Fool Portfolio Report
Monday, January 13, 1997
by  David Gardner (MotleyFool)

ALEXANDRIA, VA, January 13, 1997-- The Fool Portfolio fell on the backs of its top nine holdings Monday, as each -- without exception -- declined. Given that horrid fact, it's perhaps comforting that the Foolfolio lost only 1.28%. The market overall was as flat as a stroll on a Kansas prairie, with the S&P 500 up 0.01% and the Nasdaq down 0.08%.

So yeah, you can start at the top of the Fool Portfolio in terms of performance, and from Iomega to America Online to 3Com all the way down to NCR, every single one of 'em lost ground today. Only KLA Instruments (new high!) and ATC Communications (moving and holding back above $14) offered any solace.

The prime culprits were America Online (off $1 1/2) and a triumvirate of $1 losers: 3Com, Chevron, and GM. AOL was giving back some of the $5 1/4 it gained Friday, following bullish expectations about subscribership growth, and a takeover rumor or two. The others had no particular news behind them. We'll write those moves off to our phantom "market forces" reason.

America Online was in fact reported to be the #1 Web site by PC-Meter today, for the quarter ended October 31st. That put it past the previous quarter's leader, Netscape, which dropped down to third. Hoo placed second? Right... Ya-Hoo. I guess we're supposed to spell that with an exclamation point (Yahoo!), though I find that hard to read. Hey, since Yahoo!'s our newest partner, I'm going to spot 'em up with a little free consulting. Let's drop the exclamation point, guys... did you see how ugly that contraction was in the previous sentence?! (But otherwise, excellent ongoing performance. Three slots ahead of Microsoft, in fact.)

America Online's site was hit by 40% of Americans who use the Web. That's a pretty eye-opening figure. Keep that in mind the next time your Webhead fanatical friend tells you that the Internet is "going to bury AOL." Because remember, that 40% ain't AOL's proprietary service: that's 40% of INTERNET traffic using AOL's INTERNET site. Granted, a primary reason people hit that site is because it's the first thing that pops up when new AOL subscribers use AOL's Web browser. But that's part of the point! AOL aims to be the thing that brings newcomers to the Internet.

FYI, if you're interested, the latest demographics of the Web show 56% men, 32% women, 18% children.

Lucent Technologies announced a new product today, Maps On Us. We're not talking about any Bell Labs networking package, or a videophone. Nope, this one's a Web site... the "first public Web-based product" offered by our company. It's Basically, it's one of those sites you can type in two addresses and receive turn-by-turn directions, and a street map, between them.

Always the shareholder who's going to try my company's products out, I clicked into the site late this afternoon. Not bad. I asked the thing to trace me one of the more well-beaten paths in Alexandria, Virginia: from the local Domino's Pizza here in Old Town right to our front door at Fool HQ. Sure enough, it easily and accurately calculated and depicted the fastest route. (I'd always wondered where those Domino's guys were coming from....) Click this hyperlink and you'll know too: Old Town Domino's to Fool HQ. As you can see, it's a surprisingly straight shot (just two turns) of 1.4 miles' distance, and it's no wonder Domino's rarely if ever shows up late: the drive's estimated at 2 minutes.

Anyway, stuff works. Too bad Lucent dropped $1/2 today.

With little other news of consequence, I wanted to close my Monday report with a brief meditation on what moves the stock market. I say "meditation," rather than "lesson," because I'm not really sure one can come away with any official lesson here. Nevertheless, let's get our feet a little soggy.

I began thinking about this after reading an article by one of the financial journalists out there whom I like: Walter Hamilton at Investor's Business Daily. Walter's story today ("Can Earnings Keep Powering the Market?") posits that earnings growth is what's moving our stock market. This may be true. I don't know. Read what's below, and you tell me.

You see, on the one hand, the stock market likes a weak economy. Most of the time a bad economic figure hits the wires, the market (almost perversely) rises! Why? Well, because a slowing or poorly performing economy generally inspires the Fed to loosen things up, to inject more growth into the economy. The stock market, forward-looking beast that it is, gets excited that the Fed will institute these positive changes. The indices rise.

Digging a tad deeper, the Fed's typical approach to stimulating growth is the lowering of interest rates. Lower interest rates mean that it's easier and cheaper to borrow, increasing business growth. The key thing to realize here is that the stock market competes with interest-bearing investments (bonds, T-bills, money market funds) for your cash and mine. When interest rates drop, interest-bearing investments grow less attractive to the stock market (with its dividend yield and its historical double-digit return). This is also great for stocks.

To sum it up, then, the market likes a poor economy because bad performance brings down interest rates, both (1) increasing business growth and (2) making the stock market more attractive relative to competing interest-bearing investments.

But in Walter's article today, stock market bulls are said to be hoping that the economy will be "picking up steam and will produce a solid, if unspectacular, year of earnings growth." That directly contradicts what we just pointed out above. Above we said that an economy that's picking up steam and generating solid earnings growth would be in danger of inspiring the Fed to raise interest rates to rein in that growth, hurting the stock market. Nothing is worse for the stock market than rising interest rates. The correlation throughout history is clear: interest rates and the return on equities move in opposite directions.

And yet, who wouldn't want to see Intel announce a great report, tomorrow? Not just Intel shareholders. Intel's performance will be held up as a benchmark for the performance of the technology biz overall in the first quarter of 1997. I'm certainly rooting for INTC to knock one out of the park.

The reason I spend little time trying to predict the stock market is these very ambiguities and contradictions that confront us at every turn. Out of one side of their mouths, pundits state that earnings growth drives stock market performance; out of the other, they point out that economic growth can be deadly to stock market performance.

But I think I may have some Foolish resolution, here. This was suggested to me by my Dad, who's the only "expert" I much listen to when it comes to understanding how macroeconomic forces affect the stock market. He suggested that both sides of the coin can be true or false, depending on the interest-rate environment. When interest rates are volatile, as in the 1970's, they can drive the market like an overanxious NASCAR driver with a twitchy finger. Earnings growth takes a back seat... in some cases, earnings growth is well nigh irrelevant. (Anyone who's watched the stock market over a long period of time knows that in some market environments, it doesn't matter how well your company is performing... if the overall market is tanking, your stock probably is too.)

By contrast, in periods of low interest-rate volatility earnings can come to the fore. The 1990's is a good example, here. Interest rates have stayed steadily and dependably low, opening up earnings as a primary market driver.

Maybe Walter can toss in something about this next time. For now, it's enough to have reached some clearer understanding as to what exactly moves the market... and when.

--- David Gardner, January 13, 1997


Stock Change Bid -------------------- AOL -1 1/2 38.13 T - 1/8 38.63 ATCT + 1/4 14.38 CHV -1 68.25 GM -1 60.13 IOM - 3/16 16.81 KLAC +1 1/2 40.00 LU - 1/2 50.63 MMM - 3/8 83.38 NCR -2 3/8 32.00 COMS -1 71.00
Day Month Year History FOOL -1.28% 3.29% 3.29% 175.67% S&P 500 +0.01% 2.54% 2.54% 65.69% NASDAQ: -0.08% 3.09% 3.09% 84.81% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.81 567.44% 8/5/94 680 AmOnline 7.27 38.13 424.21% 8/13/96 250 3Com Corp. 46.86 71.00 51.52% 8/11/95 125 Chevron 50.28 68.25 35.73% 8/12/96 110 Minn M&M 65.68 83.38 26.95% 8/12/96 280 Gen'l Moto 51.97 60.13 15.68% 10/1/96 42 LucentTech 47.62 50.63 6.32% 8/12/96 130 AT&T 39.58 38.63 -2.41% 1/2/97 8 NCR 33.63 32.00 -4.83% 8/24/95 130 KLA Instrm 44.71 40.00 -10.54% 10/22/96 600 ATC Comm. 22.94 14.38 -37.33% Rec'd # Security In At Value Change 5/17/95 2010 Iomega Cor 5063.13 33793.13 $28730.00 8/5/94 680 AmOnline 4945.56 25925.00 $20979.44 8/13/96 250 3Com Corp. 11714.99 17750.00 $6035.01 8/12/96 280 Gen'l Moto 14552.49 16835.00 $2282.51 8/11/95 125 Chevron 6285.61 8531.25 $2245.64 8/12/96 110 Minn M&M 7224.44 9171.25 $1946.81 10/1/96 42 LucentTech 1999.88 2126.25 $126.37 1/2/97 8 NCR 269.00 256.00 -$13.00 8/12/96 130 AT&T 5145.11 5021.25 -$123.86 8/24/95 130 KLA Instrm 5812.49 5200.00 -$612.49 10/22/96 600 ATC Comm. 13761.50 8625.00 -$5136.50 CASH $4600.04 TOTAL $137834.17 Transmitted: 1/13/97