Follow the Money

If you’d told me that the NASDAQ would fall 68 percent in a year, I would’ve told you that the American shopper would simply stop spending. You kill the stock market, you kill the consumer, and if you massacre the consumer, you obliterate the U.S. economy. Every stock-market maven and economist in the country would reach that same conclusion.

Yet here we are with $4 trillion in market capitalization vaporized in one year’s time, and what’s happened? The consumer is on fire. Housing starts defy gravity and home builders report record numbers. Auto sales are revving up, and automakers are planning to increase production in the fall. General Motors is one of the strongest stocks in the Dow Jones averages. Same-store sales for retailers, the true gauge of spending, are running well above last year’s levels as companies as diverse as Kohl’s and Best Buy work hard to keep shelves filled with the hottest goods. You can’t keep these stocks down!

So, then, why have we had to cut interest rates six times this year in order to get the economy moving again? How come consumer spending, which traditionally represents two thirds of the gross domestic product, hasn’t resulted in better overall growth? Why, given the rosy shopping forecasts and the blossoming consumer confidence, are most market prognosticators, including those within the Fed, more worried about a recession than at any other time in the past decade?

Because the stock market’s decline wrecked the hopes of another class of big spenders: America’s CEOs.

While consumers keep gushing, the corporations have shut off their own spending spigots – despite massive declines in interest rates. Chief executives are panicked; their personal stock losses have translated into a buying paralysis, and they have clamped down on all sorts of spending, including travel, R&D, and, most important, technology spending (routers, storage, mainframes, fiber optics).

As long as their stocks were moving up, these executives kept buying and buying, knowing that if they ran out of cash, they could always tap the equity or convertible-bond markets. New companies could raise money at the drop of a hat in the initial-public-offering market and could finance any amount of capital goods with it. The faster they grew, the more likely their stock would go higher and the more equity they could sell to finance ever-greater expansion. If they thought they would run out of growth, they would just purchase a rival with their inflated currencies.

In the final years of the boom, financial managers created companies with the sole purpose of enticing a bid from another company that wanted to “grow into its market cap.” I know dozens of companies that were started just so Yahoo or Cisco or Nortel or JDSU would buy them. And this fueled growth well beyond technology. We saw massive expansion of the financial-services sector, and the tech boom also produced dramatic increases in the real-estate and construction businesses as companies needed square footage for everything from new executive offices to space for dot-com equipment.

But the NASDAQ’s 2000 swoon killed demand for just about every aspect of that growth, from office construction to brokerage volume. Now, with many tech stocks mired at the same level for almost a year, the cycle can’t seem to be restarted by simple interest-rate reductions. After all, none of the tech growth was bought with borrowed money anyway. It was financed by the stock market, not banks.

How come we didn’t see this coming? Because it has never happened before. Sure, in 1929, we had a dramatic fall-off, but the stock market affected far fewer companies those days. Bonds, not stocks, fueled most economic growth and wealth. It didn’t happen with the crash of ‘87, either, as most of the stock decline was borne by old-line industrial companies. The 1990-91 recession barely dented the smaller-capitalization tech companies, as the banks and retailers led that retreat. Those came back quickly once the Fed crushed rates to stimulate growth.

This time, we simply had no idea that corporate demand and the stock market were joined at the hip. No one, even at the companies that made the hottest capital goods, knew how much the stock market had stimulated the economy itself. When I visited Silicon Valley last year at this time, executives were adamant that demand remained strong. They couldn’t see it coming because they didn’t know demand would evaporate as the Nazz sliced through 3,000 and 2,000 on its way to 1,600.

Corporate demand and tech stocks are so correlated that when the NASDAQ put on a good show in early April, orders at many tech companies picked up, only to recede back to weaker winter levels when stock prices declined in May and June.

So what is the point of the rate reductions if they can’t reignite capital spending? Away from tech, rates still matter a great deal. The combination of lower interest rates, a tax rebate, and lower oil and gas prices will produce better earnings-per-share numbers year after year for a host of non-technology companies that count on consumers to buy, not the corporations. Rate reductions can influence the price of the tech stocks that have consumer exposure, most notably Microsoft and America Online, two companies that are geared to consumer spending.

But don’t look for the companies that took part in the huge stock-led boom to come back anytime soon. Even if interest rates went to zero, these companies wouldn’t go much higher. They are the true casualties of the end of the nineties bull market, and without a levitation act of magical proportions, the best days of stocks like Broadcom, PMC-Sierra, Applied Micro Circuits, JDSU, Ariba, and Akamai all lie behind them. They were beneficiaries of a level of demand that was as unrealistic as that of Japan in the eighties. And just as many Japanese companies can’t get out of their own way years later, the same may be the case for many of the companies that doubled, tripled, and quadrupled in the final months before the turn of the century.
Check out’s “10 Questions” feature this week. Jim Schmidt, manager of the John Hancock Financial Industries Fund, is on the hot seat. Available free of charge at

James J. Cramer is co-founder of At the time of publication, he owned stock in AOL, Microsoft, Best Buy, Cisco, and Kohl’s. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time. E-mail:

Follow the Money