moment to let you know that I don't mean
to be callous in continuing with business in this issue. It
seems to me that the ultimate victory of terrorists would
be for us to live our lives in terror. I am not terrified.
I am not terrified by what might take place in the stock market,
by the prospect of flying in a plane, or by taking the elevator
to the top floor of what buildings we construct to replace
the fallen World Trade Center. I will continue investing,
I will fly as always, and I will gladly visit New York to
ride those elevators when they're completed.
Until
then, I will do my best to help your money grow over the long
term. I know this devastation comes at a particularly fragile
time for our economy. The arrows were already pointing down
when the planes struck the buildings. The last thing the economy
needed was a sudden blow to our emotions such as the one provided
by these terrorists.
I
know you join me in coping with these events in your own way,
in your own part of our country, and with your own private
concerns. Let's be strong together, with our fellow citizens
and allies around the world.
We
will one day look back on these times from the vantage of
a reconstructed New York, a recovered stock market, and a
world with fewer terrorists than we have today.
The
State of the Economy
The economy
is teetering near recession, if it hasn't already entered
one. Consumer confidence is waning, evidently, as people pull
in their spending to survive layoffs and a lack of raises.
Much of the debt racked up during the runaway bull market
years is finally becoming a worry for free spenders. That
will lead to a redirection of today's spending money toward
settling the bill for yesterday's.
Unemployment is rising, but is still low compared with historic
standards.
In
response to the terrorist attacks, companies have begun lowering
earnings estimates. Particularly hard-hit will be the insurance,
air travel, and tourism industries, for obvious reasons.
The
Federal Reserve is attempting to hold the economy afloat by
injecting some $38 billion into the banking system, and swapping
$50 billion with the European Central Bank. In exchange, the
Fed will receive an equivalent amount of Euros. The extra
dollars in Europe will be distributed to banks affected by
the disaster in the U.S.
The
actions by the Fed might also be followed by another interest
rate reduction before October. At that point, the extra cash
injection and low interest rates should add up to an extremely
liquid financial picture in the United States. Eventually,
it will work to get the economy back on track.
Back
on track is certainly where it needs to be. After Tuesday's
attack, the economy nearly shut down. The morning commute
in Los Angeles and other major metropolitan areas reversed
direction as people went right back home to watch the story
unfold. Restaurants, clothing shops, and car dealerships closed
their doors. Starbucks put a sign in the front door saying
that it had closed all of its North American stores for a
day to pay respect to those who lost their lives.
In
sum, the economy was already struggling to keep itself afloat
before the attack. Adding the burden of the attack to the
list will probably be enough to send us into recession. Some
say we're already there. If so, then this will send us deeper
into recession.
How
The Market Will React
What
that means for the market is entirely unclear. Welcome to
the same old line of song: nobody knows where the market goes.
As
an indication, however, we can take a peek at how bonds did
when they reopened for trading on the Thursday after the attack.
Prices on government bonds surged, indicating that their was
an enormous demand as people moved their money to safety.
Overseas,
an initial drop on exchanges was mostly recovered by Friday.
The hope by some analysts is that the emotion that would have
resulted in a massive selloff in the United States has had
a chance to diminish. Other markets sold off and are now back
to normal. Perhaps we can just resume as normal without going
through the selloff.
It's
possible that people will feel a solidarity and choose to
stay put. This approach is much easier if you own quality
investments that can stand the test of time. Traders and others
who hold questionable businesses don't have that luxury.
Luckily
for this newsletter, everything currently owned is of high
quality. That wasn't always the case, but after a series of
changes made throughout this year, all the stocks and mutual
funds in the portfolios are solid.
How
The NeatSheet Will React
The
NeatSheet is an aggressive newsletter, willing to tolerate
short-term losses in exchange for what should be long-term
gains. My focus on technology and biotechnology creates a
higher volatility than newsletters with widely diversified
portfolios. It should also, over time, create a greater return.
Even
before Tuesday's attack, the portfolios of The NeatSheet
were sinking. Try as I might, however, I could not find any
individual catalysts. The market as a whole became gloomy
in the past month with continuing bad economic news. Our holdings
were simply dragged down in a wave of selling.
I
don't know how the stocks and funds of these portfolios will
hold up after the attack. I imagine they will do roughly what
they did before the attack. The companies will do their best
to make money. They will manage their assets, control their
debt, and compete to the best of their ability. Over time,
that will be rewarded.
Immediately,
however, there might be indiscriminate selling. We might be
going down another 20 percent before people see that a terrorist
attack does nothing to change the business plan of, say, Oracle.
Which
happened to have reported first-quarter earnings in the midst
of the market shutdown. Guess what? They slightly exceeded
Wall Street estimates. The company plans to fully discuss
its results when markets reopen.
Foundry
Networks was cut in half this past month for no apparent
reason. There was no trouble with its manufacturing, no lowered
earnings estimate, no management changes, nothing. Yet the
stock went from $17.78 in the August issue to $8.71 in this
issue.
Take
a look at the recent headlines for Foundry and see if you
can figure out why this stock would drop:
*Sep
11: Foundry Announces High Performance Active-Square Firewall
Load Balancing and SYN-Guard Denial of Service Attack Protection
for Next Generation Web Infrastructures
*Aug
30: Foundry Networks' Internet IronWare Named a Finalist in
the Best of Show Awards at NetWorld+Interop 2001 Atlanta
*Aug
24: Foundry Networks upgraded by WF Van Kasper
*Aug
20: Foundry Networks No. 1 in Overall Market Share in Layer
4 - 7 Web Switch Port Shipments According to Dell'Oro Group
Does
that read like the headline list of a dying company? Not to
me. Nor does it seem bad to see that Foundry has $260 million
cash and no debt. It has sustained a 15 percent profit margin.
The good news in all this is that you can now buy shares for
just 19 times earnings.
Few
sectors are as hated these days as telecom, and the dark clouds
gathered thicker than ever in the past few weeks. Shares of
Tellabs fell to $10.93 in this issue, down from $15.36
last month. The stock was downgraded by Merrill Lynch, a sure
sign of better days ahead.
Tellabs
has a P/E of just 11 now. It has $1 billion cash with no debt.
Its profit margin is 13 percent.
A
piece of anecdotal evidence in favor of Tellabs: Bill Miller,
manager of Legg Mason Value, bought shares. He is the
only mutual fund manager to have beaten the S&P 500 in
each of the past ten calendar years. He is bearish on technology
overall, thinking that the sector is in for a few bad years.
But he bought Tellabs stock.
The
thing to remember when markets reopen is that nothing about
America has changed. We were in an economic downswing before
Tuesday's attack, we're still in an economic downswing. We
talked on telephones before Tuesday, we will continue talking
on telephones. And we will improve them, and buy new ones,
and install a better infrastructure for the next phase of
the internet. Companies used database software before the
World Trade Center collapsed. They still use it. They will
keep using it. America will regain its footing. Our individual
investments will recover.
Might
I suggest that you do not sell in the coming weeks, but instead
look for places to invest new money? Rothschild advised investors
to "Buy when there is blood on the streets."
Take
a look at New York City.
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