*** Record trade gap...but still the dollar, the Almighty
Dollar, hallelujah...does not fall...
*** Still a massive weakness in tech...CMGI down 94%!...
*** Fund managers still bullish...what bull market?...and
more!
*** Yesterday's big news: the trade deficit hit a new
record. Americans are exporting less and importing more.
*** In September, the US imported a record $126 billion of
goods and services, producing a gap between imports and
exports of more than $34 billion - $3 billion more than
economists expected.
*** Caterpillar, the world's largest manufacturer of heavy
equipment for the construction industry, said its profits
fell 1.4% in the 3rd quarter.
*** US manufacturing companies have only been able to
increase profits 3.4% per year for the last three years -
the peak years of the New Paradigm economy. Why the low
profits? The strong US dollar makes imports relatively more
attractive. US companies - faced with cheaper competition
from abroad - have been unable to raise prices...which also
explains why domestic inflation has been so low.
*** The total deficit through September came to $270
billion, compared to $188 billion in the same period last
year.
*** There were big increases in imported energy - oil
imports, for example, rose 16% in September. Natural gas,
imported in volume from Canada, is at a record high price.
Heating oil is near its highest level since 1979 - over $1
per gallon.
*** Meanwhile, a snowstorm in the Buffalo area reminds us
that there are cold winters as well as warm ones...and that
nature, and her markets, are perverse. When better to have a
cold winter than when heating oil supplies are low? People
don't necessarily get what they expect or what they hope
for, but what they need and deserve. More below...
*** You might think that the dollar would fall on the news
of a greater-than-expected trade deficit. But no! The dollar
rose. The euro fell about 1% - under 85 cents.
*** "The bottomline," according to Nick Sanger of JP Morgan
Private Bank, "is: why are foreigners putting money in [the
U.S.]? International and U.S. investors perceive that the
returns on investment in the U.S. are higher than the rest
of the world."
*** International investors, like their domestic
counterparts, suffer from the momentum of sentiment factor.
Ed Hyman, for example, reports that even though both the Dow
and the Nasdaq are down for the year - with the Nasdaq close
to losing half its value - equity fund managers are "record
bullish".
*** Perceptions will eventually catch up to reality. But it
takes time. Rarely do you see the media discussing the end
of the bull market. Why? Because they never recognized that
there was a bull market. In the minds of these pilgrims
stocks always go up in the long run and the stock market
always acts pretty much as it has for the last 18 years.
There is volatility...but no downward trends.
*** Lucent warned investors that its 4th quarter profits may
not be exactly what it had hoped for. The stock fell 16% on
the news - dragging down a number of issues in the tech and
net sectors. Lucent was $60 a share in July. Now, it's $17.
*** "The whole market on the tech side," said one analyst,
"just has no support." "Still a massive weakness in
technology," added another.
*** One of the stocks noticeably weak was CMGI, the Internet
incubus... I mean incubator. This was one of Henry Blodget's
favorites back in the glory days of dot.coms. Blodget was
undisturbed by the high price - $163 last January. Many of
these stocks, he said, "perpetually look overvalued." But
don't worry, buy them, he advised, and you will be "richly
rewarded." Well...investors got the reward that they
deserved, if not the one that they expected. In the last
month, two of CMGI's sucklings have announced layoffs. Four
said they were going out of business. The stock closed at
$10 and change yesterday - down 94%.
*** The Dow rose 31 points yesterday. But the Nasdaq fell 4
points.
*** Yahoo hit a 2-year low, losing 14% during the day.
AOL, which was $95 a year ago, can be bought for $43 today.
Amazon.com closed down - at $24.25. A news report says that
Amazon's 400 customer service people are trying to unionize.
[Collective bargaining suggestion: forget pay hikes, ask for
generous layoff and termination terms]
*** Gold fell 70 cents. Gold mining shares are among the
ugliest securities you can buy. This may be a good time to
buy a few shares.
*** "The strikingly popular earnings augmentation," writes
Grant's Investor's Eric Fry, "is a delicate operation that
typically requires the replacement of a company's GAAP
earnings with a kind of financial prosthetic. Thanks to a
nip here and an injection there, Flextronics Corp. has
increased its gross profit size in the first quarter to a
much sexier $169.2 million form only $85.5 million before
the operation. Is it any wonder investors admire the
company's well-endowed income statement?" (see: Financial
Makeover
http://www.dailyreckoning.com/body_headline.cfm?id=776)
*** "Imagine a company... that strip mines national forest
land to get asbestos that it then puts in cigarettes - using
sweatshop, child labor in India to roll the smokes by hand."
I reprise this remark from yesterday's letter because Steve
Sjuggerud found a company that might fit the bill.
Steve writes: "Gudang-Garam is the largest clove cigarette
manufacturer in Indonesia...[it fills) nearly all your
required ingredients, even the sweatshop Asian child labor
rolling clove cigarettes by hand (with 40,000 employees,
many of them have to be underage by western standards) Maybe
the paper mills are loaded with asbestos too! Gudang is at a
P/E of 9, with little overall debt and zero long-term debt."
*** I cannot express the sadness that overcomes me as I read
that the two sanctimonious sugar mongers, Ben and Jerry, may
be leaving their trade. They sold out - but made an
agreement with the buyers to devote a portion of the sales
to "socially beneficial activities." What, wasn't making ice
cream socially beneficial?
When The Greatest Credit Bubble in History Bursts...What
Comes Next?
No banks or brokerage houses went bust in the 1929 crash. In
fact, many investors and businessmen prospered. The real
damage was done later on - when popular sentiment turned
against stocks altogether. Just as is happening in our
markets today...
Will you profit in the months ahead?
You will if you prepare yourself now - EVERYTHING that is
happening in the markets today has already happened before.
Click here to learn more about:
People can believe what they want to believe. In the `60s
movie, Closely Watched Trains, a man tells how his father -
a magician - believed he could stop the invading Nazi tanks.
"And so he stood in front of them," he says, "and using the
power of his mind alone commanded the tanks to stop. And
they did stop...for a moment."
We left off yesterday mischievously wondering whether there
might be some over-riding principle - such as Emerson's Law
of Compensation - which might give us a clue as to what will
happen next in U.S. markets.
Markets, being instruments of poetic justice...or torture...
always seem to find the Perverse Outcome - the result that
inconveniences the greatest number of people at the least
convenient time. As I am fond of saying, they give people
what they deserve, rather than what they expect.
There is a simple reason for this, of course. When people
expect a particular outcome - they rush to take advantage of
it. If a stock, for example, is expected to rise in price -
they buy it. The very act of investors seeking to gain from
predicted events almost guarantees that those events - in so
far as they are market-based - will never happen as
expected.
Thus, in the example given above, it was expected that
buyers of CMGI stock would be "richly rewarded." CMGI was
not merely an Internet company...but an `incubator' of other
dot.coms and techs. Buyers of the stock could imagine their
profits growing like little yellow chicks under a heat
lamp...dozens...hundreds of successful projects - each one a
potential AOL or Microsoft.
This expectation, alone - backed by analysts such as the
infamous Henry Bloget and a chorus of financial media - was
enough to destroy all hope of ever making a profit on the
stock. The price of the stock soared to $163 in January - a
level so unrealistic that an investor might just as likely
sprinkle Miracle Gro on a pile of cash in the hopes that it
would sprout additional $100 bills. Of course, you could
have made money by speculating on how extravagant the
hallucination would become...or when it might end...but that
is a very different business...
"From a strict economic perspective," writes Dr. Kurt
Richebacher in his most recent report, "it is hard to
imagine a greater economic folly than buying low-yielding
equity capital with much higher yielding indebtedness."
You could search high and low in the winter of '99-'00 and
find no lower-yield investment than CMGI. There was no
yield. Zero.
And yet, if you look at the aggregate financial numbers for
the entire U.S. economy, you see that buying very low-
yielding assets, with much high-yielding debt, was just what
was going on. Corporations sold bonds - often at junk-bond
yields - in order to buy their own stock...or the over-
priced stock of other corporations. People were mortgaging
their homes - at 8% interest - in order to buy stocks like
CMGI, that yielded nothing.
This may have had a salutary effect while CMGI and other
stocks were going up in price - the capital gains offset the
cost of borrowing. But when CMGI stock went down, the full
effect of the folly must be felt. The asset disappeared. But
the debt used to acquire it remained. It is as if you had
bought a new home with a big mortgage, and then the house
burned down - uninsured.
The way you become wealthy, generally, is by working hard,
saving your money, investing it wisely, and waiting. People
who do so deserve the wealth they get.
By contrast, when you spend more than you earn, go deeply
into debt, and buy `get-rich-quick' stocks, you deserve
something else. What? We will find out soon...because that
is what American businesses and consumers have been doing.
Where they should have been saving - they were spending.
Where they should have been investing in real businesses
with real products and real profits - the money went into
foolish projects - such as CMGI.
"After paying out dividends and covering their investment
expenditures," explains Dr. Richebacher, speaking of what he
calls `degenerate U.S. capitalism', "the U.S. corporate cash
flow overall is in the red. So in reality the huge stock
repurchases have to be financed by borrowing at interest
costs that are generally several times higher than the rock-
bottom equity yield. How can a corporate manager in his
right mind do this?"
Why would they do such a dumb thing? Because investors as
well as superstar CEO's became obsessed with fast, easy
money. Building a business...and making real money...takes
time, effort, expertise, and forbearance. It was much easier
to `unlock shareholder value' by jimmying up the share
price.
Dr. Richebacher provides an example: "IBM is a case study of
how to delude investors," he writes. "Over the last four
years, Big Blue has managed to increase its revenues by a
modest 5% and its gross profits by an even more anemic 1.3%.
However, thanks to a massive $34 billion share buyback
program, it managed an average annual rise of 10.5% in the
one number that Wall Street treasures above all others: per
share earnings."
While per share earnings were rising, so was per share debt.
But the per share debt number is not even noticed. No one
cared about debt - neither consumers nor businesses - as
long as they could keep the share prices rising. Balance
sheets suffered - from those of powerful multinational
corporations such as IBM down to those of people who live in
trailer parks.
People now owe a lot more money than they did 20 years ago.
So do corporations. They expect that they will not need
xsavings. In the last two years, for example, personal
savings collapsed from $265 billion in 1998 to less than $50
billion this year. And they think stocks will soon resume
their upward move.
"The old joke about 'Where does a 600 pound gorilla go?'
gets answered by: 'Anywhere it wants to go!'," wrote Ray
Devoe recently, referring to the effect of momentum buying
on big techs like Cisco, Sun and even GE. "...these '600
pound gorilla stocks', with total market caps of just under
$2.6 trillion at their highs, still represent a major supply
of stock in the hands of 'true believers' or momentum
players." (see: The Untouchables: Taken Out And Shot
http://www.dailyreckoning.com/body_headline.cfm?id=773)
The true believers, like the man who thought he could stop
trains with his mind, were able to drive the price of their
stocks to nosebleed heights... for awhile.
We know what these people expect. What do they deserve?
"If I am right," Marc Faber observed recently, "and the next
recession is a deflationary bust, then corporate America
will have made a fatal decision...[to go so deeply in
debt]." Non-corporate America, having made the same
decision, will suffer too.
Your correspondent...
Bill Bonner
P.S. Tomorrow is Thanksgiving. But it is not a holiday in
France. So I will write, anyway. My apologies in advance
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