FOOL ON THE HILL
Three months ago, the dot-com crash started stalking bigger prey as large technology companies began to swoon. A spate of earnings warnings later, the dreaded R-word is on everyone's lips. Funny how much press it's getting, when so many expect that the recent fed rate cuts will cause the economy to rebound. However, Bill Mann's not so sure.
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If you read this story's headline, I'll bet I just insulted a bunch of you right off the bat. I'm sorry. Don't take it personally. I just think that being hard-core about anything in a dynamic environment is not bright -- not in politics, and certainly not in investing. Actually, you can be as ideological as you want and never be tested on your correctness. Sure, there are some crackpots out there who think Mussolini was "just kidding," but by and large no one ever gets the opportunity to perform a fully undiluted social experiment and receive resultant feedback. The economy rocked through the '90s. Was it Clinton's doing, or was the foundation laid during the Bush and Reagan presidencies? Or was it neither, but rather the tinkerings of Messrs. Greenspan and Rubin? None, or all, of the above? Every single case can be convincingly argued, and every single theory can be decidedly debunked. No one will ever really know the true reasons for the economic growth. Stock markets do not behave this way. Bad corporate policy is almost always revealed in the long term. Not immediately, sometimes not for years -- but if a poor decision is not reversed, it eventually flows through to the bottom line of a company and its shareholders. Some of these things are grossly obvious in hindsight: I will never forget the sick feeling I had when, about five months too late, I finally took pen to paper and figured out how many subscribers Iridium would have to capture to stay ahead of its payments on $5 billion in debt. My mistake in that situation was obvious. It was not so much holding on to Iridium stock too long, but buying it in the first place. The stock market is a patient arbiter, and our mistakes are often revealed to us long after they've been made. Those who felt Amazon.com (Nasdaq: AMZN) had endless amounts of option-value creation through its branding and positioning in 1999 had to wait until mid- to late-2000 to truly see that the company had not invented a better mousetrap. (For an excellent description of "option value," see Zeke Ashton's article from yesterday.) The tug-of-war between those who lamented America Online's decision to take over Time Warner, its fractious corporate environment, and $11 billion in debt, and those who believe the merger into AOL Time Warner (NYSE: AOL) was yet another masterful move by Steve Case & Co., will not be decided anytime soon. At some point, though, one opinion will prove correct -- or, more to the point, largely correct. There is no use tallying past wins and losses. They are past, and investing only has one scorecard: your total compounded annual returns (after taxes and commissions, of course). One correct piece of analysis can more than obliterate several incorrect ones. Still, any investor holding individual stocks who does not regularly review her mistakes is depriving a village somewhere of an idiot. As recently as three months ago, there was a widely accepted premise that the advent of technology and its facilitation of more-efficient inventory management, procurement, and other bottlenecks in the process of commerce were going to smooth out previously wild swings in the business cycle. Perhaps many still believe this, but just as I no longer believe that CMGI (Nasdaq: CMGI) is much more than a collection of also-ran Internet companies (a painful recognition of one of my own mistakes, by the way), it seems to me that technological solutions actually aggravate business cycles. Now, I still haven't addressed why I believe it is stupid for someone to call himself or herself a "bull." (I'll let someone else point out that it's impossible for a female to be a bull, and I'd never, ever suggest that women should use the gender-specific "cow" instead. Nope, not gonna do it.) The reason I believe so has everything to do with the quick reversal of the last three months. Even through a long downturn starting last March, there were precious few analysts predicting a rapid downturn in business fundamentals. Sure, some of the Fleckenstein-like perma-bears harped on stock valuations, but that's not the same thing, is it? Not until some of the big boys like Intel (Nasdaq: INTC) and Hewlett-Packard (NYSE: HWP) issued warnings -- and the pink slips started flying -- did a recession seem likely. There's a good reason for this: Now that the Fed has lowered interest rates, it is trying to encourage corporate spending that, due to those aforementioned business cycles, is completely unwarranted. Those calling for a rebound later this year seem to be oblivious to this fact. Years of double-digit growth and easy, cheap money caused companies, particularly those in the technology sector, to make enormous capital expenditures, expecting that demand would continue to grow apace. I find it curious though that the general public and the Fed alike seem to be more concerned about recessionary pressures than inflationary ones, yet many talking heads are not only calling for a market rebound, but predicting roughly when it will happen. Seeing as so few predicted that the new economy would swoon as hard and fast as it has, I'm not sure why any validity should be given to these new prognostications. Now capital spending has slowed, much of that added production capacity is threatening to strangle those same companies that were building furiously. Lucent (NYSE: LU), for example, was one of the first big companies to drown in its own inventory. Slowed growth also means inventory and receivables are rising at contract manufacturers such as Flextronics (Nasdaq: FLEX) and Solectron (NYSE: SLR). Ericsson (Nasdaq: ERICY) has chosen to stop manufacturing cellular handsets due to continued poor profitability (i.e., none). Among these are well-run companies, but they might just be the proverbial canaries in the coal mine. Contract manufacturers are at the beginning of the product chain, not the end, so their inventory and profit-margin issues could be seen as warnings for the likes of Nortel Network (NYSE: NT) and Motorola (NYSE: MOT) up the road. We missed it, we all missed it. Why? Because of the vain notion that we had "figured out the business cycle." We haven't. If anything, technology has just made it less predictable -- as if it were ever predictable. But, those who are "bullish" and those who are "bearish" are both missing something basic. They are assuming that someone, anywhere, is actually able to predict where the economy is going. I'm sorry, but we cannot. You can play the sector rotation game, but you're assuming that you are a little bit more clever than everybody else. That's a difficult way to invest, because, as has been said many times before, it's like "playing bridge with everyone's cards showing." I know I'm not being very helpful. I'd suggest to you that the time to be investing is when everyone else is running away in terror. You don't have much chance to call the bottom, but you can buy into companies when they are cheap. Good companies, like WorldCom (Nasdaq: WCOM) or Applied Materials (Nasdaq: AMAT), have been beaten to within an inch of their lives. I don't know when the economy will turn around, and I also don't particularly care when it does, either. My philosophy is, as it always was, that most of the time when trying to figure out what to do, "nothing" is the best course of action. Hot air makes stuff go up, cold water makes things shrink. The market has plenty of both elements to keep itself occupied. Me, I'm looking at individual companies, trying to figure out which ones will be making money years from now. Fool on! Bill Mann learned about the O.J. verdict from a guy with a bone pierced through his nose. At the time of publication, Bill owned shares in Intel. You can see what else he owns by taking a look at his profile. The Motley Fool is investors writing for investors.
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