Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 23 MAY 2001
To Create An Energy Crisis
*** Dow down...Nasdaq rises for 6th straight session...
*** E-commerce companies are doing okay...but poor Jeff
*** Small companies beat big ones...gold steady despite
dollar rise...and another pretty darned cheap stock...
|*** Like kernels of corn on a hot stove, individual stocks |
and stock sectors are "popping" higher one-by-one. First
pharmaceuticals, then financials and now, technology stocks
of all stripes.
*** Indeed, the technology stocks have taken the lead, just
like old times. Cisco showed the way by adding almost 3% to
its 13% advance on Monday. For its part, the NASDAQ ended a
sixth straight day in the plus column by gaining eight
points... just like old times...
*** The Old Economy couldn't seem to keep pace however, as
the Dow closed more than 80 points lower.
*** What about Old Man Gold? He managed to hang in there,
finishing unchanged on the day. Gold stocks did not fare as
well, however, as most fell more than 5%. Despite today's
retrenchment, gold mining shares remain one of the market's
*** "Last year, bankers were greeted at the opening night
party by semi-naked women, nipples visible and dabbed in
gold paint, daintily pretending to be fairies," the
Financial Times reported. No, the gala event being
described was not last year's Agora Wealth Symposium (nor
is any such festivity anticipated for this year's Symposium
in Las Vegas, although we have not yet ruled it out).
Rather, it was the European Technology conference in
*** This made me think I should take a trip there and check
it out for myself. Alas, eyewitnesses report that at this
year's conference no scantily clad "fairies" appeared.
Instead, as befits the less exuberant post-bubble era,
fully clothed flamenco dancers provided the entertainment.
Then, as if orchestrating a self-parody, guests to this
year's event were given "a tiny stainless steel champagne
bottle filled with detergent and a delicate bubble blower.
Within minutes, the hall was filled with bursting bubbles."
*** It's not all bursting bubbles out there in cyberspace.
The new "e-performance" report by McKinsey & Co. states
that one in five dot.com companies is a profitable
Similarly, ActivMedia Research's recent report, "The E-
Commerce Shakeout: Surviving the Maturing Web," observes:
"There are a solid core of profitable Web businesses
continuing to thrive online." By the research firm's
estimation, a solid 58% of all "dedicated profit centers"
online are profitable.
*** I can report to you dear reader, that our own e-
commerce efforts are profitable. And thank God! I have 5
more children to put through college.
*** But poor Jeff Bezos. Once TIME magazine's Person of the
Year...once the wunderkind of e-commerce...once nearly as
rich as Bill Gates...the poor man is now the target of
jokes and lawsuits. He's been named in 3 federal cases. And
now he's being investigated for selling a measly $12
million of his own stock. But it wasn't the amount that
rubbed the SEC the wrong way. It was the timing. Bezos
allegedly sold days before a negative report was released.
*** Fred Hickey's High Tech Strategist observes, "Power
One, which does approximately one of its business with
Cisco, said that its net new orders were negative in the
first quarter due to cancellations by several top
*** Likewise, "Cypress Semiconductor admitted that order
cancellations in the first quarter (mostly from cell phone
manufacturers) virtually offset every new order it received
in the period."
*** The macro-economic news is not much better. "With
profits down from $192 billion to $152 billion, [in the 4th
quarter of 2000]," writes Dr. Kurt Richebacher, "U.S.
manufacturing has been earning substantially less than the
$166 billion in 1995. Listening to proliferating CEO
warnings about revenues and profits, it's clear that the
worst has hardly started." (see: The American Profit Myth)
*** Bad news, schmad news. Investors are not about to let
reality get in the way of their investment hopes and
dreams. Since April 4, Cypress Semi shares have climbed
58%, while Power One stock has soared 91%.
*** Investors seem to be singing along with Bob Marley and
the Whalers, "Don't worry about a thing. Every little thing
is gonna be alright. Singin' don't worry about a thing..."
*** The New York Times: "FISHER SAYS PRICES OF STOCKS ARE
LOW... Quotations Have Not Caught Up With Real Values As
Yet, He Declares"
The Fisher responsible for this ill-timed headline was the
Yale economist, Irving Fisher, America's leading economist
of the era. And the year of publication was 1929. Most
folks know Fisher for his epically ill-timed pronouncement:
"The nation is marching along a permanently high plateau of
prosperity." Five days later the market crashed.
With the benefit of hindsight, we may chuckle smugly at
Fisher's folly. Now, it's not so easy. Since WWII, the
average P/E of the S&P has been about 14. It is 25 today.
And yet, nearly every financial commentator swears that
stocks are cheap.
*** Says Fred Hickey, "You have to believe that stock
prices can be held at grossly inflated prices through the
magic of rate cuts and money supply growth indefinitely."
*** David keeps beating up on Goliath. "Tiny companies with
market capitalizations below $250 million are up 24% on
average this year," USA Today observes, citing a report by
Salomon Smith Barney. "[Meanwhile] corporate giants with
market caps above $20 billion are down 7%."
*** Here's a tiny company that has the additional virtue of
being pretty darned cheap. Grant's Interest Rate Observer
introduces us to the Zapata Corporation, a company with
interests in food packaging and fish meal. The remarkable
thing about the company is the share price - recently
around $16 a share. It is remarkable because the company
has $29 in cash for each share. And it has another $21 in
other realizable assets.
Dot.coms or asbestos businesses will sometimes trade at
prices far below the value of their short term assets. But
Zapata is neither. Still, management was able to lose
nearly $10 million on a dot-com venture called ZapNetwork.
That business was dropped, but as Grants warns, there is no
telling what other bad ideas lurk in management's
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Does government really make a mess of everything? In
today's guest letter, professor Hans Sennsholz shows how
bureaucrats engineered an energy crisis:
HOW TO CREATE AN ENERGY CRISIS
By Hans Sennholz
It was not until the middle of the eighteenth century that
economic knowledge emerged as a new discipline worthy of
any attention. Heretofore, some economic thought had been
gleaned from writings on religion, politics, and
jurisprudence. In California, this may still be true today.
The work of the Scotsman, Adam Smith, was truly epoch-
making in the development of economic thought. In his An
Inquiry into the Nature and Causes of the Wealth of
Nations, which appeared in 1776, he explained the law of
supply and demand: "The market price of every particular
commodity is regulated by the proportion between the
quantity which is actually brought to market and the demand
of those who are willing to pay the natural price of the
commodity, or the whole value of the rent, labour, and
profit, which must be paid in order to bring it thither."
In the halls of the state government of California this
simple principle apparently is as yet unknown.
The supply-and-demand principle points to three ways of
creating an energy crisis. One, legislators and regulators
fix energy rates that do not allow for rent, labor, and
profit to bring it thither. In modern terminology they set
energy prices below market prices. Two, legislators and
regulators do not set rates but prevent producers from
meeting a growing demand through stringent emissions and
zoning rules, which causes the rates to soar until there
will be a "rate crisis." Third, legislators and regulators
may do both, fix rates below the market and prevent the
supply from adjusting to the demand, which is bound to
create a double-prong crisis.
California political leaders chose the double-prong
approach. In 1996 California legislators unanimously passed
a 67-page electricity-restructuring law. They called it
"deregulation" by which, in typical political duplicity,
they meant re-regulation.
It contained something for all the different players. The
number of regulators was increased with the addition of two
new quasi-governmental organizations - the Power Exchange,
which controls all transactions between utilities and
electricity generators, and the Independent System
Operator, which operates the electricity grid, purchases
the needed power and charges the utilities.
Consumer groups got an immediate 10 percent rate cut and
price caps at roughly the 1995 level. Powerful
environmental groups were reassured of stringent
environmental rules and zoning restrictions. The utilities,
finally, were given strong financial incentives to sell
their fossil fuel-fired power plants. They subsequently
reduced the self-generated power from 72 percent to just 20
percent, purchasing the balance on the market.
Fearing corporate collusion, the law prohibited long-term
power contracts and made the spot market - the most
volatile of all - the only market. While consumer rates
were set by the government, wholesale prices were to be
negotiated from minute to minute at the PX. With retail
prices fixed at roughly 12.5 cents per kilowatt-hour and
wholesale prices soon soaring to 40 cents or higher, the
utilities' losses mounted, approaching $15 billion, forcing
Pacific Gas & Electric (PG&E) to file for Chapter 11
protection on April 6.
Adam Smith's simple principle of "bringing it thither"
would solve the crisis immediately. But it is unlikely that
the politicos who created it are willing and ready to solve
it. Their economic understanding obviously is gleaned from
politics itself, that is, the plotting and scheming of
those seeking personal power and position. Facing a crisis,
their primary concern is political survival; to admit their
culpability and liability would be committing political
They rant and rave, always pointing toward the producers of
energy. It is they who heartlessly, scandalously,
viciously, and immorally conspire to create energy
shortages in order to reap exorbitant profits.
Every utility law the California legislature passes and
every decision the governor makes seems to compound the
problem. With the utility companies in or near bankruptcy
the State now purchases electricity in the wholesale market
for delivery to customers. To pay for the power which it
has already purchased and to keep the lights on during the
summer, it is authorized to sell up to $12 billion in
Future taxpayers will cover present losses.
The legislature also created another power authority: the
California Consumer Power and Conservation Financing
Authority which may issue bonds to build state power
plants. Moreover, it is preparing legislation authorizing
the State to issue more bonds to buy the transmission lines
from the utilities. If they refuse to sell, the governor
threatened to use the power of eminent domain. In short,
the State is taking over the electricity industry.
Whenever a food shortage descends on Cuba, Fidel Castro
invariably raves about profiteers and laments about the
weather. In the coming months the governor of California
may sound like Fidel, holding forth about evil
industrialists and bewailing the unbearably hot summer.
Hans F. Sennholz
From 1992-1997, Prof. Sennholz served as the President of
The Foundation for Economic Education. He can be reached
via his website: www.sennholz.com
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.