State of the Markets: Stocks and Real Estate…The Coming Real Estate Recession 28 May 2000 Quick Comment regarding the Israeli Withdrawal from Lebanon: What we have learned.

State of the Markets

I took some of my own advice issued at year’s end and sold a good number of tech stocks in mid-March. The seasonal dip came about 2 weeks earlier than I had hoped but nevertheless we have a down market that should probably last till September with a seasonal rally in the 4th quarter of the year. I don’t think that the presidential election will have any real effect on the markets.  The question is whether or not to buy now and hold or keep waiting for prices to go down further.

The market will not go back up until the top teck stocks have been sufficiently “hit” so that people will stop saying the market is overvalued. The biggies have taken 35% hits and NASDAQ is at 3,200; it probably needs to go down to 2,800. There are some fundamentals at work here that are depressing the market: 

Market Factors: First and foremost, Interest Rates — The Fed is raising them and is not signaling that it will stop. I am not concerned that the Fed is putting the economy in danger of a hard landing; its vigilance is designed to avoid a repeat of its catchup policies two decades ago which led to a hard landing. Although tech companies do not issue debt, the venture capital companies that fund them are finding money becoming more expensive and that matters. Also, stock markets in general don’t like high interest rates.  The key item driving this is inflation. A key item driving inflation is that oil is back up to $30 a barrel. Last month, we got OPEC to hold the line. Now we have a different problem. The reason oil is up, besides that it is summer and demand is at its peak, is that the Clean Air Act as of June 1 requires that oil have an additive that keeps air clean. Someone has a patent on this additive. All oil companies must pay the patentholder and there is some uncertainty as to exactly what will be paid. This is driving up the price of oil. Government could stop this by suspending the regulation. Unless it does, this is beyond OPEC’s control. As long as oil is expensive, inflation will be high, interest rates will be high and the markets will be down. This more than anything threatens Gore in November. Perhaps this is Al Greenspan’s contribution to the Republicans although George Bush Sr. primarily blames Greenspan’s high interest rates in 1991 for costing him the election at that time.

The economy is not bad; the rest of the world is relatively optimistic and doing well although their markets are also depressed; and the leading companies are not 50% worse than they were 2 months ago, although their values were inflated and still are to some extent. I would buy the leading tech companies under the assumption that the market will place its bets on the safe companies (ie: Oracle, Sun, Cisco, Intel). Other companies that are out of favor but that I still think will be good long run are Lucent, Worldcom, Sony, Qualcom, Microsoft, AOL, Agilent, Hewlett Packard, Motorola, IBM, JD Edwards. I have not given up on 3COM but it has been a loser for me. I think that Florida East Coast Railroad (“FLA”) has a good mix of real estate and fiber optic properties and it is an overlooked company with a good future. This discussion leaves out industrial companies such as Elf Aquitaine, Phillip Morris, Waste Management, Lockheed Martin and Disney (some examples) which I bought earlier this year and hold onto. I will probably buy some tech stuff now and more in August. If there is a rally in June based on end of quarter window dressing of index stocks by mutual funds, I will take profits toward the end of June because I expect more dips before the year end rally.

The more intriguing thing is not so much the stock market but what I feel will finally be the recession in the real estate market. We haven’t had such a bird in New York City for almost a decade and it is overdue. Fact is, many startup internet companies are running out of cash and they will be finking out on their leases. This is going to depress the commercial market; lost jobs and companies will also cause people to move away and to stop paying astronomical rents and keeping up palaces. New York City has a short supply of housing and it didn’t take many people to drive up the market in the first place so it shouldn’t take that much to cause a run on the residential market as well. I just refrained from signing a lease on commercial property because I know that investment bankers are sweating and selling their deals short; I don’t want to be stuck with an office building I can’t rent even though right now I can’t get office space at a reasonable price and I have walked the streets big time looking. Historically, real estate recessions come at least 6 months behind Wall Street dips; even if the markets come back in the 4th quarter, there will be real pain by then. NASDAQ trading was down 30% this past month and trading in tech stocks have “gone off the cliff” according to this week’s Economist. 2nd quarter trading revenues for online brokers will be awful.  So if you’re looking to buy or rent in the City, wait till year end. I think it will become cheaper.

Quick Comment regarding the Israeli Withdrawal from Lebanon: 
What we have learned. 

For all the talk, it went as well as could be expected,  and without any Israeli casualties. A miracle actually. Kudos all around and the army senior brass deserves them. As far as I am concerned, it occurred on schedule once I was given the word that things would begin to move in May. I never gave credence to the idea of a protracted pullout and the Israelis have to learn a lesson from this; West Bank Palestinians could follow the example of the civilians who stormed the South Lebanese Army town and began the rout that drove out the army a few days later. Once the Israelis agree to withdrawals from the Golan and the West Bank, they should carry them out quickly and not think that dragging them out will give them any more control over the situation.

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