*** No pardon for the Junk Bond King...but will today's
junk bond investors do as well?
*** GE down, Walmart down, MSFT up... a default every
day...
*** Hero to fool in record time...Nasdaq rally
continues...debt grows...gas lines... 'Electricity will
replace God' ... and more!
*** Poor Michael Milken. Bill Clinton handed out pardons,
er...liberally - including one for his drug dealing half-
brother, Roger, and Whitewater stonewaller Susan McDougal.
But no pardon for Milken.
*** Despite reading the press reports at the time, I never
was able to figure out what Milken had done wrong. He was
the junk bond king on the throne of aggressive
capitalism... and maybe that was crime enough for the
proles who sit in prosecutors' offices and on juries.
*** But what happened to investors who bought Milken's
junk? Ah, what about the victims? Well, it turns out, they
did well. The rate of return on Milken's junk was healthy
and, in some cases, spectacular.
*** And it is thanks largely to the return on Milken's junk
that investors today are rushing back to buy high yield
debt. Despite defaults at the rate of one a day -
including, last week, high-profile Globalstar (which made
our list of Financial Darwin Award winners) and the
improbable Chiquita Banana, investors are confident that
this junk will survive and reward them just as Milken's
did.
*** But that has been the way of things for the last decade
or so... Every time things looked as though they might go
very wrong - well, something happened...and they turned out
all right after all. There was the crash of '87...the fall
of Japan, Inc...the Gulf War...the LTCM crisis...Russian
debt...Asian currencies. Every story had a happy ending.
So, investors might be forgiven for coming to believe that
something good always happens in the investment markets and
that things always turn out for the better. But do they?
See below...
*** The Dow fell 90 points on Friday. It was dragged down
by Home Depot - whose stock fell 7.3% after a disappointing
announcement. Harley Davidson dropped 7% too. Walmart fell
4%. And GE ended the day down 1%.
*** But all the news wasn't bad. Microsoft rose 10%. And
some other techs and Internets managed a decent
performance. The Nasdaq rose nearly 2 points.
*** "The Nasdaq is going back up," Benoit remarked to me
yesterday as we filled our stonewall with concrete. "I
thought you said it was dead."
*** "Did I say that?" I replied, feeling as though I had
already slipped from hero to fool in less than 3 weeks,
"Well, I still think it is dying..."
*** The Nasdaq is in the middle of what appears to be a
bear market rally. It has bounced back up less than a fifth
of the 2757 points it fell since last March and could go
much further. Stocks crashed in October of '29 - from 381
in September to 198 in November. Then, they began a rebound
that lasted until April and took the Dow back up to 294 -
recovering more than half its losses. But then, as Bill
King puts it, stocks began their "death march" that took
the Dow all the way down to 41 points in July of '32.
*** "The high of the post-crash bounce was on April 17,
1930," says William Fleckenstein, "from which the market
collapsed nearly 90 percent. The moral of that story is
that folks shouldn't confuse the bounce that is under way
with a return to prosperity - no matter how long it
lasts..." (see: Wall Street switches from basting pan to
pressure cooker
http://www.dailyreckoning.com/body_headline.cfm?id=884)
*** So relax, Benoit. The Nasdaq could go up another 800
points or so - and still be within the range of a typical
bear market rally.
*** Friends from New Canaan, CT, report that they had to
top the offer price to buy a condo in town - and still got
into a bidding contest. But the WSJ reports that expensive
properties are taking longer to sell - and sellers are
becoming less confident.
*** The University of Michigan reports that consumer
sentiment has dropped to its lowest level in 4 years. And
the trade deficit fell for the second month in a row, in
November, to just a little more than $1 billion per day. It
looks as though the deficit may have peaked in September.
*** Still, that does not seem to have reduced the demand
for credit - at least, not yet. Doug Noland, of The Prudent
Bear team, reports that MBNA, the largest credit card
lender in America, increased loans by 20% (annualized) in
the 4th quarter of last year. MBNA added $16.5 billion to
its lending total during the year. Much of that amount is
securitized and sold, by the way.
*** Providian, a sub-prime credit card lender, increased
its lending in the 4th quarter at a 50% rate. The weakest
credit risks are borrowing at the fastest pace, in other
words.
*** Capital One added - could this be right? - 47,000 new
accounts a day...bringing the total to 33.8 million
accounts by year-end. "Consumer loan balances" at Capital
One grew at a 22% rate in the 4th quarter.
*** But 57% of investment advisors are bullish; only 32%
are bearish.
*** Yet, "on the basis of the 200-day moving average,"
writes Harry Schultz, "the US stock market is bearish." All
of the major indices are below their 200-day moving
averages, with the exception of one: the Value Line Index.
*** Globally it doesn't look so hot either. As of January
12th, says Harry, only one index is above its 200-day
moving average:
Brazil's Bovespa
The following indexes are BELOW their 200-day moving
averages:
Australia's All Ords (by 2 points)
Belgium's BEL 20 (by 2 points)
Canada's Toronto 300
Finland's Helsinki General
France's CAC 40
Germany's DAX
Greece's General Share
Hong Kong's Hang Seng
Italy's MIBtel
Japan's Nikkei 225
London's FTSE 100
Malaysia's KLSE Composite
The Netherland's AEX
New Zealand's Cap 40
Norway's Total Share
Singapore's Straits Times
Spain's Madrid General
Sweden's Stockholm General
Switzerland's SMI (barely)
Taiwan's Taiwan General
Thailand's SET (by 2 points)
"Of the 23 stock markets above," Harry opines, "1 is long-
term bullish, 22 are long-term bearish, based upon their
200-day moving averages as the key criteria."
*** Consensus earnings for 2001 are now nearly even with
those of 2000. Analysts do not expect earnings to rise.
Yet, the Dow is still selling at a P/E over 20. Why would
people pay nearly twice the historical average P/E for
stocks that aren't growing earnings?
*** Oh what a mess of things! "Gasoline Shortages
Possible," AP reports from California. A pipeline operator
was on a "service interruption contract" with the
utilities. When the juice stopped coming, the gas stopped
pumping. And now what? Gas lines in the Information Age?
*** Meanwhile... "The CIA predicts a world population of
7.2 billion in 2015..." writes John Myers, "...95% of this
increase will occur in developing countries, and most of
that in already rapidly expanding Third World cities. Yet,
four-fifths of the world still lives agrarian lives. No
society can go from the hoe to the Internet without
stopping first to use a tractor. In short, 5 billion people
need cars, electricity and the infrastructure that goes
with a developing economy. The process is already underway.
And if world growth represents anything like post-World War
II Western growth, commodities at today's prices are a
tremendous opportunity." (see: The World's Next Great
Explosion of Wealth
http://www.dailyreckoning.com/body_headline.cfm?id=886)
*** Vladimir Ilych Ulyanov, better known to the world as
Nikolai Lenin, died on this day in 1924 of a cerebral
hemorrhage. Lenin, a violent believer in New Eras, once
said: "Electricity will replace God."... if this is true,
it would appear residents of California are in serious
trouble.
Imagine for a moment you had been in on these deals: Your
investment in real estate makes you a clean 50% in less
than a year...
- A "private placement" home run you've put your money in
turns your $50,000 into anywhere between $250,000 and $1.9
million (depending on when - and if - you sold).
- You're in line to earn between 2.5x and 10x times your
money on another exclusive private arrangement. What's
more, you have a tidy income stream from several very good
businesses...play money...
Sure would beat the pants off the stock market these days,
wouldn't it? You'd have EQUITY OWNERSHIP in a number of
very good businesses. Equity you could sell at any time to
the highest bidder...
"During the Clinton years," writes executive editor David
Ignatius in the International Herald Tribune, "treasury
secretaries Robert Rubin and Lawrence Summers and the Fed
chairman, Alan Greenspan, were able to move quickly and
quietly when disaster loomed..."
The "pros" as he calls them, were called the 'Committee to
Save the World,' "because of their success in averting
financial disasters."
"Tending Global Finances is a Mission for Experts,"
proclaims the headline of Mr. Ignatius' article. But what
do the experts do? Well, we're told that it involves
"negotiating with banks, [and] imposing harsh conditions on
foreign countries..."
Negotiating with banks must be a drag, but imposing harsh
conditions on foreign countries could be fun. Who could not
vastly improve some of these forlorn, Third World sink
holes? Take a country like Albania, for example, a
misbegotten muck of a nation. How easy it would be make the
place better!
You could force everyone to wear those funny folk costumes
with tassels. And anyone who didn't look good in tassels
would be deported to Bulgaria, which as far as I know is
tassel-free. All buildings constructed after WWII should be
razed...and replaced with traditional-style Albania
architecture. I don't know exactly what that is...but it is
bound to be better than the Stalinist monstrosities that
blemish the landscape today. Also, all motorized vehicles
should be outlawed. This would seem like a "harsh
condition," but it would pay big dividends. Not only would
the energy bill be cut in half...the country would be so
picturesque! Tourists would flock to Albania and soon turn
it into one of the richest nations on earth.
But do you think the honchos who run the treasury, the
World Bank or the IMF would think of such a thing? Should I
watch my mail for a note of "thanks" from the Albanian
Economic Development Agency? No chance. They lack the
necessary imagination.
You may recall, dear reader, that a lack of imagination
lies at the heart of so many of the world's troubles.
People seem unable to imagine the consequences of their own
actions - even when the results are as obvious and
predictable as the IHT's editorial comments.
Modern humans seem unable to imagine a world more
complicated than say, an automobile engine or a grapefruit
juicer. That is how the "pros" are supposed to be able to
do their work - these experts are thought to understand how
the machine works...they know what levers to pull and what
screws to turn.
People understand, more or less, how machines work. Yet,
when they try to apply the same metaphor to human society,
the results are disastrous. Lenin, whose death we celebrate
with loud hosannas today, had a machine-like vision for how
Soviet society ought to function. The trouble was that
people were never willing to follow the plan. This led to
one economic calamity after another. But rather than revise
his view of how the world works, he and his successor,
Josef Stalin, decided to force people to do as they were
told. Over the course of the 70 years of Soviet rule -
including wars, economic programs, starvations, mass
deportations, gulags, purges and other 'harsh conditions' -
an estimated 20 million people were killed. And when it was
over - the resulting national carcass was as lean as a New
York anorectic.
In the U.S. voters still believe that Mr. Bush or Mr.
Clinton 'run things'. Many people still think that you can
make goods and services more affordable by decree - as
President Nixon did with his wage/price controls. Some
still believe that rent controls reduce the cost of
housing, and you can or that pass a law (minimum wage) that
will make people richer.
And yet, experience shows that none of these measures work.
Human society is far too complex for these simple-minded
fixes.
Investors, many of them, still think that Greenspan and
other experts can avoid financial hardship simply by
negotiating with banks, imposing conditions on foreign
countries...and setting interest rates at the correct
point. And it has been so long since the last serious
economic downturn in America that we have no personal
experience to contradict it.
What about America's Great Depression? What about Japan?
Well, those were a long time ago, or a long way away.
Besides, Alan Greenspan explains:
"While bubbles that burst are scarcely benign, the
consequences need not be catastrophic for the economy. The
bursting of the Japanese bubble a decade ago did not lead
immediately to sharp contractions in output or a
significant rise in unemployment. Arguably, it was the
subsequent failure to address the damage to the financial
system in a timely manner that caused Japan's current
economic problems. Likewise, while the stock market crash
of 1929 was destabilizing, most analysts attribute the
Great Depression to ensuing failures of policy."
Apparently, the Japanese didn't know what knob to turn.
Hoover and his Fed chairman pulled the wrong lever. But, is
the 'Committee to Save the World' infallible?
I put it to you, dear reader, that it doesn't really
matter. There is some suffering - like an overdue visit to
the dentist - that cannot and should not be avoided. It is
best to get it over with as soon as possible.
"The way to deal with a collapse of exchange," wrote
Freeman Tilden in 1935, "is not to pretend that
'prosperity' is merely in a temporary eclipse, to return
again if everybody will act optimistically; but frankly to
acknowledge that conditions were unsound, and permit the
natural impulses of trade to rectify them. This prescribes
a bitter medicine, which people do not like and politicians
cannot collect upon; but quack remedies merely put off the
final day of reckoning.
"The natural remedies, if the credit-sickness be far
advanced, will always include a redistribution of wealth:
the further it is postpones, the more violent it will be.
Every collapse of credit expansion is a bankruptcy, and the
magnitude of the bankruptcy will be proportionate to the
magnitude of the debt debauch. In bankruptcies, creditors
must suffer."
How does a small, almost never talked about group of
presidential advisors - appointed, not elected - guide the
White House in almost every major financial and economic
decision ever made?
Better yet, how do their covert decisions affect your
money!?!
You can't afford to miss the answer. Click here for an
expose of the Insiders Behind The Market. Plus, four money-
saving strategies based on over 30 years of economic
forecasting at the highest levels; including 6 Ways to
Bullet-Proof Your Portfolio Now - a must-have checklist for
evaluating your holdings BEFORE you get swamped by the
market slowdown.
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and sends it off by e-mail before most Americans’
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get up—not only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.
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Last modified: April 01, 2001
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