*** Uh-oh...the economy is not falling off a cliff...
*** Consumers are in terrible shape - but they're spending!
*** Rate cut rally may be over...but the "automatic
recovery" continues...stocks set to produce 5% return over
next 10 years...trains & planes...and more!
*** An alarming realization seems to have struck the market
yesterday: the U.S. economy may not be falling off a cliff
as expected.
*** Auto sales have been stronger than expected - so strong
that DaimlerChrysler announced it would not be closing its
Jeep and minivan plants after all.
*** And retail sales - which represent two-thirds of the economy -
are rising. Last week, same store sales rose 2.4% over
December and 3.4% over the same period a year ago.
*** Home sales are looking good too - with forecasts of
5.14 million units expected to sell this year...up from a
forecast in December of only 4.94 million. Housing starts
are increasing more than expected too.
*** "U.S. Car Manufacturers Set for Growth," says a
headline in the Financial Times. "Consumers more likely to
open their wallets," notes another in the S.F. Gate.
"Consumer confidence may be stronger than data suggest,"
adds the Boston Globe.
*** All this good news seemed to weigh on Nasdaq investors
yesterday...along with a report that the Fed was
considering a measly 25 basis point cut in rates next week,
rather than the 50 points investors had expected. Plus,
Greenspan testified before the Senate that he now favors a
tax cut - further worrying investors that a big rate cut
may be moved to the back burner.
*** Thus, the "rate cut rally" may have come to an end
yesterday as the Nasdaq fell 104 points. Nasdaq investors
have so much simpleminded confidence in rate cuts that
anything that seems to stand in their way - even signs of
economic growth - must be taken as a sell signal.
*** So, they took their money out of the techs and moved it
over to the Dow, which rose 82 points. There were 1,589
advancing issues on the NYSE exchange yesterday; 1,232
declining ones. Breadth was positive for 12 of the
last 13 days.
*** The euro slipped a little bit more...to 92.25 cents.
*** Not much action in the gold market.
*** What happened to the bear market and the coming
recession? All in good time, gentle reader, all in good
time. "The great Dow theorist Robert Rhea," writes Richard
Russell in yesterday's message, "said that the 'single
surest action in the market is the automatic recovery,
often 50%, following a crash.'"
*** But the longer-term prospects for neither the stock
market nor the economy look good. Russell: "When the S&P
sells for over 22 times earnings, the median appreciation
in stocks over the coming 10 years is 5%." Against that, he
notes, is the yield on 10-year T-notes of 5.27% -
guaranteed.
*** And the economy still has to wash out trillions' worth
of bad investments, hose down millions of greedy investors
and debt-caked consumers, and mop up resulting mess. "The
financial condition of the consumer," notes a report from
Hoisington Investment Management of Austin, Texas, "is the
worst in modern times due to 8 years of heavy spending
relative to income." The same might be said for businesses.
*** "It still boggles my imagination," Barron's quoted
Barton Biggs recently, "that everybody thinks we can come
through the biggest bubble in the history of the world and
certainly the longest boom that the U.S. has ever had and
get out of it with a very, very mild recession. Is that the
way it works?" No...I don't think it is.
*** And yet, even the junk bond market has revived: The
L.A. Times reports that over $10 billion of high-yield bonds
were issued already this month, more than twice the $4.16
billion issued in all of the last quarter. Another $2.4
billion is in the pipeline. More below...
*** Christopher Byron notes that a Salt Lake City company,
InvestAmerica, got a boost in its share price the day
BEFORE it announced it was planning "to buy '$675 million
of optical networking equipment' from Nortel Network. "How
will InvestAmerica pay for such a purchase?" asks Byron.
"So what that InvestAmerica has exactly $70,533 of cash on
hand, has no tangible net worth, and only $1.3 million in
revenue and $4.8 million in losses last year. On the
trading day prior to the announcement, the stock soared as
high as $1.47 a share from 70 cents (funny how things seem
to work that way on Wall Street, isn't it), then collapsed
the next trading day as the early birds sold out, driving
the price down to close at 74 cents."
*** "Sanitizing and defanging are alive and well on CNBC,"
says Legg Mason's Ray Devoe, "as if the 54.6% decline in
the NASDAQ from the March 10, 2000 high to the recent lows
never took place. One recent feature presentation was based
on the theme 'There's Money To Be Made In This Market' and
featured some of the alternative power stocks that could
benefit from California's electricity crisis. Plug Power
was the apparent winner - the announcer stated that it 'was
up 178% in about three weeks.' I have followed this
controversial company as it rose from its IPO in 1999 at
$15 to $156 a share on January 12, 2000. The stock crashed
to $9 on December 21, 2000-a 94.2% loss in less than a
year. Even after what could be a 'dead cat bounce' at $25
the stock is still down 84.0% from where it was a year
ago." (see: Defanging The Big Bad Bear)
*** "The TMT (Technology, Media, Telecom) bubble is eerily
similar to the 1845-1846 mania," writes The Fleet Street
Letter's Robert Miller. "There was a massive explosion of
companies seeking to exploit every conceivable niche of
newly opened markets, however bizarre. At the height of the
boom in 1845, the capitalisation of railway shares was
around 30% of British GDP compared to 50% for IT stocks as
a percentage of US GDP in March last year.
"But the true lesson of the 1845 railway mania is that the
decline in TMT stocks is far from over. Some 1,500 miles of
line that were authorised in the boom years were abandoned
and numerous bubble railway companies collapsed. But
equally, apparently well-established companies, with lines
between important cities, saw their earnings and their
share prices collapse. Likewise, the 1845 bubble...was
followed by a major recession which savaged the earnings of
even established companies..." (see: A Taste Of Things To
Come)
*** Yesterday began badly when a strike by train workers
stopped the regular service out to the airport. But the
line of people waiting for a cab was so long - I realized
that I could never make my flight to Miami. Fortunately, I
heard an announcement explaining that I might get a train
from another station...so I rushed to the other station and
finally got to CDG. At the airport, without a minute to
spare, I was taken in hand by a bold and beautiful clerk
who rushed me through security...so I finally arrived on
board on time and in style.
*** "Strikes!" she said as we dashed through passport
control. "It wouldn't be France without strikes."
*** Once on board, I discovered that my travel agent had
managed to get me into first class. Normally, I use
frequent-flier miles to upgrade to business class. But they
have discovered an even better trick - which I will reveal
in due course.
*** All the denizens of the first class compartment were
middle-aged men (except for one woman in her 30s who
looked middle aged) wearing blue jeans. The suit-and-tie
merchants in Paris made nothing on these gentlemen. Once
airborne, they all got out their DVD players and watched
movies - which activity entertained them throughout the 10-
hour flight. On one screen to my left, Nicholas Cage was
getting a rather serious looking face-lift. On the screen
to my right Nicholas Cage was driving an ambulance, in
desperate need of a shave, sleep and a career change. I
felt like a party pooper when I pulled out my laptop
computer and began answering my mail.
YOU COULD'VE MADE 91% IN ONE DAY! Or as one fellow investor
put it:
- "Lynn, I wanted to thank you for [your] efforts... in the
last couple of weeks the information [you supplied] has
produced a realized total of $23,210."
With Lynn Carpenter's F-O-X system, you'll be alerted to
early price volatility in stocks like American Express.
Lynn's readers bought bargain call options when the stock
was at $54.38...and sold them the next day for 91% gains.
Follow this link - and get in on her next trade:
Poor Michael Milken. Not only did he not get the
presidential pardon he had hoped for...he must have found
it particularly galling that another, shadier financier got
the pardon that might have otherwise been his.
Marc Rich, on the lam in Spain for more than a decade, is
now free to come back to the United States and get on with his life.
Thanks to the efforts of his ex-wife, and his two law
firms, which, coincidentally, were also those of President
Clinton and his wife, Mr. Rich may now take a seat of his
own at Democratic fundraising events.
The game is not over, of course...both men are still alive.
And there is, of course, the Great Unknown of the afterlife
too...but so far it does appear that these two men have not
gotten justice.
Milken ran afoul of the SEC for crimes that are impossible
to describe to a sober man. "What exactly did he do wrong?"
will come the reply...to which you will find no ready
answer. But, prosecutors leaned on Milken so hard -
threatening to destroy his life and that of other family
members - that Milken crumpled, copped a plea and served
time.
Rich, on the other hand, was charged with two major crimes.
He dummied up oil contracts in order to evade taxes...and he
violated the "Trading with the Enemy Act" in his commercial
dealings with Iraq.
Then, faced with prosecution, Rich did the arguably smart
thing: he fled the country and has lived in luxury ever
since.
Which man deserved the pardon? I will leave that for you
to decide.
What concerns us today is not really Mr. Milken's battle
for justice, but the market of "high-yield" bonds that he
helped create. My source for the following report, by the
way, is Grant's Interest Rate Observer, which keeps an eye
on such things.
As mentioned here a day or two ago, Mr. Milken's junk bonds
harmed few investors. "By the close of 1991," explains
Grant's, "high-yield securities (as junk bonds are
designated in the up portion of the cycle) had generated a
12-month return of 39%." Grant's quotes a high-yield
strategist, with this curious elaboration: "1991 was the
highest return year on record for high-yield and it was
also the highest default year."
Defaults on junk bonds have been in the news lately. They
are what you normally get on the down slope of the credit
cycle. Since the upward side of the debt cycle saw an
Everest of borrowing...it seems likely that the coming
downside will be similarly steep and long - with an
avalanche or two of bankruptcies and defaults to bury
unsuspecting investors.
That may be reason enough to avoid junk bonds altogether.
Or maybe not. Bonds are not equities. They lack the triple-
digit dreams of profit. But so, too, do they lack the
complete emptiness of a share in an unprofitable business.
They come with a coupon, in other words, and investors may
be able to earn a good return on their money - even if the
company fails...and even if the stock market falls. Then
again, they may not.
And here, dear reader, I offer you a bright flash of
insight...If you have already thought of it, you can go on
about your business, confident that you are not missing
anything by not continuing:
When things are out of whack, they tend to get back into
whack. Only God knows when...or how.
Junk bonds are out of whack - selling for far less,
compared to T-bonds, than usual. If it were to get back
into the average whack - say, the spread that prevailed
between 1995 and 1997 - it would mean an increase of junk
bond prices of 38%.
Is that enough to offset the risk of loss? I don't know.
But the Grant's team also notes that not all junk bonds are
issued by junk companies. Some of them are decent, Old
Economy companies that just have taken on too much debt for
the down cycle of the junk bond market. One, for example,
leads the nation in the production of ice. Another is the
dominant firm in a number of industrial equipment niches.
These companies stocks don't have to soar to make money on
their bonds. They just have to be able to pay their bills.
And the junk bond market just has to return to at least as
good a condition as it was when Michael Milken headed off
to jail.
Then again, this credit contraction could turn out to be
much worse than it was in the early '90s.
More to come...I've got to run to catch another plane.
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 4, 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:
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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