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Investment Guide: Stocks and Bonds
Leon Levy Says Sell on Strength
If power is destined to shift to Asia, do you want most of your wealth in U.S. equities?Age can turn a man bearish. For the greater part of the past half-century Wall Street financier Leon Levy has been an optimist. Levy believed that the U.S. economy would, through a succession of business cycles, reignite and spark the higher profits that are the fuel of rising share prices.Today, at 77, worn but wealthy and still active as an investor, he is more pessimistic about the U.S. economy and stock market than ever before in his adult life. "The outlook for profits is disappointing," Levy says. "It's very hard to tell how bad the economy will be. Still I feel it will be worse than any time since World War II." Don't dismiss Levy as a stopped-clock bear who stumbled onto the right side of the ticker tape only since March 2000. He amassed a fortune of $750 million, currently ranking him 313 on The Forbes 400, by making bets on the long side. He helped build Oppenheimer & Co. into a successful securities firm and created the Oppenheimer Group of mutual funds (current assets of $125 billion). After selling Oppenheimer to the U.K.'s Mercantile House for $162 million in 1982, Levy multiplied his fortune as a founding partner of Odyssey Partners, a private investment partnership. Levy's newfound bearishness is the result of lessons learned as a young man from his economist father, Jerome Levy. Levy senior used basic economic statistics to predict the direction of the stock market. "Look carefully at the economy, and you will see that the main props for growing profits are not going to be here," Levy junior says. Those missing struts are the hundreds of billions of dollars represented by the drop in business investment and the trade deficit. Levy also worries deeply about the utter lack of shortages of consumer goods and the degree to which the consumer is in debt. Take capital expenditures first. From a peak of $1.34 trillion (annualized rate) in August 2000, corporate spending on new plant and equipment had shriveled by 11.9% to $1.18 trillion by last May. "It means less money invested in building factories and other commercial enterprises that will pass through to other companies and the consumer and be translated into profits," Levy says. It foreshadows, he adds, weaker profits for companies in the years to come. Levy also views the U.S.' record current account deficit--$520 billion on an annualized basis in the second quarter--as an inevitable drag on U.S. companies' profits. The largest chunk of this deficit is in trade in goods and services, at $110.6 billion for the quarter, up from $88.9 billion the same quarter a year earlier. Another piece of the deficit has to do with the fact that the U.S. pays more to foreigners in profits, royalties and interest than we receive from them. In other words, a growing fraction of the returns to capital is going to foreign suppliers of capital and not to the bottom line of U.S. companies. (The last item in the current account has to do with government spending.) To be sure, trade--and foreign investment in U.S. factories--makes U.S. consumers better off. You benefit when Honda offers terrific cars at low prices, even if you end up in a Chevrolet priced to compete with an Accord. But the presence of Honda is bad news either way for your General Motors dividends. Third, and here Levy cannot be too emphatic: "Nothing is in short supply. I keep asking that question of everyone. And they have no answers." He rattles off consumer products in excess--"autos, fiber optic cable, computers, cell phones, trucks, airplanes, steel, even food." "It won't get back to the way it was," he says darkly. "If nothing is in short supply then how can profits rise?" More supply than demand triggers a deflationary spiral of lower prices and profits. He doesn't see a replacement source of higher profits on the horizon to break the spiral. "Where is the compelling force for growing profits?" he asks. The consumer not only lacks for nothing, but also is paying down debt or building up personal savings. Wealth is shifting from corporate savings (i.e., profits after taxes and dividends) to households, he emphasizes.
Gilead Squares Deal To Buy Triangle - 12/4/02 9:53:42 AM ET Gilead Sciences says it will buy the smaller biotech firm in a move to strengthen antiviral drug focus. Nextel's Blackberry Hits The Market - 12/4/02 10:00:00 AM ET The latest Blackberry device supports every wireless communications method that most people could want. Finding Technology Stocks In The Bathwater - 12/4/02 8:30:00 AM ET We dipped into the Nasdaq index in search of promising technology stocks. Vivendi To Cut Costs At U.S. Entertainment Arm - 12/4/02 8:35:39 AM ET The firm is preparing for a possible partial flotation of the business, which includes Universal Studios. 2003 Investment Guide - 12/9/02 12:00:00 AM ET Our annual year-end guide to bettering your personal finances.
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