*** Why the panic? Inquiring minds want to know...
*** Look for more rate cuts...will the Internets continue
to rise? Or will gold?
*** Bill Clinton could become President of the Republique
Francaise...salacious gossip...and more!
*** The sales figures for December came out; they were down
just 0.1%. Not a big deal. Other economic figures reported
recently show the same picture - a softening economy, but
not a collapsing one.
*** So, why the hurried 50 basis point rate cut by the Fed
on Jan. 3rd? Even Alan Greenspan's colleagues on the
Federal Open Market Committee were surprised. It is rare to
change rates between meetings - and practically unheard of
to reverse the previous direction of changes.
*** "Speculation is rife throughout the Fed," reports the
Washington Post, "as well as throughout the market, as to
what caused Greenspan to decide a big rate cut was needed
so urgently."
*** But Charles Peabody has a hypothesis: A record $600
billion of commercial paper - loans held by banks - needed
to be refinanced in the first 3 weeks of January. The Fed
may be concerned with the health of the stock market...as
well as the health of the economy...but what really keeps
the bankers awake at night is the health of their own
businesses.
*** "Bank of America had to honor a $1 billion line of
credit to PG&E last October," writes Dr. Gary North. "This
is a continuing problem for large U.S. banks in general.
They have made credit lines available to companies that, in
a credit squeeze, would not otherwise qualify for loans. We
are not talking about a few billions; we are talking
trillions... The banks can easily get saddled with new
loans issued to firms to which they would not otherwise
make loans." (see: Reading The Tea Leaves)
*** Few banks have actually cut interest rates - despite
being able to get money more cheaply from the Fed. My
guess: they're using their fatter margins to offset rising
defaults.
*** So far, the economy is deteriorating...but maybe not as
rapidly as it first appeared. Consumers and investors are
anxious, worried - but not really negative. They expect
Greenspan to save the day.
*** Those that need to borrow money are doing so. Most
people are hesitating - either because they expect lower
rates or because they are already "spent out" and/or are
becoming uncomfortable with so much debt.
*** As the year moves forward, the economy will probably
continue to weaken. Stephen Roach may be right - we may see
negative GDP growth in the first half of the year.
*** Wall Street is closed today, for Martin Luther King
day. But tomorrow, GE will come forward and make its
earnings announcement. Will this be the year GE finally
misses its numbers...or has to guide analysts to lower
numbers? Maybe... GE fell another 2% on Friday.
*** The Dow dropped 1.3% last week. But the Nasdaq, though
it fell 14 points on Friday, realized its biggest weekly
gain since September - up 9%.
*** The big winners again on Friday were the Internets. The
INX rose 5%.
*** Losers were the Big Techs - Gateway lost 8%, Intel was
down 4%...and Hewlett-Packard lost 5%. Gateway says it will
cut 10% of its staff. William Hewlett, founder of HPI and
Silicon Valley, moved on, too. He shed his mortal coil
Friday morning.
*** Oil is back over $30.
*** People who hope for another rate cut are likely to get
their wish. Why? Because the underlying problem is that
there were too many bad investments and bad loans made
during the boom period. Those have to be written off,
worked out, and picked over. Lower rates can help get the
economy moving again - but only after the mess has been
cleaned up. Until then, lower rates get adversely selected
by the worst credit risks...and make the final reckoning
even more difficult.
*** But since lower rates are the only trick Greenspan
knows - it's one he will perform over and over. Rates will
fall...and fall...and fall. The dollar will fall too - as
it becomes relatively more attractive to hold European or
Asian investments.
*** And who knows, gold could rise...
*** Today is Maria's birthday. She turns 15.
*** Henry, 10, and Jules, 13, took part in a series of
skits put on by the local scouts. The 'scouts' in France
are very different from those in America. "Scoutism," a
young man explained to parents, "is a form of
Catholicism...for young people...to instill in them a sense
of devotion, faith, and obedience."
*** Just as he spoke these words, barely audible over the
roar of boys playing in the background, Henry came running
around the corner, chasing another fellow, and knocked over
two metal chairs.
*** But at least Henry had a good role in one of the skits
- he played Jacques Chirac, President of France, while a
very pretty young girl took the part of 'Miss France'. The
point of the skit I didn't quite get - but it looked like
the actors, if not the audience, were having a good time.
And Henry played his role with such confidence, I thought
he was right for the role.
*** But I read in the Figaro over the weekend that Henry
may have competition. Public Law 1284 gives any citizen of
a former French colony or possession the right to run for
President. Arkansas was once owned by France. So, says the
Figaro, Bill Clinton could run for Jacque Chirac's job if
he wants to.
*** And now I will let you in on some course and salacious
small town gossip. It is said that a certain young woman in
our burg has been cursed (or blessed, depending on your
point of view) with nymphomania. She has "the fire
derriere" as the disapproving farm matrons put it. (I am
just reporting what I hear.)
*** Well, I saw the thin, blonde woman -looking a little
pale and perhaps exhausted, at the scout show, sitting by
herself as her younger sister performed. It might have been
my imagination, but she seemed a little out-of-place. So, I
decided to sit down and keep her company, in proper
Christian scout spirit. Besides, it was a cold night and I
need the extra warmth.
In a Private Room at the Four Seasons Hotel in Las Vegas -
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can't still listen in... as the World's Hottest Investment
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"Have you found another company such as W.R. Grace," Benoit
asked me again on Saturday. We were pouring concrete into a
stone wall, in a technique that seems almost foolproof.
It had better be foolproof, I thought to myself. Neither
Benoit nor I have any experience in stonemasonry. But it
seems simple enough. We lay up the stones on the outside
surfaces of the wall we are building - using mortar to hold
the stones in place. We run the walls up two feet or
so...then, when the mortar hardens, we go back and pour
concrete between the two stone surfaces - giving us a
single, very solid wall. As long as we keep them reasonably
straight - using a mason's line to guide us - the walls
should be okay.
But Benoit is not impressed by physical work. He's seen
enough of that already. He knows what you can get from hard
work. What interests him is the stock market - that is, the
money you can earn without working.
I had told him about W.R.Grace a few weeks ago - after I
discovered that the stock had fallen so low it was trading
below 1 times earnings...and at a fraction of book value.
The company faced more than 100,000 lawsuits from its
asbestos-era work. Still, I was willing to bet that the
price of the stock was more likely to go up at that point
then down.
So, I mentioned this to Benoit...and he began to follow the
stock. When it rose sharply he began to think that I might
have the magic touch...that I could find stocks that were
about to begin a rising trend.
I warned him that no one could really do so.
"Stocks move up and down almost at random," I explained.
"You cannot predict whether they will go up or down in any
period of time. The market is extremely efficient. At the
margin, it is unbeatable."
"That said," I continued, "there are occasions when stocks
are so extremely underpriced or overpriced that they should
correct to the mean. You still don't know when...or
how...but the farther they get away from ordinary
valuations...the more likely it is that they will come back
quickly. It is as if they were attached to ordinary levels
by bungee cords. They can go a long way from where they
ought to be...but the further away they get, the more
tension on them to return."
W.R.Grace was stretched so far on the downside that the
cord almost snapped. And maybe it will snap. But, at least
for now, it has pulled the shares back towards the 'normal'
range (with a lot farther to go).
The Big Tech and Internets, on the other hand, were an
example of tension in the opposite direction. They had
become outrageous - and exerted such a tug on the bungee
cord of reasonable value that it had to spring back.
But apart from that small insight, I confessed to Benoit, I
have no magic.
Still, I sensed that Benoit doesn't quite believe me. "Once
a pig learns how to hunt for truffles," his father said to
me one day, "you can't stop him." Anyone who can pick one
good stock, Benoit must be thinking to himself, can pick
another.
So, in the interest of full disclosure, for Benoit's sake
as well as yours, dear reader, I went back and looked at
the recommendations, suggestions and gratuitous investment
comments I made over the course of the last year. You may
come to your own conclusion.
First, I suggested that you "sell the dollar." This advice
was proffered on the 4th of January, 2000, when the dollar
index was at 100, and a euro was worth $1.03. Alas, a year
later, the index had climbed to 110. And the euro could be
bought for just 94 cents.
Perhaps I was not wrong. Maybe I was just premature. But
whatever truffle lay buried in this recommendation must
still be there. I will keep digging...
Then, on January 6th, I recommended Philip Morris and GM.
The cigarette maker nearly doubled, from $23 to $43. But
the automaker? The stock did rise during the first 5 months
of the year. But if it had been a bargain at the beginning
of the year, it was an even bigger bargain at year end -
losing about 40% of its value.
The next day was a good one for DR readers. I said that
Amazon.com was doomed. The stock, then $66, is about $16
today.
In like manner, I suggested that you might want to sell
Ameritrade and drkoop.com. The former has fallen from $21
to $8 since then; drkoop has fallen even further - down
from $11 to 44 cents.
Similar profits could have been made on AOL or Etoys, both
mentioned negatively on the 18th of Jan., 2000. AOL fell
from $61 down to $44. Etoys got smashed - from $20 down to
18 cents.
Of course, the whole Internet/Big Tech sector went down.
Among those I mentioned:
Cisco fell from $72 to $36
MicroStrategy fell from $21 to $11
Intel dropped from $73 to $33
Micron slumped from $89 to $38
IVillage sank from $6 to $1
And so on...
But what about the non-techs? Let me see...
Hmmm...
While I suggested you go long on GM, I recommended the
opposite side of the trade with regard to the other big G
in the Dow: GE. On January 31st, sober and not under any
extreme stress, I said that I thought the world's biggest
and most widely admired corporation was overpriced. The
stock, $44 a year ago, rose to $54 on the ides of
March...but then, Oh ye of little faith, it fell to where
it stands today - about $43.
I recommended Raytheon on Feb. 22nd. It went from $21 to
$30. But I also recommended mobile home maker Fleetwood and
Newmont Mining - both of which went down.
Procter and Gamble, recommended March 8th, rose from $58 to
$72. But Tenneco fell; and so did American Woodmark.
On the other hand, First American Financial nearly tripled,
from $10.94 to $31. So did RJ Reynolds (a recommendation
from the Fleet Street Letter) - from $18 to $49.
GPC, Pohang, Midland, Visteon, Northrop Grumman - some went
down and some went up. Still, not a bad performance...with
most selections up.
There were also a number of energy companies - mostly
suggested by Dan Ferris, then of the Real Asset Investor -
which also went up.
And the record shows a motley crew of foreign stocks that I
haven't yet checked.
Without putting too fine a point on it, it looks like year
2000 was a good one for DR readers. But there was no magic.
I hope we do as well this year.
Your correspondent, still searching for the magic...
Bill Bonner
P.S. It was so cold on Sunday afternoon, Benoit and I
retreated into the house to hang pictures. Alas, picture
hanging was not foolproof. We propped a large gilt-framed
painting against a wall so we could drill holes in the
wall. While doing so, somehow a piece of cardboard poked
through the century-old canvas. You know the old saying:
Three moves equal one fire. (Psst...don't tell Elizabeth;
maybe she won't notice.)
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Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and 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 up—not 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 ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
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.
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All Rights Reserved. Republication of this material,
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Last modified: April 01, 2001
Published By Tulips and Bears
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