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World Business Academy Rekindling the Human Spirit in Business CONTINUUM Volume 16, Issue 15 October 9, 2002 Bear Market Longest in 60 Years The current bear market in stocks is already the The Bush White House has taken some steps to assure longest in 60 years, and with few investors willing to Americans the U.S. is taking seriously the terrorist step up and buy, the likelihood is it will go a little threat. But economists say that the administration longer, market analysts say. should make clear it is taking economic steps too, especially since the Fed doesn’t have much room to cut Worse news for some investors, the Standard & Poor's short-term rates much lower than they already are. 500 index is flirting with its most recent low, which makes it perilously close to making this the deepest Source: Wall St. Journal, Bob Davis bear market since 1938. History Backs 4th-Quarter Rally "It's not fundamentals causing this, but an overdose of uncertainty with" the Iraq situation, said Anthony Historically, the final three months of the year have Chan, chief economist at Banc One Advisors which been the kindest for stocks, in both good times and bad. oversees $150 billion in assets. The Dow Jones Industrial Average has shown a positive return in 58 of the previous 82 years, about With the Bush White House reviewing military options 71% of the time, in the fourth quarter. By contrast, the against Iraq, investors are on tenterhooks as to the other three quarters have shown a gain only 59% of the timing of any action against the regime of Saddam time. And since the market slide in 1987, the Dow Hussein. Any war could be costly and derail the U.S. Industrials boast a positive fourth-quarter return 12 of economic recovery as oil prices rise and resources are those 14 years. diverted toward defeating Iraq. That is the good news. Though Chan hopes the index won't retest the lows and go into potential freefall, in the current climate he The bad news for beaten-down investors this year is doesn't rule out the possibility of another 5 percent to that analysts say a variety of factors – from recession 10 percent drop in the index, which would push it well and war to corporate earnings – could neutralize the past the depth of the 1973-1974 bear market. fourth-quarter effect this time around. Source: Reuters, Nick Olivari Average quarter-to-quarter percentage gain for the Dow industrials since 1920: Gauging the Economic Consequences of First quarter – +1.71% a War with Iraq Second quarter – +1.73% The Bush White House is confident – smug, even – Third quarter – +1.32% that the U.S. can invade Iraq and still improve the Fourth Quarter – +2.58% economy. White House economic advisor Larry Quarterly performance of the Dow industrials this year: Lindsey says spending $100 to $200 billion to remove a “huge drag on global economic growth” – Saddam First quarter – +3.82% Hussein – is a bargain. (Note, though, that the U.S. Second quarter – minus 11.16% grew briskly in the 1990s with Mr. Hussein in power.) Third quarter – minus 17.86% Fourth quarter – ? The last time the U.S. and Iraq were poised to go at it, Source: Wall St. Journal, Craig Karmin in the summer of 1990, the U.S. economy tumbled into recession. Oil prices doubled to $40 a barrel, while Fox Takes on Corruption in Mexico’s home sales and business investment sagged. The shock of Iraq’s invasion of Kuwait and the fear of heavy U.S. Oil Monopoly casualties battered consumer confidence. Two years after his electoral victory over the long- Today, the recovery is so fragile, and the uncertainties ruling Institutional Revolutionary Party, Mexican surrounding a war immense enough that the U.S. President Vicente Fox has begun to challenge the core would be lucky to avoid another Gulf War recession. of the PRI’s lingering power – the axis of political and Even if the U.S. wins decisively, the cost may be steep union bosses in the state-owned petroleum monopoly says Mark Zandl, chief economist for Economy.com. Pemex and the Oil Workers Union – as part of his Households with incomes of less than $50,000 spend efforts at reform. about 8% of their income on energy, making them Source: Los Angeles Times especially vulnerable to oil-price boosts. Lawsuit Seeks IPO Profits From Five Canada’s Economy is Growing Executives From Vancouver to Regina to Toronto to Montreal, New York's attorney general sought to force five cranes and earthmoving equipment are steaming at a telecommunications executives to give up millions of rate not seen since the 1980s, constructing high-rise dollars in profits they earned selling shares in condominiums and new houses in the ever-sprawling companies going public during the Internet boom. suburbs and producing tens of thousands of well- paying jobs. In a lawsuit filed in New York State Supreme Court, Eliot Spitzer charged that former WorldCom chief The Canadian economy now has the fastest growth rate executive Bernard J. Ebbers and four other executives among major industrial countries. Government received shares in initial public offerings by steering statistics show that Canada’s gross domestic product grew by 0.4 percent in July from the month before, the lucrative investment-banking business to brokerage th firm Salomon Smith Barney Inc., an arrangement that 10 consecutive month of improving economic was not disclosed to investors. Spitzer said the men performance. should be forced to give up the $28 million in profits In a new report, the International Monetary Fund earned when they sold those shares. predicted that the Canadian economy would grow by The lawsuit also asked that the executives be directed 3.4 percent this year and in 2003, less than the 5 to return $1.5 billion in profits they made by selling percent in the first half of this year but still well above shares in their own companies, saying they knew their the U.S. economy. stock was inflated. Canada’s good fortunes may also prove to be a cushion Others named in the lawsuit include Metromedia Fiber for the slowing U.S. economy given that 25 percent of Networks Inc. Chairman Stephen A. Garofalo; former U.S. exports go to Canada. McLeodUSA Chairman Clark E. McLeod; and two Economists note that when Canada did not follow the former Qwest Communications International Inc. U.S. into a recession after the September 11 attacks, it executives, Joseph P. Nacchio, who was chief was the first time in 25 years that the country had been executive, and Philip F. Anschutz, who was chairman. able to avert being tugged into an American tailspin. Anschutz remains on the board of directors. Source: N.Y. Times News Service Source: Washington Post CEOs sour on economic outlook Car Craze Sweeps Over China, Sales Chief executives' confidence in the U.S. economy Skyrocket as Prices Fall retreated for the second consecutive quarter, with current assessment of business conditions plunging in As one of the world’s most protected markets the June to September period, a private report said last continues its historic opening, car sales nationwide Thursday. surged 44% through July vs. the same period last year. Car prices have plunged as China’s entry into the Compiled from a survey of 100 chief executives of World Trade Organization has lowered tariffs on U.S. industries, the Conference Board's Business imports. The price cuts, combined with galloping Confidence Index fell to 54 in the third quarter, down economic growth, are fueling a fever that has riveted from 61 in the second quarter. the global auto industry from Detroit to Stuttgart. Some While the overall index remains above the 50 mark, project that China will vault to the world’s third-largest which reflects more positive comments than negative car market by 2010 behind only the USA and Japan. ones and is well off its recent low of 40 seen at the end Percentage growth in personal vehicle sales, forecast of last year, current conditions tumbled -- to 45 in the for 2001-2002: third quarter from 61. China: +23% Still, future expectations held somewhat firm at 60, South Korea: +13% down modestly from 63 in the prior period. United Kingdom: +2% "Despite executives' concerns about the present state of Canada: +4% the economy, CEOs' expectations for the near future USA: -1% remain cautiously optimistic," said Lynn Franco, Germany: -3% director of the Conference Board's Research Center. France: -5% Brazil: -7% Capital spending plans improved modestly, with 11 Spain: -7% percent of CEOs reporting an increase in their spending Italy: -10% plans since January, up from 8 percent in the same Japan: -12% period last year. Still, 38 percent of companies plan cuts in business investment. Source: USA Today and J.D. Powers LMC Automotive Forecasting Source: Reuters 2 JetBlue soars on CEO's creativity After Long Boom, Weaknesses Appear JetBlue CEO David Neeleman is succeeding where In U.S. Housing Market others have failed. The two-year-old airline is adding Cracks are spreading in the foundation of the U.S. 15 planes this year and hiring 1,000 workers at a time housing boom, as evidence mounts that the long run-up when major airlines are slashing fleets and laying off in home prices can’t be sustained. workers. Service to its 20th destination, Las Vegas, For the last several years, a rare confluence of factors – starts this week. including low interest rates, low unemployment, easy While the industry expects to lose more than $6 billion credit standards and tight housing supply – has this year, JetBlue earned $27.6 million in the first half combined to stimulate an unprecedented surge in home of 2002 on the strength of low operating costs and sales, sending prices rocketing up.

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