Will the Fed move again? Yes, no, whatever. Over the long term, the effect is the same. Alan Greenspan knows it and now you do, too. As Rule Maker investors, we're concerned more with the macro economy and pro-business nature of our government than we are with a quarter-point increase here and a half-point move there. (For a detailed explanation of the Fed, check out our Fool Special on the Fed.)
Sure, these up and down moves by the Fed affect our companies and they certainly affect the prices of our holdings. Last Wednesday, after Greenspan announced the half-point decrease in the fed funds rate, our portfolio jumped. JDS Uniphase (Nasdaq: JDSU) alone moved 16.5 points intra-day. That's a market-cap change of nearly $15 billion! Will a half-point decrease in interest rates really benefit JDSU that much? It barely has any debt ($31 million in debt compared to $1 billion in cash). Brian Lund, manager of the Rule Breaker Portfolio, said it best: "When I look at today's rally... it's a good demonstration of why it's next to impossible to time the market."
Greenspan uses the fed funds rate moves to shock the market every now and then, but everyone, even the traders who frantically buy and sell based on the news, know that the side effects of the move will not be felt for months. Call it herd mentality. Call it panic. Either way, these knee-jerk reactions are not based on the fundamentals of a company, and that is what we are concerned with in the Rule Maker Portfolio.
In his biography of Alan Greenspan entitled Maestro, Bob Woodward details the thinking behind nearly every fed funds rate or discount rate move in the last decade under the G-man's watch. What is interesting to note is the market reaction over time. It gets more and more pronounced. Investors hang on every word the Fed chairman says and trade off it. But, Greenspan is trying to guide the U.S. economy through an obstacle course. His influence is macro, not company-specific.
Woodward's book provides an inside look at the man behind the money supply. I came away with a few surprises and several new questions. The surprises were that Dr. Greenspan (he has an honorary doctorate from NYU for a collection of writings done in the 1970s) has an ego, he is extremely political, and he doesn't have it all figured out. Sorry, folks, there is no Excel spreadsheet that interconnects all the economic data gathered each month and then spits out an "up," "down," or "neutral" interest-rate decision.
Economic models aside, I always assumed he knew how the economic puzzle pieces fit together. He understands, perhaps better than any Fed chairman before him, that what makes the economy go around is a combination of things, but what lends stability to the market is the perception of the Fed.
The key to the Federal Reserve is the perception of authority and trust. The American economy operates like a well-oiled machine because we all go to bed each night knowing that Greenspan is in charge. He has proven it time and time again, from the 7% drop in the Dow only two months after he took office to the near debacle with Long-Term Capital Management, to the Russian financial crisis. In Alan We Trust -- that is the power of the Fed.
What happens when Greenspan goes is a bigger concern to Rule Makers. I have heard and read numerous discussions over what to do when Greenspan's term is up in 2004. The law states that he cannot serve more than a 14-year term with the Board of Governors, so a re-appointment is out of the question. One potential solution to preserve Greenspan's ways has involved talk of setting inflation and unemployment targets that the Fed must adhere to. For example, if the consumer price index increases more than 1% over a period of six months, the Fed must bump the fed funds rate by a quarter point. If unemployment goes above 10%, the fed funds rate gets cut by half a percent.
Such mandatory inflation-fighting rules could be written into law and added to the requirements of the Federal Open Market Committee (FOMC). Economists and Greenspan watchers are contemplating such radical changes because they worry what the Fed will be like without A.G. They understand how much power he really has.
Greenspan actually has two jobs. He is chairman of the Federal Reserve Board of Governors, to which he is re-appointed by the president every four years. In addition, he is chairman of the FOMC, to which he is elected by the other members of the FOMC. (It is a matter of tradition for the chairman of the Board of Governors to be elected the chairman of the FOMC, not law). During his 13-year tenure atop the most powerful monetary system in the world, Greenspan has networked, politicked, and schmoozed his way to unfettered power, but has never abused it. He is a man of principle, a rock-solid island in a sea of piranha.
As a Rule Maker, I am thankful that the G-man has 1,115 days left (but, who's counting) in office and worried about who will replace this maestro. As long as the next Fed chairman continues Greenspan's policy of pursuing price stability, first and foremost, then we should be all right.
Perhaps the best solution to this problem was proposed by John McCain. He suggested that, if something should ever happen to Greenspan, we do what they did on Weekend at Bernies: We prop him up, put sunglasses on him, and pretend that he is still in charge. McCain might be on to something.
What do you think will happen when Greenspan's term is up? Let us know on the Rule Maker Strategy discussion board.
And finally, Yahoo! (Nasdaq: YHOO) took a big hit yesterday after reporting earnings that failed to live up to investor expectations. The market especially frowned on the guidance that 2001 full-year revenue might only grow between 8-17%, after top-line growth of 88% this past year. Nevertheless, with $1.7 billion in cash and no debt, Yahoo! has the financial wherewithal to survive this storm, while weaker Net players drop one by one. On yesterday's earnings conference call, Yahoo! management made a strong case for its ability to steal market share during the dot-com advertising crisis. Additionally, the company made some interesting comments about rolling out a number of premium consumer services in the coming year.
Yahoo! is one company the Rule Maker Portfolio is holding onto tightly, no matter how ferociously the market bludgeons our shares. For additional perspective on Yahoo!, check out this insightful Community Perspective on Yahoo! -- Part 1 and Part 2.