Comments: Donald Straszheim
President, Straszheim Global Advisors
How do you expect the coming recovery to shape up, especially in terms of its strength and the sectors that will lead and lag behind? How have you factored in the uncertainties surrounding terrorist activity and the war?
The U.S. economy has not yet hit bottom. And weakness in the Unites States has infected the rest of the world. Virtually every economy in the world -- with perhaps the exception of China and India -- is either in or near recession. The current business attitute in virtually all industries -- any spending that is non-essential, cut it. We see hiring freezes, layoffs, pay cuts, elimination of travel, consultants, entertainment, advertisisng, and capital spending virtually across the board. This attitude of retrenchment is likely to persist throughout the first half of 2002 at the least. 2001 should be the worst holiday selling season in two decades. The prudent business planner is coming to grips with the likelihood that the terrorists would not stop when they are one-for-one, having just hit a home run' in their eyes. So another hit to confidence, current activity and future plans is the only reasonable assumption, unpleasant or not.
The profits outlook is a crucial element in the recovery. What is your outlook for profits, and what factors will shape the profits recovery? Do your profit expectations square with those of investors?
P/Es are now at record levels because earnings are through the floor. Equities are running up on the assumption of an economic recovery -- earlier rather than later -- and implicit earnings assumptions that bear no resemblance to historical norms. And remember, security is a cost center -- not a profit center. Money is being spent, and human resources are being deployed, on security from terrorism rather than on top-line sales, new product development, operational alliances and the like. We are in the middle of the most severe profits squeeze in the postwar era. Investors need to be disciplined -- but with a short memory. That is, not holding out hope for those inflated stock prices in the tech sector of 1999-2000. the coming period is more likely to be a traders market, (like 1966-82), rather than an indexers market (1982-2000).
Consumers will likely play a major role in the strength of the recovery. In the face of low savings, heavy debts, and sharply reduced wealth, how much can we expect households to contribute economic growth next year? And can we expect any contribution from housing?
Simply, watch the savings rate. From 1982 to 2000, the savings rate went from about 10% to roughly 1%, while the Dow went from 1000 to 10000. Many many Americans concluded that they did not need to save out of current earned income in order to be prepared for a rainy day or retirement. Rather, the run up in equities and the attendant wealth accumulation would take care of that dimension of their personal financial planning. Since March 2000, with equity markets stumbling, many households mnust be wondering whether we might be entering another period more like 1966-82, in which the Dow made 5 different attempts to crack 1000 decisively, and failed every time. A more-cautious consumer, understandably, will contribute to holding the economy back over the next few years. The savings rate rising back to the 5-8% range is really quite plausible.
Copyright 2001, Bloomberg L.P.
