*** Hmmm...Intel's profits...GE's profits... They're not
great...but Intel is promising to spend even more money in
the year ahead...
*** Why are Internets and Big Techs rising? Because they
appeal to the most naive investors...
*** Is Mr. Bear in retreat? Don't count on it...O'Neill and
the dollar...dynamic silicon...and the failure of the New
Paradigm...
*** Hmmmm...
*** Yes, hmmmm...Intel's sales and earnings weren't great,
but they weren't terrible. Revenues are falling. Costs are
rising. And a third of Intel's earnings came from
investments and interest.
*** That is one of the features of an asset bubble.
Companies pad profits by investing in the inflated assets.
They buy each others' stock - or real estate, as companies
did in Tokyo in the 1980s. "During every investment boom,"
as Marc Faber puts it, "companies make extraordinary
profits by participating in the boom through the purchase
of the object of speculation."
*** Intel said that it would increase capital spending next
year, from $6.5 billion to $7.5 billion. Intel seems not to
have noticed, or cannot imagine, that the industry may be
at the tail end of a capital spending boom, burdened with
too much capacity already. Investors' trimmed Intel stock
by 3%.
*** Jack Welch was on TV too - with a similar message.
Things were not great at GE, because the economy was slow,
but the economy would surely pick up later in the year. GE
had no plans to cut IT spending next year.
*** GE did not beat analysts' estimates. But it did not
fail to meet them either. Instead, it came in right on the
money, not a penny more. Investors took 1% off the stock's
value.
*** Juniper reported strong earnings...3M reported weak
ones. Investors heard what they wanted to hear, and did the
inappropriate thing.
*** The Dow sank 68 points. But the most speculative
sectors - the Big Techs and the Internets - rose.
TheStreet.com's Internet index rose as much as 6% intra-
day, and ended up 2%. It has gained an impressive 25% so
far this year. The Nasdaq 100 is up 9% for the year.
*** The Nasdaq itself rose 64 points yesterday - as the
nation's most naive investors bought up Wall Street's most
overpriced stocks.
*** "The bear is starting to retreat," said one optimistic
trader at Kaufman Brothers. Maybe. Maybe not. In the 13th
century, Subadai took a small army of Mongol horsemen all
the way across Asia and into the heart of Europe. Often
outnumbered, his favorite tactic was to pretend to retreat.
His pursuers left their bases...stretched themselves
out...wore out their mounts...and exposed their flanks - as
Subadai wheeled around for the kill. Could Mr. Bear be that
clever?
*** A chart of mortgage refinancing has a line going nearly
straight up beginning the last 2 weeks of December. In the
last two weeks, the index has doubled. Could all these
people really be attracted by a half-percent cut in the Fed
Funds rate - especially when more cuts are as certain as a
gambler's second bet? Or, are they desperate?(see: "We are
now living financial and economic history on a daily
basis.")
*** Merrill Lynch is now forecasting flat earnings - zero
growth - for the S&P 500 this year.
*** Power blackouts in California? Emblematic of the
failure of the New Paradigm, California will begin
rationing power rather than allow prices rise and clear the
market. All the billions of IT spending...and all the
genius of Silicon Valley...were not enough to overcome the
titanic imbecility of California lawmakers.
*** The Boston Globe, meanwhile, reports that nuclear power
is making a comeback. The plant on Maryland's Calvert
Cliffs had its license extended for another 20 years -
thus, doubling its expected life cycle. Suddenly, there's a
bidding war for nuclear power.
*** The Financial Times reports that losses are growing for
U.S. banks. Wells Fargo's loan losses are up 20% over '99.
Citicorp's problem loans rose 5.8% in the 4th quarter of
last year. And Bank of American says it will lose $3
billion to bad loans next year - that is, if there is a
soft landing.
*** Expectations of a 'soft landing' are wide and deep.
Investors, CEOs and bank analysts all agree: things are
getting better. And upon this happy forecast, they build
their plans for the future - investment, business and
personal. Polls show consumer confidence falling - but
still very positive. Investors, too, expect much less than
they did a year ago...but much, much more than they did 20
years ago. According to CNBC $15 billion went into equity
funds since the Jan. 3 rate drop.
*** The dollar rose after Paul O'Neill, the man the
incoming Bush administration has fingered for the Secretary
of the Treasury, said he favored a strong dollar policy.
But Reuters reported that "O'Neill may tolerate weak
dollar." Reporters, as well as investors, hear what they
want to hear.
*** I was intrigued when Steve Sjuggerud recommended the
Argentina Fund a few weeks ago. It was trading at a 32%
discount while Argentina struggled to stay solvent.
Yesterday, I asked Steve how it was doing:
"The Argentina Fund is already up about 20% this year,"
Steve replied, "and it's going much higher. But again,
don't worry, you haven't missed a thing - the Argentina
Fund is actually trading at the same price it was back in
1992, when it was first established. There's plenty of
upside left." According to my back-of-the-envelope
calculations, the current discount - about 22% - gives you
Argentine companies at the equivalent of about 8 times
earnings. (see: The Greenspan Home Run)
*** "France's tax regime is among the most diabolical in
the world," writes International Living's Kathy Peddicord.
"As the French tax minister Jean-Baptiste Colbert (1619-
1683) explained to his King Louis XIV, 'The art of taxation
is to pluck from the goose the most feathers with the least
hissing.' Jean-Baptiste's present-day counterparts don't
even seem to mind the hissing." Despite that fact, it seems
Addison and I reside in one of two countries deemed to have
the highest standard of living in the world... an honor
France shares with the United States. (see: International
Living's 2001 Quality of Life Index)
*** And this amusing report from the frontiers of the New
Paradigm... George Gilder: "Dynamic Silicon, the missing-
link technology I have been predicting for 15 years is
emerging now and will unite the Microcosm and the Telecosm,
and consummate the transformation of the economy of matter
into an economy of mind. This emerging revolution in the
microchip industry will be as profound and transformative
as the invention of the microprocessor itself."
I don't have any idea what that means, but I thought you
should know.
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Read it today:
Why do they go marching off to war...or get caught up in a
tremendous and absurd investment bubble?
In every instance, dear reader, the problem - when you
strip it of its oily peel - is a lack of romantic
imagination.
How much human misery could be spared...simply by the
application of a little imagination! A man might imagine
what life would be like with his bride after, say, 10 years
of marriage. Sharing his life with her ...his bathroom...
his checkbook...his breakfasts and dinners...his
heartbreaks and ambitions...and watching the cheek he so
loved to embrace at 20 turn into quite another kind of
cheek by 50...he might decide to skip the whole thing.
Or he might not! But at least he would have some idea of
what he was getting into.
Likewise, if the soldiers of 1914 had been able to imagine
the pointless misery of the trenches...or the soldiers of
the Wehrmacht had been able to capture - in their minds'
eyes - the futile and ultimately calamitous denouement of
their adventure...wouldn't they simply have stayed home?
Or, think of all the investors who poured their life
savings into the South Sea Bubble, or Tulipmania, or the
Nifty Fifty? Or, think of the many people who devoted their
whole lives - and their fortunes - to trying to find a way
to turn base metals into gold. They could not imagine
it...but their investments would leave them completely
penniless!
And yet, through the fog of wishful thinking, the light of
imagination shines darkly at best. The soldier imagines the
glory, but not the lice and missing limbs. The lover's
internal screen shows photos like those in Playboy...
airbrushed to flatter the curves, and hide the wrinkles.
And the investor? Unless the experience of loss is fresh in
his memory, he is no better able to understand how things
work then a California lawmaker.
I say it is 'romantic' imagination that is lacking because
while it is easy to imagine the intended consequences of an
act...it is almost impossible to imagine the unintended
ones...even when they are obvious. And yet, to repeat a
point I make with tedious regularity - in the investment
markets, it is the unanticipated consequences that are
important - for those are the only ones that are not
already discounted in current prices.
No doubt, you have received the latest 'Darwin Awards' in
your email box. They seem to come around each year at this
time, applauding the efforts of exceptional people to
remove their own genes from the reproductive chain. The
stories are often entertaining - because we see people
doing very dumb things...things whose unintended
consequences are obvious, as well as, fatal.
In the current instance, for example, a man is given the
award for attempting to smash out his girlfriend's
windshield with the butt of a loaded shotgun. His efforts
were cut short when the gun went off directly into his mid-
quarters.
Surely there must be some equivalent award for investors -
those whose imaginations are so underdeveloped as to be
unable to foresee even the most obvious - though unintended
- consequences of their actions. Alas, it is left to us to
do the work. And a lot of work it is: the field of
candidates is so crowded...and the resumes are so similar.
It is like trying to pick the dumbest boy in the 3rd grade.
As a bubble swells in foreseeable ways...so does it
deflate. Investors imagine a world much simpler than it
really is. They think Alan Greenspan controls the economy
and the markets - increasing interest rates when he wants
to calm economic activity...and decreasing them when he
want to stimulate it.
The problem, once again, is that this simple metaphor
doesn't come close to describing the romantic perversity of
markets, economies, or human action.
Recalling a quotation from Marc Faber, "It isn't rising
interest rates that prick an investment bubble, but
widespread losses by investors."
Investors have lost $3 trillion since March 2000. Since the
U.S. economy grows at the rate of about $500 billion per
year - that loss represents about 6 years of growth!
Meanwhile, real, effective interest rates have gone from
negative 15% or so per year...to positive 30% or so. That
is what an investor might expect to get as a net return on
borrowed money.
Lower interest rates do not automatically reverse the
deflationary symptoms of the end of a bubble. In fact, they
may make them worse!
"Repeated easing by central bankers," explains Faber,
"which is designed to combat the threat of a recession or
deflation, actually ...reinforce[s] the deflationary trend,
because it allows the boom in the object of speculation to
continue for far longer than would normally be the case."
This is exactly what Intel's announcement yesterday
suggests. Buoyed by the Fed's gallant effort at
'reliquification,' Intel intends to float an extra billion
of capital spending.
Nor can investors imagine that the Fed's efforts to reflate
the economy may produce perverse results in other ways. I
have already discussed the "adverse selection" problem. At
the end of an asset bubble, new credit tends to go to
desperate borrowers, rather than those with useful projects
to finance. Sensible lenders get worried. After years of
very loose credit policies, too many borrowers are in over
their heads. Businesses and consumers go bankrupt. Lenders
turn wary and demand higher rates of interest - even though
money may be, theoretically, more readily available from
central bankers.
This - combined with falling price levels - produces yet
another paradox. "Even if interest rates are cut," says
Faber, "the borrowing costs of companies go up in real
terms... Corporate margins are therefore squeezed badly,
which in turn leads to further selling pressure in the
stock market. Worst of all, at this stage, falling stock
prices don't bring about lower valuations, because earnings
decline more rapidly than stock prices. Thus, stocks
remain, even at lower levels, overpriced."
"On the upside," Faber concludes, "the dynamics work in a
miraculous way; bubbles usually last longer than
anticipated and bring valuations few could have expected at
the beginning of the expansion."
But just as investors couldn't imagine how high prices
eventually got, nor can they now imagine how low they may
fall as bubble excesses fully correct themselves. "Every
boom leads to a bust," says Faber, marked by "sharply
declining equity prices, a weakening currency, and a
downward spiral in the economy."
Imagine that.
Bill Bonner
P.S. Tomorrow? The Daily Reckoning's Financial Darwin
Awards.
When The Greatest Credit Bubble in History Bursts...What
Comes Next?
No banks or brokerage houses went bust in the 1929 crash.
In fact, many investors and businessmen prospered. The real
damage was done later on - when popular sentiment turned
against stocks altogether. Just as is happening in our
markets today...
Will you profit in the months ahead? You will if you
prepare yourself now - EVERYTHING that is happening in the
markets today has already happened before. Click here to
learn more about:
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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Last modified: April 01, 2001
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