In Today's Daily Reckoning:
*** Meaningless activity on Wall Street...as the Summer
of Love continues
*** "I don't want to talk about it..." says Harry Potter
Greenspan, the Wizard of the Federal Reserve
*** The most likely return on the S&P over the next
decade: ZERO
*** Today's message will be mercifully short. I've got to
get in the van with the family and drive to Cherbourg and
get there in time to catch a ferry to Ireland. It's
vacation season and the roads are clogged with people
pulling trailers - often people from Germany or Denmark.
So, the drive is expected to take 7 hours. Then, the
ferry ride is 17 hours. Why did I decide to do this?
*** Ah...it seemed like a good idea at the time. And now
momentum carries us along. We've got tickets...
reservations... gotta use 'em.
*** Momentum is carrying the stock market along too. Most
of the action is meaningless. Up...down...up...down - who
cares? The bear is at the beach. And it's his market.
*** S&P futures rose at the opening yesterday - as they
always seem to do...a sign of continued bullishness among
the lumpen investoriat.
*** 1448 shares advanced. 1379 declined. 47 hit new
highs. 52 hit new lows.
*** The Dow rose 14 points after Harry Potter Greenspan,
the Wizard of the Federal Reserve, said nothing. The
Nasdaq was even more grateful. It rose 48 points.
*** Consumer Confidence rose in July. And sales of new
homes rose too - 2.8%. In this summer of love, both
indexes are at their 2nd highest levels ever.
*** "I don't want to talk about that" said the Fed
chairman in his non-talk. Specifically, what he didn't
want to talk about was the controversy surrounding the
productivity numbers. You and I, and other Daily
Reckoning readers, know they are nonsense. Greenspan
probably knows it too. But he doesn't want to talk about
it. How could he? It would mean admitting that all his
"new era" talk was rubbish.
(see: Ding, Dong The Fed is Wrong http://www.dailyreckoning.com/body_headline.cfm?id=273)
*** Bill Fleckenstein (http://www.siliconinvestor.com)
had an interesting comment today. Let's assume that the
doom and gloomers are wrong. That is, we'll assume that
there will be no crash nor major recession for another 10
years. Assume also that the P/E of the S&P will be
roughly its average since 1926. And that earnings growth
of S&P companies will be about average since 1970. And
adjust the numbers for the average inflation level since
1960. Guess how much you can expect to make from your S&P
stocks over the next decade? Zero.
*** Marc Faber mentions a similar calculation, done by
David Krotok, for the Nasdaq. Assume that these companies
can gow earnings at a compound rate of 20% per annum - a
rate that is so high it has almost never been achieved.
And assume that at the end of 10 years the Nasdaq P/E
will be twice its earnings growth rate (one times growth
is the more normal level). This takes Nasdaq's current
earnings of $25 billion to $155 billion - with a P/E of
40. Even under these fancifully generous conditions, the
Nasdaq is still lower than its high for this year.
*** Another calculation by Krotok determined what would
have to happen in the Nasdaq in order for it to produce
the same return for investors over the next ten years as
they could get from treasury bonds. Nasdaq stocks would
have to bring in their 20% per year earnings growth each
year - and sport a P/E in the year 2010 of 80...1000%
higher than the average since 1970.
*** You may take from this that it is possible for the
Nasdaq or the S&P to match the returns of treasury bonds
- but it will take a miracle.
*** Tom Petrie, by way of Ray Devoe "reckons that a $30 a
barrel translates into a $70 billion drag on the U.S.
economy and interest rates....would have to rise to 7_-8%
to exert a comparable braking impact." Devoe speculates:
"The obvious winners in this scenario are OPEC, of
course, Fed Chairman Alan Greenspan and Governor Bush.
Congress might possibly be considered to benefit since
they did not have to tax $70 billion out of the economy
to slow it down. But, since this is an election year for
the Presidency, one-third of the Senate and all of the
House - a tax of that magnitude would be virtually
impossible to become law."(see: "Belchfire 8" Gas
Guzzlers and the American Public http://www.dailyreckoning.com/body_headline.cfm?id=272)
*** The International Herald Tribune studied the results
of mutual funds worldwide for the second quarter. The
assessment: "No matter where they were domiciled, the
best equity funds tended to target areas that had little
or nothing to do with technology...such as real estate,
energy and food." The old economy, in other words, is the
one delivering the profits - not the new one.
In the Digital Age, your privacy is more at risk than
ever before. In our latest edition to the Investor's
Library, learn how you can protect yourself while using
the Net. Please see: http://www.dailyreckoning.com/specialreports
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
No time to write a letter today. So, Addison is going to
select one of the "Greatest Hits of 1999." And I'll be on
a boat tomorrow morning. You will hear from me as soon as
we get to our digs in Donegal. Friday. Stay tuned.
Until then, your roving correspondent...on the road
again...
Bill Bonner
("Tight Collars and Tight Margins" first ran exactly one
year ago today: July 26th, 1999. In this episode Bill and
his family are traveling on The Scotia Prince - a ferry
between Portland, Maine and Yarmouth Nova, Scotia.
Today... July 26th, 2000, as you've just learned, Bill and
his family are traveling on a ferry between Cherbourg,
France and Waterford, Ireland. The symmetry is stunning.
Enjoy, Addison)
The Orioles stadium in Baltimore is decorated with
baseball photos from a much earlier era. Looking at the
photos, you will see that the bleachers are much more
modest than Camden Yard today. But the most striking
difference is what is in the bleachers - the fans.
The players look pretty much like those of today, but the
fans are entirely different. They are all male, which
might be expected. But they are wearing coats, ties and
hats. Fans today no longer wear ties. Or coats. Or straw
hats. They wear shorts and tee shirts. This attire is
almost de rigueur among sports fans and vacationers. The
passengers aboard the Scotia Prince, the ferry between
Portland, Maine, and Nova Scotia wore little else.
Psychological studies show that clothes really do make
the man. Or, perhaps they just help the man on the make.
Women were asked to select men, from photos, whom they
found attractive. They almost invariably chose the guys
who were well-dressed... even when the same guys were
displayed in more casual attire. I don't know if a study
has confirmed this - but I'll bet the advantage increases
as people age. Real clothes cover paunches, bulges and
blemishes. As America gets fatter and grayer, it has more
to hide.
So why the unflattering dress codes?
I considered that question as I waited for the Scotia
Prince to dock at Yarmouth. The baseball photos were
taken, I guessed, in about 1920. This was only a couple
of years after the Great War. At the time America entered
the war, a French soldier at the front lines had a life
expectancy of just 21 days. It was only a couple of years
after the Spanish flu epidemic. Thought the statistic
seems unreliable today, the virus is believed to have
been responsible for the deaths of one out of every ten
citizens in cities such as Baltimore and Philadelphia.
The people on deck did not seem prepared for any sort of
adversity - except perhaps famine. They were big... and
soft. And very gray, too. Perfect targets for a bug...or
a bear.
Michael Rothschild's book, Bionomics, presents an
analysis of a beehive as though it were a profit-making
business. What you see quickly is that bees operate on a
thin margin. If the weather is bad... or another hive
moves into the territory... the hive won't make it. It
doesn't take a lot of adversity, in other words, to turn
a profit to a loss... and ultimately to cause bankruptcy.
Nature is unforgiving.
Those men who watched the Orioles game in 1920 were much
more conscious of nature's thin margins. This was before
the days of penicillin. And novacaine - painless
dentistry was still in the future then... as it still is
today. Human life was a more marginal proposition than it
is today. Investments were more marginal, too. When you
put your money into stocks, you took an enormous risk.
Periodic panics produced unequivocal bankruptcies. Alan
Greenspan wasn't even born yet. And the first loop of the
safety net had not yet been stitched. So people girded
themselves up as best they could - morally, financially,
and sartorially. They fastened themselves in with strict
codes of conduct and stiff collars. They bought life
insurance and saved gold coins. Rectitude and prudence
were defenses against adversity.
They were up tight.
Here in Nova Scotia, they stacked wood. A few cords of
wood are insurance against the long, cold winter. Wood is
real money in the bank. It is honey in the hive. It is a
margin of safety. Nova Scotia has been in a slump since
1920. Maybe that's why they still stack wood.
Nature abhors a vacuum. She also abhors high profit
margins. Wherever they exist, she brings in a
competitor... or a new technology... or some form of
adversity. Americans today are enjoying some of the
loosest margins in history. They fear almost no
enemy...human or bacterial. They see no danger and no
purpose to be served by self-restriction. No tight
collars, in other words. No tight budgets either. No
matter how nice things are today, they believe, they will
only get better.
I hope they are right.
But no matter how right they are, they won't be right
enough to save America's tech stocks and big Dow stocks.
They are priced for a world with a very bright future.
But it's a future that cannot exist. The prices on
leading stocks imply that they will become very
profitable at some point in the future... and then the
future will stop dead in its tracks to allow these
companies to benefit from their hoped-for margins. How
else can you make sense of drkoop.com or dozens of
others? (...dozens of others that gut crushed this
spring...Addison) Their business model calls for them to
invest millions in order to buy a chare of a market that
does not yet exist. If things go very well... this market
will come into being and the former surgeon general will
then sell things at a profit. What things?
Who knows?
But they have to sell millions of dollars worth and
continue doing so for years in order to justify the stock
price. So they better hope that evolution of technology
and the marketplace halts right there, and the future
ceases... like a photo of dead baseball fans.
Maybe it will. Maybe baseball fans will look the same in
ten years from now. Maybe the 0's will win the pennant
every year, too. Maybe nature will give the bees a break.
But don't count on it.
Your correspondent,
Bill Bonner
(On July 26, 1999 you would have paid 25 1/2 for
drkoop.com... at yesterday's close it was trading just
below $2... Addison. More 'Greatest Hits' tomorrow.)
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