September 2004  Email this  Print this
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MY POINT OF VIEW
Perception Versus Reality
by Knight Kiplinger As summer draws to a close, my mind strays to random thoughts about the economy and personal finances. For instance: perception and reality. Bad memories of recession, a long bear market and job losses seem to linger long after an economic turnaround is well established. Polls indicate a broad public perception of a punk economy -- a perception stuck back in 2002. But gross domestic product has been growing at a healthy pace for two years; an average of more than 200,000 new jobs are being created each month; corporate earnings are robust; and personal income is rising nicely. Sure, interest rates are beginning to rise, but they're still at near-historic lows. The outlook, according to my colleagues on The Kiplinger Letter, is for steady growth and healthy job creation through 2005 -- regardless of who wins the White House.
Memo to first-time home buyers
Chill out. Don't bid crazy-high prices for your first house or condo in this superhot market, as if the chance will never come again. It will -- perhaps at a lower price. Home prices will cool off as mortgage rates rise. Unlike you, trade-up buyers can make a fat profit on the house they're selling, offsetting some of the speculative premium they'll pay for their next home. But you're going to get clobbered on your first purchase, and it might be a long time before you have a gain to show.
IPO silly time
Remember the lunacy of the late 1990s? Investors -- no, let's call them speculators -- snapped up initial public offerings of Internet companies for prices that represented astronomical multiples of the company's profits -- or in many cases, nonexistent profits. And there were a lot of regrets later. Well, the '90s are creeping back. A few recent Internet IPOs have sold at prices more than 100 times the companies' earnings per share over the previous 12 months.
I like stocks whose price-earnings ratios don't exceed -- at least, not by much -- their recent and expected annual rate of earnings growth. For example, a company's profits rise steadily at, say, 15% a year, and you can buy its stock for a price that's 15 to 20 times its annual earnings per share. Plenty of strong companies are priced today at this so-called PEG ratio of 1.0 to 1.3, such as AIG, Amgen, Citigroup, Hewlett-Packard, Lowe's and Pfizer. Folks who go chasing IPOs priced at 50 to 100 times earnings have wildly unrealistic expectations -- or are hoping a greater fool than they will buy their shares later.
Insourcing
Before you tell your congressman to clamp down on companies' outsourcing their call centers to India or opening factories in China, consider the good fortune of 6.4 million of your fellow Americans who work for foreign companies that have outsourced to the U.S. It's a bummer for Japanese workers when Nissan builds a plant in Mississippi. And the Swiss will miss the R&D work that pharmaceutical giant Novartis is outsourcing to Massachusetts. But that's the way globalization works.
It's up to you
Want to lower the price of gasoline? Use less of it. Or help produce more of it. It's all about supply and demand. So buy the V6 engine, not the V8. Get a hybrid gas-electric car -- or soon, a hybrid pickup from GM or a hybrid SUV from Ford or Lexus. Drive less, reduce your speed and turn off the car's air conditioning when you don't really need it. Ask your fellow Americans why it's been 25 years since a new refinery was built in the U.S. (We're importing not just 60% of the crude oil Americans use, but 10% of our gasoline, too.) Finally, consider whether America should produce more of its own, plentiful oil -- in Alaska, the Southwest, off California and along the Gulf Coast. Something to ponder on a long vacation drive.
Columnist Knight Kiplinger is editor in chief of this magazine and of The Kiplinger Letter and Kiplinger.com. | 
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