*** Rally fizzled...then collapsed... Does the Fed know
something awful? Is the Bank of America hiding a
disaster...?
*** Derivatization...soon to become a 4-letter word?
*** How long will tech investors keep the faith? World's
top market last year...GE down 2%...and more!
*** What a week it was! Stocks began the week falling and
ended it the same way. The Dow dropped 250 points on
Friday. The Nasdaq went down 156 points.
*** But between the beginning of the week and its end, Alan
Greenspan, the main man of the Committee to Save the World,
called his group to action. The Fed cut the Fed Funds rate
by 50 basis points, which produced (in case you missed it)
the most spectacular bear market rally in history.
*** It was also one of the shortest. The very next day,
stocks began to slip again, and fell so far on Friday that
many stocks had given up all they had gained from the Green
Team's efforts.
*** Friday, Wall Street grappled with the same fears we
discussed on Wednesday. "Does the fact that the Fed acted
outside its normal timetable indicate that it knows
something awful," asked the Financial Times. "Is there a
financial crisis about to break...?"
*** Rumors flew at the end of the week that the Banc of
America was in trouble. Of course, the bank denied it, but
investors still took 7% off the stock price - worried that
the bank had a huge derivative problem about to explode.
*** JP Morgan, the "Derivative King" of Wall Street, also
suffered at investors' hands - losing 6% of its value.
*** "Derivativization," I recall myself writing, may soon
take its place alongside securitization and globalization
as a cause of the first major disaster of the 21st century -
just as militarization, nationalization, and mobilization
were blamed for the 20th century's first and decisive
disaster, WWI.
*** "Derivatives," writes Prudent Bear, Doug Noland, "have
been the key to what has been basically unlimited credit
availability that has financed the leverage behind the
great bull markets, as well as this protracted economic
boom. As we have said before, the proliferation of
derivatives has created truly frightening risk, not reduced
it."
*** "I remember back in the fall of 1998," Noland
reminisces, "when two finance companies filed for
bankruptcy without ever missing a Wall Street earnings
estimate. An excellent recent example can be found with the
troubled California utilities. Yesterday's Wall Street
Journal ran a fine piece on PG&E by Rebecca Smith and John
R. Emshwiller. The article began, 'In August, Bruce R.
Worthington did something no PG&E Corp. executive had done
in the utility's nearly 150-year history: He hired lawyers
to prepare it for possible bankruptcy protection.' Well,
isn't that interesting. PG&E reported Operating Earnings
for the third-quarter of $629 million and Net Income of
$225 million. Earnings per share were 68 cents, a 26% year-
over-year increase. Immediately after the earnings release,
the bulls were in force. Merrill Lynch titled their
research report 'Smooth Sailing...,' First Boston 'Strong
Growth Continues...' and UBS Warburg 'Bullseye!...' All of
this despite the fact that PG&E's 'uncollected deficit' had
surpassed $2.2 billion by August 31st. Looking at the
balance sheet, we see that liabilities jumped almost $2.7
billion during the third-quarter. All the same, a
consortium led by Bank of America provided a $1 billion
line of credit."
*** PG&E and Edison International had their ratings cut
last week. Edison's stock split, the hard way, from
Wednesday to Friday - giving it a market value of $2
billion, down from $6.5 billion in July.
*** Another explanation for the hasty rate cut was offered
in the NYTimes. "Greenspan Determined to Avoid Repeating
the Mistakes of 1990" says the headline. The article
maintains that Greenspan is eager to avoid the criticism he
took in the early 90s - for not acting quickly or
aggressively enough to counter a business slowdown.
*** "Importantly," Doug Noland continues, "lower interest
rates from the Federal Reserve will only exacerbate
financial and economic distortions. We certainly see the
possibility of catastrophic consequences in the interest
rate and currency derivatives marketplace to lower interest
rates. In the past, leading bulls have referred to the
'Supertanker U.S. Economy.' Well, there is some truth to
this analogy, but it's the Exxon Valdez heading for the
rocks. Granted, in the past the Fed was able to 'reliquefy'
and give new life to the bubble, but it won't work this
time around." (see: 50 Basis Points To Sustain The
Unsustainable
http://www.dailyreckoning.com/body_headline.cfm?id=847)
*** Why won't it work? Because this time, it's not just a
financial problem. It's an economic one. Years of loose
credit caused people to borrow, spend and invest as
imprudently as the Bank of America. These loans have to be
written off. Companies have to go through 'chapter'. The
workout specialists, bankruptcy courts, and vulture
investors have to have an opportunity to ply their trades.
In short, this time - It's the Economy, Stupid. The
economic messes have to be cleaned up before lower interest
rates can produce the desired effects.
*** After making 30% per year on gold in the 12 years
running up to 1980 - gold investors couldn't believe that
an entirely new cycle was running its course. Every
financial crisis was a cause for hope. And every hope was
crushed by the 20-year bear market.
*** Will technology investors be any different. I don't
know. But they are getting crushed. The Nasdaq 100 lost 3%
of its value last week - even with the biggest one-day
rally in history. On Friday, the Big Techs were clearly
back in 'sell' mode, with Cisco -12%, JDS Uniphase -12.8%
and Oracle -7.3%.
*** "...after the 1845 bubble burst [in railroad stocks]
share prices did not recover for decades," writes the Fleet
Street Letter's Robert Miller. "The same is true of
earnings. Fierce competition between the major companies
meant that earnings took a very long time to recover. All
this suggests strongly that the Internet and telecom stocks
are still probably significantly over-valued and that the
earnings expectations of even the best well-established
companies are over-optimistic."
*** Labor costs are mounting. The latest figures show an
average hourly increase of 4.2% for 2,000, compared with
3.5% for '99.
*** And in California, at least, housing costs are still
going up. The LA Times reports that the percentage of
people who can afford a median-priced home is falling - to
23% in San Diego county...and only 10% in SF.
*** Oil fell slightly on Friday. Gold rose 60 cents. And
the dollar continued to fall. The euro is now about 96
cents - and climbing. You might want to think again about
buying euro bonds. U.S. Treasury bonds have done very well
- but they are vulnerable to the falling dollar.
*** GE fell 2% on Friday. My advice: get out of GE while
you can.
*** Of the 70+ world markets covered by Morgan Stanley in
the year 2000, here are the top 12... brought to my
attention by Steve Sjuggerud:
The Shocking Final Stage of the Internet Revolution
Strap on your seat belt. It's going to be a bumpy ride. The
financial markets have entered an entirely new phase. In
fact...
The New Era ended on May 4th, 2000.
That's the day the Bureau of Labor Statistics officially
reported that U.S. productivity growth was much lower than
expected. The whole premise of an economy that could borrow
and spend its way to "inflation free" growth forever was
finally revealed for what it is - a complete and total
sham. Now, the smart money has moved on...click here to
learn:
The Seven Best Investments for the Next Ten Years:
(http://www.agora-inc.com/reports/FSUS/TheRealEconomy)
"Today marks the day when the three wise men visited
Bethlehem where the bright star in the East had directed
them and saw for themselves what the scriptures had
foretold...that a savior had been born.
"The three kings told King Herod that they would report
back to him. But they suspected Herod was up to no
good...and so they took another route home to avoid him.
That's why they were called wise men."
Father Marchand
From Sunday's sermon
"Tomorrow I am switching religions," Paul announced. "In
France, we have the right to take all our religious
holidays off from work," Paul told us. "So I switch
religions every 6 weeks. I have been a Christian for the
last 6 weeks...to get in Christmas and Epiphany. But
tomorrow I am becoming Hindu...or maybe Confuscian. I have
to check my calendar."
We sat around the big dining room table on Saturday night -
12 of us at a dinner party Elizabeth had organized.
"With the new 35-hour work week, and all my religious
holidays," Paul explained, "I may never have to work
again."
Paul is a middle-aged raconteur and provocateur. "I used to
love the Voice of America radio," he announced. "It is what
turned me into a Liberal." Liberal, outside of America,
means free-market conservative. I wanted to ask how the VOA
had done such a thing. It could only have been an accident
- since the Voice of America was a government-sponsored
propaganda outlet. But the conversation quickly moved on.
Annick, a small woman with a bird-like face and the
movements of a sparrow, was seated to my right. I may have
already mentioned her to you. This was not the first time
she has been my dinner companion. She is a financial
analyst with a big Paris bank. People who plan dinners try
to seat their guests near others whose conversation they
might find interesting. Elizabeth thought we would have
something to talk about. Unfortunately, when she spoke, she
talked faster than I could listen. I caught the beginnings
of her sentences and the ends - and had to guess about what
lay in the middle.
To my left, however, was seated an even smaller woman with
dark hair. While she knew nothing about investments,
economics, or anything else that I labor over, she was
prettier, and spoke more slowly. My head more often turned
to the left than the right.
"The nice thing about the VOA," her husband continued, "was
that you knew it was propaganda. It told you so. So you
could take that into account when listening to it. But they
shut it down a few years ago; maybe the American taxpayers
got tired of paying for it."
"Journalism used to be completely different. Le Monde, for
example," Paul cited France's leading newspaper, "used to
describe itself as a 'journal of opinion'. Even the news
items were referred to as the 'opinions' of the reporter -
not actual fact."
"But in the 60s, I think," he went on, "they dropped the
'opinion' word from the news pages. Now, it is pure
propaganda."
Montmorillon's mayor was less cynical. He is accustomed to
giving long uplifting speeches in praise of municipal
sewage treatment systems or the new fire brigade hoses. He
came readily to the defense of Le Monde and modern
journalism.
"There is a place for opinion," he said, "on the opinion
page. But reporters are not supposed to be giving opinions.
They're supposed to be reporting the facts."
"Facts?" Paul shot back. "They report the 'facts' as they
see them...and then, only the 'facts' that serve their
purpose. People are not like video cameras merely recording
what happens in front of them. Everything is subject to
interpretation. At least in the old days they admitted that
they were interpreting events, not merely recording them.
And there were dozens of papers - each with its own bias -
from which you could choose."
"Well, you have a good point," conceded the politician, to
whom all points are good ones.
"Thank you," was Paul's reply, "I would vote for you...but
I am a resident of Paris, not Montmorillon."
"In that case, vote twice. But seriously, I think people
understand that the reporter has his own point of view. You
know, they do these polls, asking people how they rate the
credibility of the media. People always say they don't
believe a word of it. They are very capable of
understanding a point of view...and decrypting the messages
they receive."
At this point, Paul's wife added a comment that triggered a
series of thoughts. We had already upended several bottles
of wine by this time...and Anne, with the glow of the
candlelight on her delicate features, was becoming ever
more profound and entertaining:
"Yes, they say they don't believe...but in fact, it is all
they believe. They have nothing else to believe. They say
they don't believe because it is fashionable to say that.
No one wants to admit that he does not think for himself.
But that is the case. What people read in the papers and
see on television is all there is."
At the heart of the New Era discussion was the idea that
information - delivered in bulk at low prices - would make
people more productive, richer...and even happier.
James Tobin, creator of the q ratio, which compares the
price of a stock to the cost of the assets behind it, even
came to think that his indicator had lost its validity. In
the digital age, he thought, new technology and new
communications greatly increased companies' 'intellectual
capital' - which didn't show up on their balance sheets.
More tomorrow...on why James Tobin was right about q and
wrong about 'intellectual capital'...
Several top geologists quit big firms, and start out on
their own. The new stock pays 100%-2,000% a year. But As
usual...
Nobody Notices The Good News Until It's Too Late.
Early investors make all the money before Wall Street even
gets wind of the deal. The pattern is repeated. Again and
again. With the right tip you could have bet a whole lot
less than the ranch - and still made a killing. For
reliable hands-on intelligence - and your shot 1,000% gains
in stocks ignored by Wall Street:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."
That's what readers are saying about The Daily
Reckoning.
Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
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Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly
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It's a brand new service... but it has a distinguished history..
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Last modified: April 01, 2001
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