Princeton Capital Management, Inc.
47 Hulfish Street
Princeton, NJ 08542
Phone: (609) 924-6867   Fax: (609) 921-9502
E-mail: [email protected]
Stay With the Music; But Dance Near the Door
The evident early signs of revitalization in Asia and in a few other troubled nations have led hopeful early responders to believe the world is regaining its footing from which commerce shall now move forward. Meanwhile, perceptions lead others to hold the view that circumstances are relentlessly moving America toward joining the rest of the world in some manner of contraction. The hyperactivity of the stock market in recent weeks has represented expressions of just such alternate — even opposing — views. On any given day, it might be the technology stocks that are battered by sellers, or that bounce upward from the sanguinity of buyers. The next day, the same volatility might happen to shares of enterprises involved in basic industries. On another day it might be fear of rising interest rates that sends a shiver through the market. Or, it could be the fear of a disruptive change of Government in Russia that intermittently rattles through the marketplace. 

The American market has become an uncommonly nervous clearing place for alternate views, all seemingly having some degree of cogency. Of course, it is intended that a free capital market be a clearing place for diverse viewpoints. Indeed, the very essence of its being is that of reconciling unlike viewpoints through price movements. The extraordinary aspect of the present is found in the opposite directions of plausible conjectures, the only commonality among which seems to be the challenging of the continuation of the favorable circumstances to which all have grown accustomed. The evident jitteriness seems to represent a developing sense (for unlike reasons) that the "best-of-all-world’s set of circumstances" must be about to end. Recent years have often been described in best-of-all-world’s terms inasmuch as they brought growth without inflation amid abundant money.

Nervousness is compounded by the very critical influence America’s capital markets have had in sponsoring the American economy, and, in turn, the very critical importance of the American economy to commerce throughout the rest of the world. America is virtually alone among major nations of the world that are still showing persistent growth, having been helped quite importantly by the levitation of share prices and abundant money that boosted a sense of well-being among shareholders, and, correspondingly, their dispositions to spend. The narrowing of the base of fundamentally thriving nations, and of industries, is of concern at the highest levels of treasuries and central banks throughout the world. All seem concerned; yet, none would wish to assume the responsibility for bursting the bubble aspects of our financial markets. The excessiveness of high valuations for so many shares escalates the prospective penalties for being wrong, until the world is convincingly in a recovery mode and can withstand the consequences. 

In order to dramatically reveal the inherent hazard associated with the vital interdependence of so narrowly based a source of support, a friend recently cited the familiar legend in which a single nail becomes perceived as a pinion for a kingdom: Remember: "For want of a nail a shoe was lost; for want of a shoe a horse was lost; for want of a horse an army was lost; for want of an army a kingdom was lost." However oversimplified by this dramatization, the implications intend to emphasize the influence throughout the American economy of the wealth created by our capital market — that is, nominal wealth, or the sense of wealth — and, in turn, throughout the world.

In recent years, the choice of our capital markets as a relatively safe haven has attracted money from troubled nations, for our benefit and for the detriment of the nations from which these inflows of money came. In turn, the American economy's prosperity has been a benefit to the rest of the world. Imports into America have been rising while exports have been floundering. American imports have permitted some of the other nations of the world to recapture part of the financial wealth that sought safe haven here. However, these imports have come at a high cost to our traditional industries, to the extent of developing political forces that are tending to constrain the largesse of access to our product markets. This comes at a time when Europe is in a declining mode, which constrains the flow of goods from Asia into Europe. Some day, the changes going on in the basic aspects of the economies of Asia will re-establish a persistent growth pattern, but we do not think there can be much growth or acceleration until Asia can export more to Europe and to America. 
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Take the automobile industry as a case in point — one of the largest, most competitive, and most internationalized of industries. By commonly expressed appraisals, this world-wide industry has some fifty percent of capacity unutilized. Purchasing of autos in America and in Europe have held well, benefiting by (1) extensive model changeovers by virtually all major producers, (2) plenty of money, and (3) in America especially, disguised price competition in the form of enhanced terms of trade-ins and extraordinarily favorable financing. Indeed, customers are offered capital for free for three years or more to take a car off a dealers lot. To be sure, this has expanded the market, but expanded by a means that is not likely to persist, or to be effective forever.  

A negative influence not to be overlooked extends from another major industry. Farmers who produce major field crops experienced a sharp down-turn in their income last year, and net incomes for the current year appear likely to be little or no better. This is showing up in purchasing throughout areas affected, and imposing upon real estate values in such regions as well.  

Of much concern to us, as cited often in our commentaries, is the counteractive force in America (and beyond) by so many corporations coincidentally deferring decisions concerning their investments in physical assets. For sake of elevating earnings per share, many management's prefer to buy their shares in, instead of using available cash (or borrowed money) to expand facilities for additional product output. Their horizons seem not to extend beyond their share prices.

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The grand exceptions to aspects of concern are found in the communications and information technology industries. Most enterprises so involved are producing in increased volumes, especially those supplying equipment to enlarge the availability of access to wide area communication. Indeed, the American economy is so diverse, and sponsored by such initiatives in the private sector, that one can feel a vibrancy of activity in the regions of America where the manufacturing of equipment for such industries is concentrated.
Though there is a hazard inherent in the quite lopsided growth of the American economy, inventiveness and an entrepreneurial spirit are still driving forces of immense worth and strength. This was so well demonstrated during the closing weeks of April as Hambrecht & Quist presented its twenty-seventh Technology Conference, where some four hundred companies were represented. Optimism seems to flourish at these conferences as nowhere else. Hubris suppresses doubts, and optimism shames concerns. Indeed, these are wonderfully American demonstrations, exuding an intoxicating spirit. These conferences give a rendezvous with a sort of creativity, supported by a belief in oneself, that distinguishes commercial life here from that of any other place on earth. It is impossible to attend such a conference without having ones sights elevated to believe in larger tomorrow's. These tomorrow's do not just happen. They are created by inventiveness, foresight, and management initiatives.
Furthermore, let no one overlook the significance of what seems to be the incomparably big news of the year thus far. This is the sequence of acquisitions by AT&T, crowned by the Media One acquisition, establishing a grand scheme for enlarging the communications capabilities here — and everywhere. AT&T has become the driving force in forming arrangements that realign and unify the cable industry and the communications industry. Expect a build-out of these systems to proceed with all possible speed, compelled by the time costs of the huge sums AT&T has already expended, as well as by management pride and commitment. This is good for users throughout America, and it is good news for enterprises supplying equipment to enlarge hybrid communications networks (broadcast, optical fibers, coaxial cables, and upgraded capacities of copper wire) that comprise deliverance of signals to and from American homes. We have emphasized participation in enterprises so related, and plan to stay so invested in the foreseeable future.
In all, we suspect the American economy is now undergoing some slow down, notwithstanding Government data to the contrary. This might be disguised or apparently delayed by some inventory building by certain large manufacturers who wish to avoid the possibility of having their production lines interrupted at the turn of the year by "snafus" owing to Y2K computer difficulties. We hear of companies preparing to do so, and if one multiplies this a few hundred fold, the latter part of this year might see a slight inventory bulge that will make nearby months appear to be stronger than otherwise would be the case, and take away from the forepart of 2000.
When circumstances give rise to such alternate viewpoints as now, the writer recalls the sage comments of an early mentor (a Harvard 1923 BA, before it became fashionable to have a Ph.D. before entering business, he would sometimes point out): "It is not a sin (he would say) to be incapable of knowing what is going to happen next; but, it is a sin in this business to be incapable of determining what to do." Present circumstances present unusual degrees of risks. The pricey market is challenged by earnings expectations that seem unlikely to be supported by volume increases, as economies of the world cope with hyper competitive circumstances and lagging international commerce. One should give first thought to preservation of capital, and, thereafter, invest in technology driven enterprises with growth expectations, relying on inventiveness and management vigor to carry the day. Remember, contractions are temporary; growth is basic and longer lasting.
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