Investment Outlook

July 2000

 

Alan Greenspan stated last month that the US economy has achieved "irreversible productivity gains" as a result of technology. But will these productivity gains allow the economy to continue to grow without putting upward pressure on wages and inflation? Mr. Greenspan seems to think so, with the added help of slightly higher interest rates and a relatively tight monetary policy. The 50 basis point jump in the US benchmark interest rate implemented in mid-May was done to attempt the fabled economic 'soft landing', rather than the decent into recession. And it seems to be working: employment growth is down, new home permits are down dramatically, and the Consumer Price Index was almost flat month over month in May.

But, can the economy keep growing at three to five percent, while inflation and wages only grow at one or two, maybe three percent annually? Probably not, there will eventually be a point where the gains made by technology start to taper off. How much faster can you type? Can you absorb information faster than you were once able to? Would you trust a Management Information System to give you two or three 'best' choices and their likely outcomes and then let you decide? The productivity gains will continue, but the economy may move more independently as the incremental gains are smaller.

The Canadian marketplace has had an incredible run over the last 8 months against the American broad indices (Click here for a comparison chart versus the S&P 500, then BACK to return). With strong rebounds in the senior technology companies and the energy sector, the TSE 300 index is again within 400 points of the Dow Jones Industrial Average, after being several thousand points down to its North American rival only a couple of years ago.

Two big items of news on the Canadian front. First, the purchase of Seagrams by French conglomerate Vivendi SA. Although a media and beverage conglomerate themselves, will the new French owners remember Seagrams' sordid past as rum-runners during the American prohibition? Probably not, as the Bronfman family tried to down-play that side of the business as well, with Edgar Jr., in particular, focussing instead on media, music and movies.

Secondly, RT Capital Management, the pension management arm of the Royal Bank, was caught manipulating stock prices. By bidding up the price of some stocks right at the closing bell, portfolio managers and traders were able to artificially improve the performance on the funds they managed. Add to this the Toronto Dominion's forced halt to trading in Japan as a result of similar charges and the number of institutions charged with manipulating stock prices could increase further. Truly a new definition to the term "money management".

In the US, another Barron's article updating readers on the cash burn rates of Internet stocks sent more waves of worry through the high-tech investing world. This article was a follow up to another one written back in March that opened the eyes of many readers on exactly how precarious some of the internet high-flyers were. Generally speaking, if a company is selling a good or service for less than it can buy or produce it for … that normally means the company is losing money. Even in the Internet world. Look for future Barron's articles on similar topics each quarter.

Microsoft has been ordered to divide into two separate entities by the US courts. Most people believe that the 2 bits are better than the 3 originally suggested, but not as good as one. Mr. Gates has promised to take the appeal to the highest court, and it looks like he may get it. The Justice Department has said that a stop at the Supreme Court would be the likely next step. But the Gates' aren't all bad, Bill and Melinda do have an endowment for libraries and education that is so large, that even after adjusting for inflation, it is larger than the gifts given by Rockefeller and Carnegy.

There has also been a resurgence in the number of IPO's coming to market with 20 scheduled for the last week of June. This increase in new offerings could mean a couple of things: 1) the Silicon Valley Venture Capitalists are starting to default on their multi-million dollar mortgages, 2) the Silicon Valley Entrepreneurs are starting to default on their multi-million dollar mortgages, or 3) the market has a very short memory and is welcoming back more high technology companies, only to be disappointed with the vast majority again. There are good technology companies out there in which to invest, but not every IPO is worth $150 million.

Finally, a point of interest for those people who drive cars. With a barrel of Crude Oil over $30 US, and gas at the pumps at least $0.72 per litre, perhaps the compact car may again become the style. Supporting this point of view is Ford, who recently reduced production on their SUV called the Excursion, the largest production vehicle ever made at 19 feet long and 7300 lbs. Production was reduced by 20% because demand for the vehicle was less than hoped. Here are some other interesting car facts:

  • Most expensive: McLaren F1 ($900,000 USD)
  • Cheapest: Daewoo Lanos ($8,700 USD)
  • Fastest (0-60 mph): McLaren F1 (3.2 seconds)
  • Gas Guzzler: Ferrari F550 Maranello (13 mpg)
  • Gas Cheater: Honda Insight (70+ mpg)
  • Most Popular: Honda Accord
  • Most Stolen: Honda Accord