Although the market today breathed a sigh of relief that there were no great earnings disasters the first quarter reporting season is only starting, and there is likely be an abundance of downward guidance over the next few weeks. In fact the two main earnings statements that were favorably regarded today came from Citigroup and Fannie Mae, two beneficiaries of the continuing bubble in consumer and mortgage debt that cannot last. In fact Mr. Greenspan is actually depending on continually expanding consumer and mortgage debt to keep the economy afloat until capital expenditures kick in. It is almost as if he has studied the US. following 1929 and Japan after 1989, and decided that the only way to prevent the dire effects of a bursting bubble is keep the current bubble going.
The problem is that the plan can’t work. Consumers are already feeling the pressure of a low savings rate and record debt, and are no longer spending freely without steep discounts and financial incentives that are squeezing corporate profit margins and causing them to cut employment and delay capital spending. This, in turn leads to further decreases in employment and, therefore, lower growth in personal income. The benefits of continuous mortgage refinancing depend on even lower mortgage rates, and that can happen only if the economy continues to weaken. Since it is this negative feedback loop rather than the war that is causing the economic malaise, the end of the war will not automatically lead to an economic revival.
The continuing bubble is evident in the stubbornly high valuations still being accorded the technology stocks. We examined the 16 technology stocks that are part of the top 50 capitalizations in Nasdaq, and found that they are selling at an average of 41 times estimated fiscal 2003 earnings. Nine of those stocks were in existence and had positive earnings in 1991. During that year their average P/E ratio was only 19, compared to 35 today when their prospects for rapid growth are much less than they were at that time. In our view the bear market is far from over, and the current nine-month trading range will be broken on the downside.
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