*** "a major refinancing boom..." Is Greenspan creating a
new credit bubble? How wrong could I be? Well, it's too
early to tell.
*** Household net worths plummet...Americans are less
optimistic... "gas furnaces...go off" ...Maria's so-called
*** What's this? Cisco's CEO took the microphone yesterday
and admitted that the last quarter was "more challenging"
than expected. He also quoted a customer who had described
the sudden slowdown in sales as "like they turned off a
*** But that didn't stop tech investors - who labor in
constant darkness anyway. The Internets were once again the
top performers in yesterday's market. The INX rose 6%.
TheStreet.com's index shot up 9%. Even Amazon.com rose in
price as investors rushed back into the most speculative
parts of the market.
*** "Part of what appeared to spark the rally late in the
day was yet another rumor that the Fed was going to cut,"
says William Fleckenstien. "It seems pretty silly to
believe on a day when the market is screaming, and oil is
at $30, that the Fed would come in again, but it just goes
to show that bubbleonians think that Easy Al, The Put-
Writers' Pal, is going to jump in to save the day any time
they get in trouble." (see: Might As Well Face It...
*** You may recall my quotations of Michael Murphy during
the last year. As techs fell, Murphy urged his readers to
buy the 'must own' tech stocks on dips, thus providing a
foil for my bearish comments. How well did Murphy's
subscribers do? Well, Forbes and my old friend Mark Hulbert
report that Michael Murphy's Technology Investing letter
lost 32% last year.
*** But now...just when the tech show seemed over...the
curtain opens and they're back! Another act? A grand
finale? Or are they just going to hold hands, bow, get a
round of applause and retreat backstage? We will see.
*** But let's look at what else is going on in the Greatest
Show on Earth: The main averages are holding up - the Dow
rose 31 points yesterday; the Nasdaq rose 82. Just like old
*** And the market's breadth was, once again, surprisingly
strong. There were 1862 stocks advancing while only 1058
were going the other way on the NYSE. 169 hit new highs and
only 20 hit new lows.
*** So far this week, the Dow is down 1%. But the Russell
2000 (a small cap index) is up 3%.
*** The dollar seems to have stopped falling. Yesterday,
the euro dropped back a little - to 94 cents. The dollar
has actually gained ground - though modestly - this
week...up about 1% against the European currency.
*** And the junk bond market seems to have come back to
life, too. $7 billion of new debt came into the market
*** And what's this? Contrary to what I told you to expect,
people are still borrowing money...and spending it. We'll
know more tomorrow, but it looks as though sales are not as
bad as you would expect. And mortgage applications - for
both refinancing and new mortgages - are increasing.
*** "We are in the midst of a major refinancing boom,"
reports the Prudent Bear's mid-week analysis. "The
refinancing index is 257% above year ago levels." (see:
*** Could it be that I am wrong? Stock prices are holding
up, speculation is increasing, there seems to be a new boom
in debt...could Greenspan's effort to pump up the credit
bubble succeed? The answer to both questions, dear reader,
is, well, yes. I could be wrong. And there could be another
credit bubble inflating now. The chief problem with market
soothsayers is that they are unreliable. Just when you come
to think they are always right...or always wrong...they
*** The St. Louis Fed reports that MZM - cash - is still
increasing at more than twice the rate of the GDP.
Liquidity, like water on a flat roof, has to leak
somewhere. But where? How? No sign of gold going up - in
fact, it fell nearly $3 yesterday.
*** But what's this? A chart of mortgage applications shows
a big spike in the last 2 weeks of December - before the
rate cut. Why would that be? Why would people refinance
before rates went down?
*** Maybe it is 'adverse selection.' Maybe they had to.
Goldman Sachs Economics estimated that household net worth
fell $875 billion in the last quarter. The Goldman report
noted that the last 3 quarters saw the "sharpest reduction
in the ratio of net worth to disposable income on record
(since 1952)..." Hmmm...there are about 100 million
families in America. Each one lost an average of $8,750 in
the 4th quarter alone. Goldman economists expect tomorrow's
sales figures for the 4th quarter of 2000 will show
*** An Associated Press poll found that only a third of
respondents thought their finances would be in better shape
a year from now - down from 50% who thought so last spring.
Less than a half thought the stock market would be a good
place to put money, with women more risk-averse than men.
"No way," said one woman when asked if she would put an
extra $1,000 into stocks, "things are too shaky."
*** "If we don't cut production," said OPEC's secretary
general Wednesday, "there will be an uncontrollable plunge
in prices." Oil rose $2.
*** "Jeremy Siegel, professor at the Wharton School of
Business and author of "Stocks for the Long Run," reports
the Oxford Club Wire, "wrote a column for the Wall Street
Journal on which we commented last March. It was titled
'Big Cap Tech Stocks are a Sucker Bet.' He specifically
pointed out companies like JDS Uniphase, Yahoo, Qualcomm
and their ilk that were outrageously overpriced. Why?
Because no big-cap stock company in the entire history of
the stock market has been able to sustain a P/E ratio of
over 100. Not one big-cap stock - ever. Plenty have reached
that plateau, from Polaroid, to Xerox, to IBM. Every one of
them crashed and burned before beginning a sustained rise
*** Excerpt from a letter sent to CA Gov. Gray Davis by
Pacific Gas & Electric: "Without the gas supplies currently
under contract, gas available to serve high-priority
customers will be depleted within several weeks, and
possibly sooner if temperatures fall below normal. At that
point, home gas furnaces, stoves and water heaters would go
*** Addison and I retired to Le Paradis bar after work
yesterday - joined by two of my children, Maria and Will.
Maria, who turns 15 on Monday, brought us up to date on her
"Mommy and I went to the Madison Agency, on Avenue
Hoche...you know, it's the agency that represents Laetitia
Casta...very posh...well, I was supposed to get some photos
taken to see if I would be a good model, but we walked in
and the woman said, "There's no need for a photo shoot...I
can just look at your face. I love your face! It's
After the gushing stopped the woman told Maria that she
might get a couple of gigs...but that she should not
consider working seriously until she was at least 16.
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There is a spectre haunting the world's markets. It is the
ghost of the Big Techs...the Internets...and the
speculative excesses of the last years of the last
"The market may be right about a lot of these companies,"
said a bullish friend recently, "but certainly not all of
them. Many will turn out to be good companies. The market
can destroy their financial capital...but not their
This recalled a high school teacher who would point to his
wrinkled brow and say, "They can take away what you have in
your bank account...but never what you have up here." This
little gem of wisdom lost a little of it luster as we
students wondered if he had much in either location.
But the notion of indestructible capital - whether it is in
the form of gold bars...or brain cells...is attractive
enough to be hazardous, like an unexploded hand grenade in
a playground. Leaving the yellow metal out of this
discussion in order to maintain a dignified tone, we can't
help but wonder what became of the intellectual capital
behind, say, PSInet.
The stock, $50 a year ago, is now a penny share. You can
buy all you want for just 78 cents a share. Did the
intellectual capital walk off the job? Did it disappear? Is
it hiding somewhere?
'PSInet' scrawled in flowing blue neon on the side of the
new Ravens' stadium, greets visitors to Baltimore each time
they drive in from the airport. Last I heard, the Ravens
still had a chance of bringing the super-bowl to Baltimore.
But it won't be the same super-bowl it was last year, when
companies expended their financial capital on ads at the
rate of $2.2 million for 30 seconds of ad time.
That is what happens to dead presidents in the hands of
what Congressman Paul Kanjorski called "high flying
dude billionaires." It is spent. Wasted. Gone forever. If
you had gone to the bathroom during the ads - you would
have missed millions of dollar worth of it. Don't worry
about it disturbing your sleep. Except for chemical
traces...such as the blue neon on the Ravens' stadium...not
even a ghost of it remains.
But what about the intellectual capital? Is there no way to
destroy it? Buried by the market, is it destined to wander
among mortals, giving them a vampire's kiss and spooking
them to acts of wanton absurdity - like buying a Picasso
painting for $55 million, as someone did recently? The blue
period painting was once owned by Gertrude Stein, whose
famous comment, 'there's no there there,' might apply to
the idea of intellectual capital better than to bourgeois
Could it be, dear reader, that 'intellectual capital' is
really nothing more than 'intellectuals' capital' - another
big, dumb multi-syllabic idea used as a tool by hustlers to
construct a world that is both preposterous and dangerous?
Feeling the wind of a major credit inflation in their hair,
investors were susceptible to what John Kenneth Galbraith
called, "the bezzle." When times are good, he said, people
are "relaxed, trusting, and money is plentiful... Under these
circumstances, the rate of embezzlement grows, the rate of
discovery falls off, and the bezzle increases rapidly."
'Intellectual capital' is a kind of bezzle - used by stock
promoters, analysts, and management to separate capitalists
from their money.
Grant's Interest Rate Observer Robert Tracey, who recently
gazed upon Oracle's income statement with the romantic eye
of an IRS auditor, discovered a bezzle...or at least a new
twist, so to speak, in the history of capitalism. Lenin had
predicted that capitalists would sell the rope with which
they were to be hanged. But, capitalists who gave their
money to Larry Ellison's Oracle went one step further - they
bought the rope themselves!
Like so many other companies rich in intellectual capital,
Oracle is generous with employee stock options. Though a
form of employee compensation - and often the principle
form - the cost of these options do not appear on the
income statement as a business expense. Instead, they show
up as a capital transaction. In effect, the firm's cash is
used to reward those who provide the intellectual capital
at the expense of those who provide capital in its more
"In the three latest fiscal years (ended May)" says the
Grant's' report, "a total of $3.3 billion in real cash left
the company for the purpose of managing the dilution from
employee options, stock warrants and the stock-repurchase
plan. This expense never registered on the income
"$2.7 billion was laid out," continues Tracy "...to suppress
the dilutive effects of the employee compensations plans.
...Last fiscal year, it amounted to 43.2% of net income.
In the fiscal quarter ended August, expenditures to manage
share dilution probably represented more than 200% of net
But intellectual capital can have a sweet side, too - like
a kiss - utterly useless in the abstract...but powerful
when put to good service.
"One of the shortcomings of GAAP accounting," observed Tracy
"is its inability to reflect the true value of intangible
assets...[especially an asset as gaseous as intellectual
capital]... Nevertheless, one would expect that the value
of these 'intangible' assets would some day be transformed
into a more tangible asset, like cash."
Of course, when this happens - capitalists appreciate it.
Companies with high earnings compared to book value have no
trouble gaining respect. They have no reason to call
attention to the intellectual capital hidden in the balance
sheet - it is obvious on the income statement. They have
felt the warm, moist smooch of profits.
Hoping you too, dear reader, have enjoyed the kiss of
profits, or at least a bit of the other kind...
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Bill Bonner is,
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writes The Daily
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and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
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Last modified: April 01, 2001
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