Cycles of the Old Order Emerge to Taunt New One

The “old economy”? The “new economy”? Can anybody tell them apart anymore?

The distinctions looked awfully blurry by late last week, when Intel Corp.--whose computer chips function as the brains of much of the new economy--stunned Wall Street with a warning that sounded very old economy.

Sales in the current quarter will fall short of expectations, Intel said, “primarily due to weakness in Europe.”

Thus, new-economy titan Intel joined the lengthening roster of companies that have been rudely reminded this quarter about the cyclical nature of things such as commodity prices, currency values and consumer demand.

Investors, on some level, still expect that kind of cyclical risk from old-economy firms such as Goodyear Tire & Rubber Co., McDonald’s Corp. and Ingersoll-Rand Co. The market tends to price that risk into the stocks--which is why they don’t sell for 500 times earnings per share.

In the new economy, however, we’ve been led to believe that cyclicality isn’t an issue.

Demand for computers, Internet routers, wireless telecom services, etc., is supposed to boom forever, isn’t it?

As for commodity costs and currency fluctuations--who cares? New-economy companies are supposed to be able to overcome any challenge by simply turning up the productivity dials another notch or two.

Apparently not so at Intel. Though the company said nothing about how the slower sales picture might affect its earnings, tech industry analysts decided they could take the hint. As analysts trimmed their 2000 and, in some cases, 2001 earnings-per-share estimates on Friday, Intel shares lost $90 billion of market value, diving $13.55 to $47.94 on Nasdaq.

In all, investors let go of 308 million of Intel’s 6.7 billion shares outstanding on Friday. It was the heaviest single-day trading volume for any stock in U.S. history.

For every seller, of course, there was a buyer. Which side of the transaction was the smarter place to be on Friday, we’ll have to wait and see.

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The new economy is a real place, and the potential for its technology to improve our lives and lower the cost of doing business is no less bright today than it was last week, last month or last year.

But the old economy--the world of commodity prices, currency markets and finite consumer purchasing power--has lately been issuing not-so-subtle reminders that it remains a force to be reckoned with.

Clearly, oil’s continuing surge has been unnerving stock and bond markets this month, helping drive the blue-chip Standard & Poor’s 500 down 4.7% since Sept. 1.

Oil prices reached a 10-year high of nearly $38 a barrel last Wednesday amid fears that producers still aren’t pumping enough to comfortably cover anticipated demand, with the Northern Hemisphere’s winter approaching.

By Friday, near-term oil futures in New York had retreated to $32.68 a barrel, but perhaps only because Uncle Sam was on the verge of borrowing yet another page from the old-economy textbook--specifically, from the chapter on government interference in free markets.

President Clinton on Friday authorized an “emergency release” of 30 million barrels of oil from the nation’s 571-million-barrel Strategic Petroleum Reserve, a move Republican presidential candidate George W. Bush immediately branded a political favor to opponent Al Gore.

Curiously, Energy Secretary Bill Richardson insisted that tapping the reserve was simply an effort to bolster supplies, not affect prices at, say, the local Exxon pump.

That statement must have puzzled most college students enrolled in Economics 101 this fall; this far into the semester they’ve probably already covered the idea that supply and demand are precisely what determine prices in a free market.

In another corner of the old economy, the relative lack of demand for the euro has pummeled the currency’s value for most of the last 21 months, driving it under 85 U.S. cents by last Wednesday, from $1.17 when it was born in January 1999.

The world’s three major central banks--the U.S. Federal Reserve, the European Central Bank and the Bank of Japan--have all along viewed the euro’s slide with indifference. Yes, it crushed Europeans’ buying power, but it also made European exports cheaper abroad, and gave Americans the best financial reason to vacation on the Continent since the mid-1980s.

All in all, that seemed like a fair trade-off to central bankers and European politicians.

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But in recent weeks, as the euro’s slide accelerated in tandem with oil’s rise, European truckers began to howl about their fuel costs.

And on Wall Street, U.S. companies doing business in Europe seemed to be tripping over one another to warn shareholders and analysts that the weak euro would hurt third-quarter sales and/or earnings. Old-economy rules still apply when it comes to foreign exchange: If you’re selling products in a foreign currency that is losing value relative to your home currency, those foreign sales will be worth less when you translate them into your home currency.

What’s more, if your customers’ buying power is eroding because their currency is sinking, they may have a tougher time anteing up to buy your product--unless, of course, you cut prices. Either way--weaker demand or lower prices--your profits will suffer.

The Clinton administration, which like all administrations pays at least lip service to the idea of a strong dollar, may have decided that the teeth-gnashing on Wall Street over the weak euro’s effects was becoming far too grating.

Most likely, it was mere coincidence that the European-sales warning from new-economy leader Intel preceded Friday’s dramatic move by the Fed, the ECB and the Bank of Japan to intervene in currency markets and buy the euro.

In any case, the intervention worked. The euro rocketed from 85.8 cents on Thursday to as high as 90 cents on Friday in Europe, before settling at 87.9 cents in New York.

For as much as Wall Street supposedly loathes government interference in the markets, it seemed to applaud both the oil-reserve move and the euro intervention on Friday: Despite the dive in Intel’s stock, the Nasdaq composite index ended with a loss of just 25.11 points, or 0.7%, on Friday, closing at 3,803.76. It had been down 5.6% at the market opening.

The Dow industrials rallied 81.85 points, or 0.8%, to 10,847.37 on Friday, fueled by some of the same multinational stocks that had been sinking in recent weeks at least in part because of the threat posed by the falling euro.

A little old-economy-style market interference, it seems, can go a long way even in the new economy.

But the more important message from the oil, currency and European-consumer markets in recent weeks is that traditional old-economy cycles still happen, and can still matter--a lot.

Should Wall Street be worried about oil prices? Of course. But at this point, it’s worth remembering that they have already doubled over the last two years. Prices may stay near current levels, but a dramatic spike from here seems much less likely, with supplies increasing.

Many economists are much more concerned about the dollar’s value. Given the huge U.S. current-account deficit--the key indicator of our reliance on foreign capital--experts have argued for years that the dollar could dive if foreign investors began to view the U.S. economy less favorably.

But American investors can be forgiven if they fail to see a genuine crisis, whichever way the dollar goes from here. The U.S. stock market, after all, rose with a weakening dollar in the mid-1980s, and rose with a strengthening dollar in the late 1990s.

At least so far, the market--in the long run--hasn’t found a dollar “crisis” it couldn’t learn to like.

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The Dollar: A Long-Term View

Currency gyrations may unnerve financial markets in the short term, but over the last 20 years the dollar’s value has plunged, then rebounded, and in both major cycles the U.S. stock market had one principal reaction: It rose.

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Quarterly closes and latest, German marks per U.S. dollar

Friday: 2.23 marks per dollar

Source: Bloomberg News

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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.