March Commentary and P&G Debacle

Echols one time told me
that tryin to get the best of a wolf
is like tryin to get the best of a kid.
It aint that they’re smarter.
It’s just that they aint got all that much else to think about.

The Crossing by Cormac McCarthy, p. 27

Several weeks ago we mailed our February 3rd Commentary “STRONG AS MARY’S BREATH.”

That paper contained a number of our current observations concerning both the stock and bond markets. It may be seen in its entirety on our web site under COMMENTARY. Our thoughts and observations have not changed materially since then.

Meanwhile the separation between the “New Economy” and “Old Economy” stocks continues to widen. As you probably know, the former is the equivalent of technology, bio-technology, internet and companies while the latter is thought of as being comprised of “smokestack” stocks, autos, oils, foods and America’s Blue Chip companies that represent America’s commercial and industrial strength.

We do not like those terms but will put up with them for now because they do have a certain illustrative value. For example, as of March 7th the Nasdaq (New Economy) had risen to the 5000 level for the first time while Procter & Gamble (Old Economy) warned of an earnings shortfall before the NYSE opened.

Result: P&G opened down almost 30 points which immediately erased about one third of its $115 Billion market value. It was down several more points again on March 8th and is trading more than 50% below its January 2000 high. The company still expects a 7 per cent earnings gain for its fiscal year ending June 30, 2000 versus its previous forecast of a 13 per cent gain.

At the end of New York Stock Exchange trading on March 7th, P&G had lost about $40 Billion of its value while the Dow Jones Industrials closed down almost 400 points after an intraday loss exceeding 400 points. This was the Dow’s fourth largest point loss in history.

The Nasdaq, after piercing the 5000 level, also closed sharply lower from its intraday high.

Ironically, or perhaps not ironically, the lead article on The Financial Times’ March 7th front page carried the title “SEC warns on market risks.” It continued:

America’s chief stock market watchdog on Monday warned investors to be on guard against biased advice, flimsy business plans and a ‘casino mentality’ in the US equity markets.

‘Unless investors truly understand both the opportunities and risks of today’s market, too many may fall victim to their own wishful thinking,’ said Arthur Levitt, chairman of the Securities and Exchange Commission.

Mr. Levitt has issued such warnings before, but the timing of his remarks – with the technology-fuelled Nasdaq Composite Index on the brink of breaking through the 5,000 mark – gave added weight to his speech at a conference on the New Economy.

“Many newly floated internet companies command record price/earning multiples. Mr. Levitt said that made it particularly hard for investors to work out what companies were worth. ‘Are some of today’s companies really worth 1,000 times nothing?’ he asked the audience of 1,800 at the Jesuit university.” (Boston College)

The investment battle continues to rage between the tech stocks and the smokestack stocks. Gasoline prices are higher than at any time since the Gulf War. Inflation is at the door, and interest rates have been picking up. This is a “G & G” market — Gasoline and Greenspan.

Please remember our warning in the STRONG AS MARY’S BREATH Commentary: “A reminder: Mr. Market does not like higher interest rates although he may be a bit slow to register his dissatisfaction.

It appears to us that Mr. Market is beginning to register his dissatisfaction.

We continue to pay a great deal of attention to the goal of capital preservation while seeking stock investment opportunities that are surfacing as a result of the markets’ upheaval and volatility. Rising rates and the inverted yield curve have also resulted in attractive yields between 6 3/4% and 7 1/4% in the short term Government and high-grade Corporate bond markets. These are the highest returns for this type of bond in years.

Avoiding the land mines is not easy. No Procter & Gamble stockholders were aware on the morning of March 7, 2000 that their holdings of this stock, truly one of the world’s Crown Jewels, would be worth a third less at the end of the day — representing a total one day loss in this single stock of almost $40 Billion!

John W. Hamilton
March 7, 2000