Steamboat Pilot & Today

Steamboat Springs — The markets absorbed a pummeling on Friday.

The Dow Jones Industrial Average gave up 238 points, and the early part of this week could be even more tumultuous.

Chief weapons inspector Hans Blix is due to make his report to the United Nations on Monday. President Bush will give his State of the Union address on Tuesday and the Federal Reserve Board meets Wednesday to assess interest rates. Translation: Buckle your seatbelt.

"The overriding factor is uncertainty over Iraq," Christopher Morson said. "The worst thing in the world for the stock market is uncertainty."

Morson is Senior Vice President/Investments with Janney Montgomery Scott LLC, a subsidiary of the Penn Mutual Life Insurance Company. He maintains a home office in South Routt County.

Uncertainty over the impending war with Iraq caused what may be the biggest one-day drop of the year on Friday. The NASDAQ was off 46 points at the close of trading and the Standard & Poor's 500 was off 26 points to 861.41. All three gave up all of their gains for 2003.

"Today was ugly," Dan Foley said Friday. "This is the longest bear market since 1939 to 1941. Since March 2000, we've lost 90 percent of the gross domestic product of the United States in stock market declines."

Foley is a certified financial planner with Sleeping Giant Financial Services in Steamboat Springs.

Despite the Wall Street selloff being fueled by war clouds, Foley agreed with Morson with there is ample reason for optimism about the U.S. economy.

"Current monetary policy is very stimulative. We're at half-century lows in interest rates," Foley said. The result has been a jump in home building.

Morson said new housing starts are a good bet to stimulate the economy.

"The consumer is key in this situation," Morson said. "Housing starts this week reached a record high. This is very good from a consumer standpoint, because we're going to be spending a whole bunch."

He pointed out that people who move into new homes typically purchase appliances, furnishings, window treatments and a variety of consumer goods.

Another positive sign the two men see is unheard of productivity among American workers.

"The best news I know," Foley said, "is that productivity increased by 5.3 percent in January, the most in a single month ever. It means people are learning to use their technology."

Morson said the impressive increase in productivity means U.S. producers of goods and services have a chance to remain profitable even if concerns of deflation prove out.

Deflation amounts to a reduction in the real dollars companies can charge for goods and services. However, what really matters, Morson said, is the margin between the cost of production and the money companies can charge for their products. The jump in productivity translates into the cost of production going down, and that protects the all-important margin.

Morson is quick to point out that he has a bias toward a specific form of market analysis called "technical analysis."

Morson pays close attention to the flow of money, either in or out of specific securities and market segments. Further, he scrutinizes the pace at which that money is flowing. He pays particular attention to reversals of direction.

Morson is enamored with technical analysis because it is a form of discipline that drives decision-making, based not on emotion and opinion, but on analytical tools.

"It's totally dispassionate," he said.

Foley said even in uncertain times for the stock market, the name of the game is making money.

"We're all investing for income, either now or later," Foley said. Small investors worried about the declining value of their 401(k)s should consider putting a portion of their money into very safe investments. He is cautionary about fleeing to the bond market.

"A lot of people think bonds are safe," Foley said. He pointed out that if the interest rate on 30-year government bonds took a hypothetical increase from 5 percent to 6 percent in the next year, investors could lose up to 14 percent of their investments.

Another trend to monitor in the coming year is the declining value of the dollar against foreign currencies. That trend has the effect of making American products more affordable on world markets and the disadvantage of pulling foreign investors out of U.S. securities.

The president's proposal to eliminate double taxation on stock dividends could provide a big boost for the stock market, Foley said, but he's skeptical about whether the change in tax law will help the overall economy.

"I personally don't think it's good for the economy," he said. "There are no behavioral financial studies to suggest that dividends will increase because of no taxation at the personal level."

Executives of publicly traded companies make decisions about what to do with available cash based on the cost of capital, Foley said. Right now, with bonds at 50-year lows, a huge amount of corporate debt is being issued, he said.

"It's like a refinance on your mortgage, just on a corporate level," Foley said.

The coming week promises to be a fascinating one for market watchers, with news events influencing stock prices.

Morson believes the popular news media tend to mislead small investors because they focus on the present.

"There is a tendency to focus on what is happening today and what happened in the past. Sophisticated investors and the stock market look forward six to nine months," Morson said.

Investors need to seek out forward-looking information sources, but the real trick is evaluating which sources are good and which are bad.

The goal for small investors, he said, is to know when to be in or out of the market.