Top Ten Financial Events of 2001:

 

1. Eleven interest rate cuts since December 2000 in response to the first economic recession in ten years.  Ninety day T-bills drop from 5.11% to 1.70%.
2. Severe drop in energy prices:  Crude oil drops 20%; Natural Gas drops 75%; and Unleaded Gasoline drops 27%.
3. Bear Market continues as World Stock Markets continue to fall:  S&P 500 drops 13%; NASDAQ drops 21%; London FTSE drops 15%; German DAX drops 19%; Japan NIKKEI Dow drops 27%; and Hong Kong Hang Seng Index drops 24%.
4. The largest energy trading firm Enron files for Chapter 11 Bankruptcy.
5. Argentina defaults on $170 billion in debt.
6. Twenty-five (25) U.S. steel companies file for Chapter 11 Bankruptcy.
7. Five hundred thirty seven (537) internet companies shut down or declare bankruptcy.
8. The initial public offerings of common stock issued by Wall Street firms drops to less than 100 offerings for all of 2001.
9. U.S. passes first economic stimulus package issuing over 100 million tax rebates.
10. FASB changes accounting for goodwill effective 1/1/02.

 

 

The common theme among the aforementioned economic events is the link between our economic system and global energy policy.  In just one year, oil prices dropped from $35 a barrel to $17 a barrel.  During the same period, natural gas prices dropped from $10 per mcf to $2 per mcf!  Within weeks after the economic reality of lower energy prices occurred, the World Trade Center and Pentagon were attacked and the largest energy trading firm, Enron collapsed.  One wonders if oil politics has more to do with the attacks than the terrorists’ disdain for the U.S. 

 

The bankruptcy of Enron comes immediately after the collapse of energy prices.  The company dominated energy prices domestically.  Yet, it appears that Enron’s accounting firm turned its head away from some very questionable accounting standards as the firm received over $57 million in fees for audit and consulting services.  Issues relating to accounting independence continue to be raised as the consulting services fees for accountants has skewed the reporting process clouding the investment decision-making process.  The invisible hand of the economy has a mysterious way of repairing such business practices as budgets get leaner and meaner during economic downturns.  Unfortunately, the collapse of Enron with revenues approaching $200 billion is quite damaging to investors, customers, and the overall energy marketplace. 

 

Additionally, world trade issues are coming front and center in Washington, New York, Brussels (headquarters of the European Economic Union), Moscow, and now Peking.  The addition of China to the World Trade Organization came just days after the September 11 attacks, and has virtually been swept under the economic rug.  The WTO turned its head on Chinese human rights violations and allowed China’s entry.  As in past recessions, governments tend to protect not to open markets; however, the underlying strength of the U.S. market should thwart any escalation of trade frictions.  Recent trade sanctions imposed by the U.S. against foreign steel manufacturers marked a change in trade policy as the global market place has contributed to oversupply in many industries including steel.

 

The continued decline within the technology industry continues to impact the major stock indices.  At one time the NASDAQ was composed of 80% technology names. Thus, it is no wonder that the index fell approximately 75% from its March 2000 high of 5200.  The S&P once had a 40% weighting in technology, but it has been reduced in the current market environment.  The Dow Jones Industrial Average has only a 15% weighting in technology and has performed better than NASDAQ and S&P 500.  Since both Intel and Microsoft recently introduced new technology, the cycle for technology should be more favorable in the upcoming months.  Previously, the technology bubble was so large, was predicated on expansive money growth and the year 2000 changeover; that we believe it will take years for the NASDAQ to approach its historic 5200 high achieved in March 2000.

 

The Cold War between the U.S. and the Soviet Union ended in 1989 with the collapse of the Berlin Wall.  The U.S. has not had a formidable enemy since.  However, the attacks on the World Trade Center and the Pentagon have dramatically changed the political landscape renewing Cold War-like tensions.  Our enemy is not necessarily a sovereign nation.  Therefore, our fear is not against one nation but fragmented groups that direct their terrorism at our way of life.  The open border policy enjoyed by the U.S. has allowed people to enter the country who are our enemies.  Our new anxieties that might inhibit our freedoms have changed our way of life for the time being.  Policy makers can debate as to whether these were criminal acts or acts against the state.  We believe that resources will be directed to defend, investigate, and police against such groups.  Tangible amounts will be spent to enhance defense systems, secure travel, and protect against all forms of terrorism.

 

Finally, we believe that real economics matter.  The private sector is unable to meet some of the current issues facing American policy and will require financial sacrifices paid for by the American taxpayer and financed by the Federal government.  The coming months and years will be a period of increased government spending that should eventually drive interest rates higher.  Consequently, long-dated treasuries are in for rough sledding in the new year.  Common stock investors should focus on real revenue and earnings growth.  The current economic environment favors companies that have already streamlined operations and have taken the necessary actions to weather slower economic growth.  Investment in stocks should favor more efficient mid capitalization companies.  Companies which have already reduced employees, cut unnecessary overhead, with manageable debt levels should fare better than large companies that may be inefficient.  Mean and lean companies will do better than top-heavy, behemoths that were not prepared for the current economic downturn.

 

Russell L. Robinson

5301 Virginia Way, Suite 150

Brentwood, Tennessee  37027

615.242.3447