In Today's Daily Reckoning:
*** Boring day on Wall Street
*** Poor Bezos is struggling...
*** But something has definitely changed...
*** It was a dull day on Wall Street yesterday, as the pros
and cons waited for the Fed to announce its latest discount
rate policy. That announcement is expected today. And it is
expected to be a declaration of contentment with the status
quo.
*** The Dow fell a bit. The status quo is becoming less and
less favorable to real economy businesses. After 6 rate
hikes, and an oil price above $30, the expense side of
business ledgers is beginning to get a little heavy.
*** Kaufman and Broad, for example, the nation's largest
homebuilder warned that earnings will suffer.
Transportation stocks have been hit hard.
*** The Nasdaq did no better. The index was down 53 points.
Celera dropped again yesterday. After announcing the
completion of the genome map, and declaring its intention
to give away the product it spent $150 million of
investors' money to create, those self-same investors are
asking: "how are you going to make any money?" Answer: no
one knows.
*** Amazon bounced a little. But poor Bezos is struggling.
"The party is over" said the Lehman Bros. analyst who
reported Monday that Amazon was running out of cash. For
every dollar in revenues, the company has raised 95 cents
from the capital markets. It now has a pile of debt...and
still a need for new cash. Even if it could somehow cut
back to reduce costs and break even on operations, it still
has to service the debt.
*** Where could Amazon raise more money? The Lehman analyst
"carefully examines all the potential sources of funds -
from banks and junk bonds through converts and equity,"
writes Alan Abelson in Barrons, "and finds not one that's
likely to prove hospitable."
*** Readers may recall that Amazon, though ridiculed and
calumnied in these letters, has been the sweetheart of
investors for several years. Alas, with the heat of summer,
ardent suitors are demanding that the company, so coy for
so long, put out or get out.
*** Gold dropped $2. Harry Schultz told me that the Gold
Conference, which took place across town at the Inter-
Continental Hotel, should have been called the 'Anti-Gold
Conference," so negative were the attendees.
*** The dollar fell yesterday. Remember, a steep drop in
the dollar will mean the end of the whole thing - the
bubble...the illusion of wealth...the summer of love...
*** Twenty new IPOs are scheduled for this week. It will be
interesting so see how they fare.
*** Certainly something has changed. A few months ago, an
entrepreneur could expect phone calls from venture
capitalists eager to sponsor him for membership in the
public markets. Now, I'm getting calls from entrepreneurs
of dot.com companies looking for private financing. "Are
you profitable," I ask. "Not yet," is the most common
reply.
*** But the situation in the venture capital markets is
creating some interesting opportunities. Entrepreneurs -
fired up by the prospect of easy billions - have started
thousands of projects, and now find venture capitalists
won't talk to them. A few of these new projects, by dumb
luck as much as anything, are decent businesses. See the
advertisement below for how I hope to take advantage of
this situation.
*** "I can't think of any time when two members of the
Fed's Open Market Committee (FOMC) dismissed the Bureau of
Labor Statistics (BLS) data as 'not credible.' " says Ray
Devoe. The BLS calculates that Average Hourly Earnings were
rising at a relatively mild 3.4% annual rate, but says Ray:
"in my area of the New Jersey Coast (the Irish Riviera) the
local McDonalds has only four of the eight stations
manned... because they cannot hire the people needed, even
at wages well above the minimum. Anyone who recommends a
person who is hired there receives a $100 gift
certificate." (see: Something Is Wrong with the BLS Data
http://www.dailyreckoning.com/body_headline.cfm?id=210)
*** Stock options given to executives doubled between 1997
and 1999. Non-option compensation remained the same. Is it
any wonder "unlocking shareholder value" is the number one
concern of American business leaders?
*** This is the anniversary of the assassination of the
Archduke Ferdinand and his wife, Sofia. History, too, takes
us in unexpected directions. The Archduke took a wrong turn
on his short trip through Sarajevo, one which took him, by
chance, within pistol range of his killer. Five years and
millions of bodies later, on this very same day, the Treaty
of Versailles was signed, formally ending the first world
war and preparing the ground for the next one.
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Have you ever heard the expression in the room, in the
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"There's one born every minute," said P.T. Barnum. And yet,
near the peak of a bull market, the one-per-minute estimate
seems low. Everyone seems to be a fool.
"Things change," notes Richard Russell
(http://www.dowtheoryletters.com) in today's commentary. "A
year ago the following four Internet stocks were considered
the blue chips of the net, the stocks you could buy and put
away for the kids. They were AOL, AMZN, YHOO and CMGI. I
added together the peak prices for the four, and it came to
621. At latest count the current price of the four adds up
to 249. That's a decline of 59% from the highs... Reality
has come to the Internet, and it's still coming."
"What am I trying to prove? I'm trying to prove that it's
tough to make money in a bear market, even when you buy the
most glamorous stocks in the hottest group. Of course,
buying the most popular stocks in the hottest and most
hyped groups is always a study of the `greater fool'
thesis. And if you buy the hot stocks and the hot group and
then you run out of greater fools, well horror of horrors,
you wake up to find that it's YOU who are the greater
fool." (see: The Demise of the Greater Fool
http://www.dailyreckoning.com/body_headline.cfm?id=205)
The idea of the greater fool concept is that no matter what
price you pay for a stock, there is usually someone willing
to pay a higher price. In a bull market - that is, a time
of rising expectations and rising euphoria - there are
plenty of fools, both great and small. But eventually, the
greatest fool of all steps into the market. In the case of
the Dow, the world's biggest fool was a buyer on January
14, 2000. Since then, the fools have seen some shrinkage in
their net worths. Four times, the Dow has rallied. And each
time, the rally stalled at a lower point.
But as Mark Twain put it, "I may be a fool. But I am God's
fool. And all His works deserve respect."
By all measures, the Dow at 11,722, was overpriced. Nobel
prize-winning economist, James Tobin, developed something
known as "q" to determine just how overpriced the market
was. The idea is simple. A company should be worth what it
would cost to replace it. This is something we think about
in private business acquisitions. Instead of buying a
company, we ask ourselves, what would it cost to recreate
it?
The market price of a stock should be the equivalent of its
replacement cost. The q ratio, which has the market price
as the numerator of a fraction and the replacement cost as
the denominator, should, therefore, be 1.
Andrew Smithers, a London investment advisor, and Stephen
Wright, an economist at Cambridge, have written a book,
"Valuing Wall Street: Protecting Wealth in Turbulent
Markets." In it, they applied the concept of q to the
entire stock market, and discovered that this market was
and still is far higher now than either before the crash of
'29 or the bear market of '73-'74. In fact, were the market
to follow the pattern of post-'29, the Dow would have to
fall below 2,000. If it merely follows the example of the
'73-'74 bear market, it would fall below 4,000.
Either way, the dividends were so meager, and the threat of
capital losses so great, that buying on January 14th - as,
by the grace of God, I pointed out back then - had to be a
foolish thing to do. And yet, God created plenty of fools
ready, willing and eager to do so.
Why?
"There are three aspects to the human character," says my
friend Francois, a man so out-of-step with modernity that
he lives in a house in the Paris suburbs without a phone or
central heating. "There is the rational aspect, the
aesthetic aspect, and the spiritual aspect. But these days,
people only consider one of them."
He refers to man's sense of reason. We are all rationalists
now. Every one of the investors who bought the hottest
stocks at their moments of most intense molecular activity
- Amazon at 113 in December or the Dow on January 14th at
11,722 - had a reasonable explanation: "These are 'must
own' stocks for the New Era." ... "I'm a long-term, buy-
and-hold investor. I don't care if they go down in the
short run." ... "Everyone's buying them. I heard someone on
CNBC say Amazon was underpriced." (As reported here,
someone calling himself an analyst and drawing a salary
from a large brokerage thought Amazon should be trading at
$125!)
All of these rationalizations were "reasonable." And who
knows, the Dow could have gone higher. And Amazon may yet
hit $125. But reason might just as well have driven an
investor to an opposite conclusion: that the stocks were
too expensive.
"I don't know what you see in that church service,"
complained my son Will, 21, after joining us last weekend
at the church in Bourg Archambault. "You stand up. You sit
down. You chant. What's the point?"
Neither Will's aesthetic sensibilities, nor his spiritual
ones, were moved by the little Catholic service. He got no
sense of exaltation, no connection to supernatural powers,
no hint of God's purpose or His designs. No religious rush.
The whole service might as well have been in a foreign
language - which, of course, it was. Maybe had we gone to
St. Peters, he would have been impressed by the gilt and
frescoes - but in little Bourg Archambault there was not
even that.
The ability to reason peaks in the late teens and early
20s. These are also the years in which people are most
unreasonable. Everything is subjected to rational
criticism. Going to church makes no sense to Will. It is
neither entertaining, nor productive. It is not a
reasonable thing to do.
And yet, as someone once said of a crazy man: "all he had
left was his sense of reason." He could add and subtract.
Two plus two still equalled four. But he was insane -
beyond the reach of ordinary conversation, like a space
probe that overshoots its target and drifts into cosmic
nothingness.
We are all God's fools. We reason. But it is not reason
that causes us to buy stocks at crazy prices, or sell them
at good prices. It is desire dressed up to sound
reasonable. Eventually, desire will give way to fear and
that will seem reasonable too.
Your faithful, foolish friend,
Bill Bonner
P.S. A few months ago, it seemed reasonable to buy Internet
stocks at almost any price. These companies represented the
wave of the future. Now they seem to be drowning in the
surf. An e-mail message I received recently:
DOOMED?
Sites most likely to go belly-up, according to a popular
web site:
1 CDNow
2 Pets.com
3 drkoop.com
4 Amazon.com
5 Kozmo.com
6 Buy.com
7 Napster
8 MP3.com
9 AllAdvantage.com
10 eToys
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Last modified: April 02, 2001
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