|Dear Alan: Zip It!|
By Gene Walden
From the Minneapolis StarTribune
Message to Alan Greenspan (in the words of Paul Simon):
“Just slip out the back, Jack…make a new plan, Stan...hop on the bus, Gus…drop off the key, Lee and get yourself free.”
In other words, Alan, go away—far, far away—like Mars or Pluto. Because Asia doesn’t seem to be far enough. Your Asian tour was one recession bombshell after another, so maybe it would be better if you would just leave the planet entirely.
And when you go, Alan, please don’t bring any communications devices with you, because we really don’t ever want to hear from you again.
It’s not that we don’t like you, Alan. Aside from presiding over the biggest stock market crash in 70 years, most economists believe you did a fine job of holding inflation in check. And it’s not that your words are irrelevant or that your message doesn’t carry any weight. It’s just the opposite, in fact. Your words carry too much weight.
In case you missed the memo, Alan, you’re no longer the Fed chairman. There’s a new chairman in town and you are supposed to relinquish your power. But when you speak, you can still rattle markets around the globe. That’s not your job anymore.
First you said it was “possible” the U.S. would go into recession in the second half of this year. A couple of days later you revised that to say that recession was a “possibility, not a probability.” Then a few days later you said there is a “one-third probability” of a recession. I’m not quite sure there is such a thing as a “one-third probability,” but semantics aside, if you’re Alan Greenspan and you keep uttering the word “recession,” it can become a self-fulfilling prophesy.
Recession, after all, is partly a state of mind. If we expect a recession, consumers may tend to put off new purchases and new construction and businesses may hold up on capital improvements, expansion and new hires. And suddenly, it begins to look a lot like recession.
That’s why we don’t need an extra guy spreading doom and gloom around the globe, Alan—or irrational exuberance or anything else that might cross your lips. Someone else has been designated to fill that role—your successor, Ben Bernanke. So you need to zip it and let him do his job.
In other words, get a new plan, Greenspan, and set us all free.
Back on the rollercoaster
Two days after Greenspan first broached the subject of recession, the Chinese market plunged 9 percent. That drop sparked a tidal wave of falling markets around the world, followed by several days of volatility reminiscent of the 1990s.
“It was a wake-up call for investors that there is still some risk in this market,” said David Koch, equity director for Windsor Financial Group of Minneapolis. “It had been several years since we had had a serious correction. I think complacency had set in with a lot of investors.”
The correction, said Koch, was not unexpected. “The market is in a period of transition in response to a slowing economy and decelerating earnings growth. Corporate earnings appear to be slowing from double-digit growth to single digit growth. We’re also seeing fewer positive earnings surprises and we expect gross domestic product growth to slow to a rate of about 2 to 2.5 percent.”
But while Koch is cautious on the market, he does see a number of positive signs. “Valuations are reasonable, and the S&P (Standard & Poor’s 500) is trading at less than 16 times 2007 earnings estimates, which is in line with long-term historic valuations. Earnings yields on stocks look positive (just over 6 percent) versus bond yields (U.S. Treasuries are paying just 4.5 percent). And corporate balance sheets are flush with cash. There is a tremendous amount of liquidity in the system.”
For the time being, Koch recommends that investors stick with larger, more established blue chip stocks. “They tend to hold up better in challenging economic environments.”
But bargains are hard to find, says Koch. “No sectors really jump out as being terribly cheap, although health care may be one of the best values now because it had a terrible 2006.”
Among his top picks are Johnson & Johnson (JNJ), American Medical (AMMD), which makes products to treat prostrate problems, incontinence and erectile dysfunction; and Gillead (GILD), a biotech company that focuses on infectious diseases, such as medications for HIV.
In the financial realm, Koch likes Principal Financial Group (PFG), a Des Moines based insurance company, and Wells Fargo. Among energy stocks, he likes Apache, which is involved in the exploration and production of gas and oil. “Apache has a low price relative to the rest of the energy industry.”
Among regional stocks, Koch likes Alliant Tech Systems (ATK), a defense contractor that he believes will benefit from a high defense budget for at least the next two year, Donaldson, which makes filtration products, Bemis, which is a leading producer of flexible packaging, Target and Best Buy.
Koch believes that continued volatility in the market could result in some good buying opportunities. “The markets do tend to become somewhat irrational in times of high volatility, which creates opportunity. We will be looking for those types of opportunities to buy on weakness in both the domestic and the international markets.”