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*** Investors are looking forward to next week. The FOMC
meets and is widely expected to cut the Fed Funds rate by
50 basis points. Futures trading shows investors put an 86%
probability on a rate cut of 50 bps.
*** Over the last 18 years, investors have learned that it
is usually unprofitable to fight the Fed. When the Fed cuts
rates - stocks rise.
*** And so, in anticipation of another breath of hot air
into the bubble economy, investors boosted up the Dow by 71
points and the Nasdaq by 82. There was not much rhyme or
reason to it - other than the hope that things will be
better now that Greenspan & Co. are back on the pumps.
*** "No matter what you read or hear about widespread
bearish sentiment," Marc Faber wrote recently, "the fact is
that investors and strategists have remained stubbornly
optimistic... brokerage industry strategists are now
allocating a record 64.7% of their clients' assets to the
stock market, which is by far the highest in the history of
this indicator. [And according to Investors Intelligence]
...52.9% of advisers are bullish, which is just within 4%
of the all-time high figure in January and March of last
*** The Fed is in bubble mode. MZM (money of zero
maturity...or cash as it is commonly called) is rising
almost 5 times as fast as the economy itself...that is, at
a 12.9% annual rate. Adjusted reserves are soaring at a
16.7% annual rate.
*** This is, of course, inflation: more money relative to
the goods and services that it can buy. Will it produce an
increase in the consumer price index? An increase in stock
prices? Or nothing at all?
*** While the Fed tries to pump up the bubble economy...
there are still some serious leaks. Earnings, debt,
bankruptcies. If investors lose confidence - they can whack
the markets for a 10%...20%...or even 50% loss in a matter
*** Let's go back to the big numbers. The stock market is
worth $14 trillion. Even a 10% drop would mean a loss of
capital (money) equal to $1.4 trillion. How much would a
12.9% increase in MZM offset that? Not much, dear reader,
*** And, there's Bush's tax cut. There's another $500
billion that might be made available to consumers...that
should get the bubble air stirring, right? But, again, it
represents less than a 5% move in stock prices. When this
market is ready to go down...neither rate cuts nor tax cuts
are going to stop it.
*** Is it ready to go down now? Well, not yesterday. Twice
as many stocks rose as fell on the NYSE yesterday. 140 hit
new highs, while only 7 hit new lows.
*** In Bill Clinton's final budget, a federal surplus is
projected of $4.42 trillion for the years 2001-2010. But
economists at Economy.com say that the figure will be more
likely $1.8 trillion. And that it won't be a surplus, they
predict, but a deficit. All you have to do, says
Economy.com, is change a few of the assumptions about the
stock market over the next few years and you get a very
*** The NY Conference Board's Index of Leading Indicators
fell for the 3rd month in a row. It dropped 0.6% in
December, its sharpest decline in 5 years. Three
consecutive months of falling figures is usually an advance
warning of recession.
*** Here's another interesting note to log in the "Too Big
To Fail" category: "Bank One's bad consumer loans were 61%
higher last quarter than they were the previous year,"
reports the Motley Fool. "Additionally, Bank One took a
pre-tax write-down of $575 million for currently impaired
assets, including vacant real estate and abandoned car
*** Friend Justin Ford writes: "The nation's plummeting
savings rate is not a new phenomenon... did you know,
Irving Fisher died penniless? Apart from being the Fed
chairman during the '29 crash, Fisher was a renowned Yale
economics professor and entrepreneur in the 1920s and
1930s. He had built a multi-million dollar fortune. But he
also neglected basic lessons about investing... Yale had to
buy the house he was living in so he could live out the
rest of his days there." Justin's been working on a program
called 'Seeds of Wealth' designed to help young people
learn the value of saving and investing. I'll tell you more
about it later.
*** The dollar went nowhere yesterday. Oil fell 23 cents.
*** The Bank of England's gold auction was oversubscribed 5
times over. There were plenty of buyers for gold - but the
price of the metal fell 30 cents yesterday. The mining
index, XAU, lost 2%.
*** Marshall Auerbach, on the uncalculated threat of
derivatives: "Ashanti Gold, a large West African gold
producer, was not the first mining company to enter into
gold hedging arrangements via the OTC derivatives market.
But the derivatives used by Ashanti to undertake such
hedging were unusually complex ... to the extent that
nobody in the marketplace could truly understand them.
Investors were fobbed off with the argument that the
company had the situation 'well in hand', when questions
about these exotic hedges were posed.
*** Then, "when the European central banks surprised the
gold market in the autumn of 1999," continues Auerbach,
"with the announcement of the Washington Accord (an
agreement to restrict the amount of gold sold by the
European central banks to a fixed quantity over the next 5
years), the gold price soared un unprecedented $80 in just
4 trading days. Unfortunately for both [Ashanti] and its
shareholders, Ashanti's derivatives' bet did not
incorporate this sort of rapid price spike as one of a
possible range of scenarios ... the resultant margin calls
pushed the company to the brink of bankruptcy. Seventeen
major bullion banks had exposure to Ashanti, yet NONE were
able to quantify the extent of their liabilities until one
of the Goldman Sachs's 'rocket scientists', who helped
design the original derivatives contracts for Ashanti, was
parachuted across the Chinese Wall and able to make the
*** And yet, "OTC derivatives in the gold market," says
Auerbach, "are but a tiny irrelevance in relation to the
trillions of dollars of exposure in the area of interest
rate and foreign exchange derivative structures..." (see: The Great Looming Threat To Financial Markets)
*** "The world of Wall Street spin is like a dozen
simultaneous games of 3-dimensional chess," writes Howard
Kurtz in his book Fortune Tellers, passed on to me by Harry
Schultz, "...a dizzying match in which stock prices,
corporate earnings & millions of individual investments are
riding on the outcome. Amid the endless noise, whom do U
trust? ... Street analysts have too much power, for the
media mindlessly trumpets their predictions as if set in
stone. And if the assessment turns out badly wrong, well,
too bad. Zero accountability."
*** Schultz adds: "Analysts praise company stocks while
trying to win that firm's investment banking biz, & few
make the connection. Via airwaves & press, fund managers
tout stocks in which they're long. Rarely are they asked if
they own the stock, & even if they admit it, no one
screams: interest conflict!"
*** "Martha Stewart Living has swept Wall Street off its
feet right along with the rest of the world," says
GrantsInvestor analyst Rosa Ann Tortora. "But as cracks
begin to show in this fabulous facade, investors may want
to reconsider their paean to gracious living." The company
currently trades with a p/e of 55 and a $1 billion market
cap. But, according to Rosa Ann, Martha's Internet project
is hemorrhaging cash. And she thinks there's some money to
be made on the short side. (see: Running Out Of Style?)
*** The collector car market is still hot, says the Arizona
Republic. Two recent auctions produced record sales and
turnout. A '34 Ford street rod built by Boyd Coddington
sold for $130,680. A '35 Duesenberg sold for $1.045
million. A '68 Shelby GT500KR sold for $85,575.
*** A front-page article in The International Herald
Tribune warns that Europe's forests are in bad shape.
Nowhere does the paper explain that European forests are
victims of European government - which pays farmers to
plant unprofitable crops on land that would otherwise go
back to wilderness.
*** And poor Christine Deviers-Joncour. The woman was paid
$9.25 million dollars by oil company Elf Aquitaine. And now
she is being forced to explain to a court why her services
were so valuable. The money, it is alleged, was a bribe to
former French foreign minister Roland Dumas, to whom she
was mistress. Christine says she worked tirelessly for the
money. Yes, Judge Sophie Portier said: "You put your body
and soul into the job."
"There's just as much money to be made in the wreck of a
civilization as the up-building of one."
In ante-bellum Georgia, few people could imagine what a war
with the North might bring. They knew wars took courage...
horsemanship...and discipline. They figured they had
plenty, and boasted, in the words of one of the Tarleton
boys in Margaret Mitchell's novel, that they could "lick
the Yankees in less than a month."
But it was not to be. After 4 years of struggle, the south
was beaten, devastated, and occupied by a foreign army. It
was a new era, after all.
Things do change. New Eras do come along, but only at great
cost...and unexpected suffering.
"Practically breaking the bank with a $3 million publicity
campaign," reports Frederick Sheehan in his Quarterly
Market Review for John Hancock, "Warner Brothers' escapade
swept the nation."
Sheehan was not referring to 'Gone With The Wind,' which we
made our entertainment last Saturday night, but to another
film which revolutionized the movie industry - The Jazz
Singer, the first talking picture, released by the then
third-rate studio, Warner Brothers.
"Predictions for this new technology were mixed," writes
Sheehan. "The reasons for this ambivalence were many,
including the terrible quality of the sound." Said Tallulah
Bankhead of the audio: "They made me sound as if I'd been
But you can't stop a good innovation. Soon, "everyone in
Hollywood was ...scrambling for money, and in the heat of
the bull market , it was easy enough to borrow and then
borrow some more. By 1933, the technology was standardized
and much improved, 99.5% of all movies were now
If ever there was a new technology that was a winner - it
was talking pictures. We do not have to consult the dusty
tomes of economists for proof. Nor do we need to stretch
our imaginations. All we have to do is to open our eyes.
Everywhere you go in the world, or nearly everywhere, you
find U.S.-made movies. It is Planet Hollywood. American
movies...and the actors and actresses who make them ...are
known worldwide. They are among our most successful and
most profitable exports.
The old era of silent films fell faster than the
confederacy. Only a few years after the introduction of
'talkies' they were being watched by crowds of millions.
Even Josef Stalin loved American films. He worked until the
wee hours of the morning - personally approving the lists
of hundreds, sometimes thousands, of people who were to be
murdered. Then, his labors finally over for the day, he
retired with a few henchmen to a private studio...not to
discuss Karl, but to watch Groucho.
Surely investors who put their money in this world-changing
new technology were richly rewarded. Alas...what a
confusing, frustrating...and astonishingly baroque world we
live in. Sheehan reports that by 1933, "the entire motion
picture industry had defaulted on its debt (there was one
exception: Loews). The studios struggled to survive."
What went wrong? The studios were trapped by technology as
well as enriched by it. They were forced to invest huge
amounts of money [like today's telecoms or Internets?] in
order to remain competitive. "They had no choice," explains
Sheehan. "Profits of the industry tripled between 1927 and
1929. They had achieved this apparent success, but at an
enormous cost. ...The industrial system as it had evolved
for the previous three decades needed to be completely
overhauled; studios and theatres had to be totally re-
equipped and creative personnel retrained or fired. In
order to fund this conversion, the film companies were
forced to borrow $350 million. What William Fox and Sam
Warner did not anticipate was a stock market crash."
One of the myths that has grown up around the Depression
was the audiences turned to the film industry for
entertainment and escape. Maybe so...but going to the
movies was discretionary spending...and sales dropped for
the motion pictures just as they did for the auto industry.
In 1931, movies brought in $831 million. By 1933, sales had
fallen to $546 million.
Even on a VCR, the sunsets, fires and panoramas of "Gone
With the Wind" are impressive. They are the work of one of
the greatest success stories in Hollywood - the Technicolor
Corporation. Formed in 1915, the company had a monopoly on
supplying color to the film industry. After the spectacular
success of 'Gone with the Wind' and the 'Wizard of Oz,'
both made in 1939, movies began a conversion to color almost as
rapid as the switch to talkies in 1927. Technicolor was the
sole supplier of color to Hollywood until 1947. Still,
against the current of falling stock prices on Wall Street,
Technicolor could make no progress. The stock never
recovered to its '20s high.
"In the end," comments Barrie Wigmore in his book, "The
Crash and Its Aftermath," the movie industry thrived, the
Warners and the Foxes retained control, but the investors
Fox Films hit a high of $106 in 1929. By 1933, you could
buy it for 75 cents. RKO fell from $76 in '29 to 25 cents
in 1932. Warner Brothers dropped from $67 to 50 cents.
The money investors put up - funding the development of
some of the most successful new technologies for one of
America's most profitable new industries - was lost. Like
the Old South, it was gone with the wind.
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.
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Last modified: April 01, 2001
Published By Tulips and Bears