Forum Archive Index - June 2002

["Viewpoint ." <viewpoint_@hotmail.com>]

Every now and again analysts manage to sum up the current stste of affairs 
very well.

The perceptive and well written piece I have pasted below is by somebody at 
ABN Amro and was posted on egoli.com.au.

When the General Electric share price halves in rwo and half years it must 
be confirmation that all is not well in the USA.

The writer still shows a fair degree of optimism in that he/she thinks the 
current downturn is cyclical and that things will look better towards the 
end of this year.

However he/she does (quote) "raise the question of whether what we’re seeing 
now is part of a major structural re-evaluation of the US"

I feel that is what is currently happening and is the underlying cause of 
the decline the US sharemarkets and currency.

Such 'structural re-evaluations' generally take many years. As such we will 
continue to be changes in the US economy - which will, for better or worse, 
affect other economies throughout the world.

The article:
________________________________________________________________________

General Electric astounded investors for many years, and did it again 
overnight: its share price closed at US$30.08, less than half of $60.50 peak 
it hit in January 2000.

This is of some symbolic importance: GE is the bluest of blue-chips; it, 
more than other company, embodied the superior corporate ability of America.

While the dot.com mania gave rising share prices a bad name, General 
Electric was the stock that epitomised not the frenzy of the late 1990s, but 
the twenty year bull market that started in the early 1980s.

It hasn’t been tainted by Enron-like fraud or criminal greed (Tyco 
International’s Chairman resigned overnight on news that he’s being 
investigated for tax evasion).

General Electric simply relied on top executives who were appropriately 
remunerated – hence Jack Welch’s US$9 million a year for life company 
pension, courtesy of the generous retirement plan for senior executives 
magnanimously and selflessly designed for the good of the company by, err, 
GE’s senior executives.

Those executives produced a steady stream of double-digit earnings growth 
that seemed to defy the cycle and the pressure of compounding growth on 
large numbers.

In short, if General Electric is being sold, then you know some of the 
foundations of the bull market are coming under question.

All this raises the question of whether what we’re seeing now is part of a 
major structural re-evaluation of the US – something that is affecting its 
currency as well as its asset markets – or whether it’s a shorter-lived 
affair.

If it’s shorter-lived it could reflect either concerns about the cycle, or 
politics – or it could reflect the fact that the market in aggregate has not 
got cheap: from the peak in early 2000, it has gone from egregiously dear to 
around fair value.

General Electric may have halved, but it’s still on a PE of over 20; 
likewise, the S&P may have fallen by 33%, but it is not cheap, either on a 
PE basis or relative to bond yields.

Having said all that, I still think that with earnings growth of 20% and a 
funds rate of 2% or less – and with the economy turning (see page 2) – that 
cycle factors should provide Wall Street with decent support through this 
year.

That, however, may not stop the market going down if we are now seeing a 
structural de-rating.




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