Fool Portfolio Report
Monday, March 31, 1997
by Jeff Fischer (MF BudFox)

CHICAGO, IL., (March 31, 1997) -- Over the long weekend the market stood poised with baton in hand -- Carl Lewis, frozen. At the bell this morning it passed the baton on and resumed, full-sprint, down the same descending path. The market stumbled and broke the tape at the finish-line only by collapsing upon it. Why?

The economy appears too strong. A strong economy results in buying pressure on everything from running shoes to televisions. Buying pressure pushes prices upward, which leads to inflation. To counter this, the Fed tightens the money suppy by raising interest rates, as it did last Tuesday. Higher interest rates naturally increases the attractiveness of fixed-rate investments, while lowering the draw to stocks, as companies may be facing a slowing economy and, as a result, lower earnings.

It's more complicated than this, though. Even if American companies continue to increase earnings above expectations, nervous money might still shy away from stocks as long as we're in an environment of rising interest rates. Uncertainty abounds in a cycle of rising rates. Questions include: (1) How many times will rates be increased? (2) How great an affect will this have on corporate earnings? (3) How long will the "tightening" cycle last? (4) Will this be another, all too often witnessed, "boom to bust" swing of the pendulum for the economy?

It's by no means a given that last week's rate increase will lead to further increases, but many are projecting as such. History suggests the possibility as well. In the past, a period of "tightening" usually results in an average of four fractional interest rate increases, typcially of either a-quarter point or a half-point each, before the cycle relents. Tuesday we saw a quarter-point increase. Today, strong personal income data was released, which hints a vibrant economy and increases the possibility of more rate increases -- hence, the market continued to sell-off.

Friday, employment data is released. This yardstick will probably be tightly watched over the coming months, as it was last year, too. Strong employment data could send stocks lower as the news strengthens the possiblity of another interest rate hike -- again, in hopes of slowing the economy and controlling inflation.

Three years ago the Fed rattled the market by raising the Fed fund rate seven times, from 3 percent to 6 percent, over a 12-month period. Stocks were flat to down during the entire time. On Jan. 31, 1996, the central bank cut the federal funds rate a quarter point to 5.25. This was the latest lowering of that rate. Since then, as you may recall throughout 1996, the market has anticipated the opposite action, and sold-off many times on the possibility. Last week the opposite action -- a rate raise -- took place for the first time since February 1, 1995. Will more increases follow, and another flat to down market result, as in 1994?

You may dislike me for saying this, but to most of us, it doesn't matter. I don't need to explain why, again.

I'm going to get flame mail from traders for this attitude. Letters asking, "Why hold stocks when you know the environment is unfavorable?" Or, somewhat baffling, people have sent email stating, "Buy and hold doesn't work." If a person doesn't believe in buy-and-hold it is probably because:

1) they're too young to have seen it work, and can't believe it without seeing it
2) they're not watching the right companies
3) they don't have a mind-frame of at least ten years

But, the most likely reason why a long-term strategy doesn't work for many people is:

4) failure to execute

Long-term investing is extremely difficult. It's counter-intuitive to hang onto a depreciating investment. If you don't hang on, you sell. Where does that leave your money? When do you reinvest it? What kind of merry-go-round are you riding?

The only way to refute such short-sightedness is to give examples, and historical returns, and list those who have grown very wealthy -- those we all know, and those we know personally -- through buy and hold approaches. Still, you need to be invested in the right companies. If not that, use an index fund. If more than that, The Foolish Four. Meanwhile, many of us are investing regularly, perhaps with each paycheck, so we might even enjoy steep market declines, while thinking of fifteen years from now.

All of this said, we won't obssess with interest rates and a declining market (if the market does decline for any period of time) any more than we work to keep from raving about a rising market. I think most of us Fools, thanks to the foundations Tom and David have poured, are on the same page, and writing about "the need to be long-term" is redundant -- even on days of steep market decines. I would have liked to more or less ignore the market move today, and talked about individual stocks instead, but maybe now, in the future, readers will be more prepared for this writer's animosity to day-by-day market moves.

The first quarter of 1997 ended today. It was the worst quarter for stocks and bonds, performance-wise, since late 1994 -- another period of rising interest rates. The year is twenty-five percent gone, and March was the ugliest month, with the Nasdaq down 6.67%, and the S&P losing 4.26%. The S&P has lost over 4% in the last two market days alone. The Fool had a strong March, rising 2.05%. Today, the Foolish Four stocks held up better than the market, dropping 0.98%. For the day, the S&P and Nasdaq both dropped over 2%, while the Fool Port lost 1.65%.

Significant Fool Port news came from IOMEGA (NYSE: IOM), which announced that it has agreed to allow NEC Corp to produce and market drives utilizing Iomega's Zip technology. This is the second such world-wide agreement for Iomega in its important progress towards becoming the far-spread standard. The company also lowered prices on the Zip Drive, from $199 to $149.

In the world of 3COM (Nasdaq: COMS), surely you've heard by now that ASCEND COMMUNICATIONS (Nasdaq: ASND) is merging with CASCADE COMMUNICATIONS (Nasdaq: CSCC). MF Raleigh wrote very well of the event in the Fool's Lunchtime News. This $3.7 billion merger certainly means more "focused" competition for all networkers, including 3Com and US Robotics, especially as Robotics and Ascend compete more directly in Internet access products. Ascend has been a powerhouse all on its lonesome, rising from relative obscurity in 1993 to become a market leader.

Interesting note: Ascend's CEO had just stated in an Investor's Business Daily article that the merger of 3Com and U.S. Robotics was sending more business to Ascend, because customers were leery of complications which the merger might present to them as customers. Now, Ascend is likewise in a large merger situation. Where to now, potential customers? Give CISCO SYTEMS (Nasdaq: CSCO) a call?

I called ATC COMMUNICATIONS (Nasdaq: ATCT) today and spoke with the Vice President of Marketing, Holly Fergus, mainly about their recent strategic alliance with ISI. ATC is focusing on providing businesses (in this case, governmental branches) telesourcing front-end and back-end support -- full support -- so that firms can get their telesourcing businesses up and running. The company stated that the industry was definitely moving in this direction, and several more such strategic alliances were in the works at ATC. Front-end fulfillment and back-end support from ATC. You need only fill the middle. The company announces earnings April 28th, and seven cents is expected. More on this later.

Finally, I opened the Sunday edition of the Chicago Tribune and out fell a free AMERICA ONLINE (NYSE: AOL) disk. What is this? I thought the company wasn't trying to obtain more customers until it could satisfy the ones it had? Perhaps this marketing duet with the Tribune was already, unstoppably in motion, but I doubt it. By summer AOL should have twenty users to each line, while the industry average is ten users per line (or modem). Twenty-to-one for AOL, that is, if the company doesn't net more members

Tomorrow:

April Fools' Day: April 1, the day of the year when it is considered proper to play harmless jokes upon one's friends. This occasion, known also as All Fools' Day and almost universally observed throughout Christendom, can probably be traced back to the old custom in France of paying formal calls on April 1, one week after New Year's Day according to the Julian calendar. When the old calendar was replaced by the Gregorian in 1562, mock calls continued to be paid on April 1 as a joke.

Fool on!

(c) Copyright 1997, The Motley Fool. All rights reserved. This material is for personal use only. Republication and redissemination, including posting to news groups, is expressly prohibited without the prior written consent of The Motley Fool.

TODAY'S NUMBERS


Stock Change Bid -------------------- AOL - 1/4 42.50 T - 3/8 34.88 ATCT - 5/16 6.44 CHV - 1/8 69.75 GM - 3/4 55.38 IOM - 3/8 16.25 KLAC -1 3/4 36.50 LU + 3/8 52.50 MMM -1 84.63 COMS -1 1/2 32.63
Day Month Year History FOOL -1.65% 2.05% -7.20% 147.68% S&P: -2.17% -4.26% 2.21% 65.17% NASDAQ: -2.22% -6.67% -5.37% 69.64% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 16.25 545.10% 8/5/94 680 AmOnline 7.27 42.50 484.36% 8/11/95 125 Chevron 50.28 69.75 38.71% 8/12/96 110 Minn M&M 65.68 84.63 28.85% 10/1/96 42 LucentTech 47.62 52.50 10.26% 8/12/96 280 Gen'l Moto 51.97 55.38 6.55% 8/12/96 130 AT&T 39.58 34.88 -11.88% 8/24/95 130 KLA Instrm 44.71 36.50 -18.37% 8/13/96 250 3Com Corp. 46.86 32.63 -30.38% 10/22/96 600 ATC Comm. 22.94 6.44 -71.93% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 28900.00 $23954.44 5/17/95 2010 Iomega Cor 5063.13 32662.50 $27599.37 8/11/95 125 Chevron 6285.61 8718.75 $2433.14 8/12/96 110 Minn M&M 7224.44 9308.75 $2084.31 8/12/96 280 Gen'l Moto 14552.49 15505.00 $952.51 10/1/96 42 LucentTech 1999.88 2205.00 $205.12 8/12/96 130 AT&T 5145.11 4533.75 -$611.36 8/24/95 130 KLA Instrm 5812.49 4745.00 -$1067.49 8/13/96 250 3Com Corp. 11714.99 8156.25 -$3558.74 10/22/96 600 ATC Comm. 13761.50 3862.50 -$9899.00 CASH $5240.09 TOTAL $123837.59