*** Bad news from Intel and Cisco -- both the Dow
and the Nasdaq retreat...
*** Unemployment numbers stay about the same...will
Greenspan still cut rates next week?
*** Yet another rally has exhausted itself. The Big
Bottom investors thought they had spotted early last
week turned out to be a false bottom. So the bulls are
changing their metaphors: "We're in the eighth inning
of declines," said a broker on Friday.
*** More likely we're in about the third inning. But
we won't know until the game is over and a new game
begins.
*** Friday, the Dow fell 213 points further from Abby
Cohen's target for the year, ending five straight
sessions of growth. The Nasdaq dropped 115.
*** Breadth was negative on both the NYSE and Nasdaq,
by 2 to 1 on the former and 3 to 1 on the latter.
*** Reasons for the turnaround? Two things happened
to worry investors. Intel and Cisco warned investors
that business might not be as good as they had hoped.
Intel said revenues were off 25%. And Cisco said that
the problems it was having may last more than two
quarters. Cisco fell 10%; Intel lost 11%.
*** Neither did the unemployment numbers bring joy
to Wall Street. Unemployment for the month of
February registered 4.2% -- just as it did the
month before. But investors were hoping for something
worse. They're afraid that if the ranks of the jobless
do not swell, Alan Greenspan might take a break from
destroying the currency. They're still counting on
another rate cut next week -- and will be deeply
disappointed if they don't get it.
*** IBM slid seven points on Friday. GE declined 5%.
No two companies pose a greater threat to investors'
money -- since so much of it is locked up in these
two overpriced shares.
*** I mentioned last week that investors had lost more
money on Cisco than any stock in history. A reader
challenged me: "Didn't the money just change hands,"
he asked. "Wasn't there a seller for every buyer?"
*** Alas, most of the people who lose money when a
stock goes down are neither buyers nor sellers. At
any given moment, only a tiny handful of shares are
actually in play. This tiny handful determines the
market value of all the shares. In an extreme case,
the buyers disappear all together. A stock with no bid
is worthless -- no matter how many millions of shares
remain on the sidelines.
*** Many of the people who lost money as the Big Techs
tumbled never even held the shares. Instead, they had
options to buy at fixed prices. For example, employees
at Yahoo! were given millions of dollars worth of
options. But as the stock price fell from $205 a year
ago...to $17 Friday...80% to 85% of those options
have become worthless.
*** Gold was the star performer on Friday. It rose
$5.40. Newmont shares are now worth more than Yahoo!
shares...and almost as much as those of Cisco.
*** While the United States is probably in the early
innings of its bear market/economic slump...the end of
the game may be near in Japan. "Japan's Economy: The
Nightmare Chain Reaction," warns the cover of a
leading business magazine. The country is "approaching
a state of collapse" says the nation's finance minister.
After 11 years of trying to spend its way out of a
slump -- building dams, airports and highways --
the Japanese government has piled up debt worthy of
an American consumer...equal to 134% of GDP. A crisis
seems at hand. Perhaps sensing that a crisis might
mark the bottom of the ninth, a Japanese economist
quoted in the Financial Times says, "A crisis
would be good! Good, good, good, good, good!"
*** And he may be right. But a crisis in Japan may be
bad for the United States. Japanese corporations, banks
and other institutions own billions of dollars worth of
U.S. stocks and bonds. Whether they choose to sell
them or are forced to sell them, the effect will be
the same: bad, bad, bad, bad, bad.
*** But enough of this gloomy talk! Let's turn to
something more important -- the epizootic that is
threatening all of Europe:
*** "It's too late," Mr. Deshais announced on
Saturday morning. He was standing in the courtyard
discussing the panic that has gripped farmers all over
the continent. "Mr. Bonner," continued the gardener,
"we missed our opportunity. Not only have the markets
for live animals been closed, last week they forbade you
from transporting animals from one farm to another."
*** "Yes," added Pierre, always ready to complain about
farmers' lot, "and they have already arrested a guy in
Normandy...and they're going to put him in prison."
"What did he do?" I asked.
"He just picked up a few sheep from one farm and took
them to his neighbor," Pierre explained.
"So we can forget about buying our pigs...for now,"
continued Mr. Deshais, a twinkle in his eye in anticipation
of the destruction of Western civilization.
Later that day, I drove over to the farm coop to buy some
supplies. In order to enter the packing lot, I was obliged
to drive through a bath of straw soaked in disinfectant.
Then, at the entrance to the store, a large pan of water
(which I presume contained some form of antibiotic) was
placed. Customers had to walk through the water in
order to enter the store.
In a nearby town, hundreds of sheep were killed when
inspectors discovered that they had recently been imported
from England. Around the farm, two concentric rings were
drawn -- one at 1 kilometer...the other 3 kilometers out.
The whole area has been placed under quarantine...disinfected
...and will be observed for several weeks. If no evidence
of the bacteria is found, they will disinfect the area
again and then unlock the quarantine.
Still, no confirmed case of the disease has been found in
France!
*** The church choir is revving up for Easter. We practice
every Saturday evening. The organist can't play. Neither
the sopranos nor the altos can sing. And we practice in
an unheated stone church built in the 12th century --
a place so cold and tomblike that I feel we should be
singing funeral dirges.
But the acoustics are good. And Pierre (a different Pierre)
and I, the only two bass voices, amuse ourselves -- singing
as though we were members of a paratroop glee club with a
weekend pass to Paris.
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Thank God for big mistakes! Just when things seem to be
getting completely out of balance, along comes some colossal
blunder to put them back in order.
I described last week how Hitler's Third Reich, advertised
in the late '30s, to last 1,000 years, was out of business
by 1945. The short life span of the Nazi empire is generally
attributed to the monumentally stupid blunders of the Fuhrer
himself.
Instead of exterminating the British at Dunkirk, he let
them escape. Then, instead of destroying the RAF, he tried
to destroy London. Then, instead of giving Rommel the forces
he needed to close the Suez Canal to the English, he attacked
Russia.
By the time of the German invasion in 1941, attacking Russia
was already recognized as a proven method of military suicide.
It worked for the Swedes, and then for the French. "Russia
is an easy place to get into," wrote a military historian
after Napoleon's disastrous campaign, "but it is a hard
place to get out of."
Just to make sure that the incompetent Soviet Army could
destroy him, Hitler committed the number one mistake of
military commanders -- he divided his army. Then he
committed the second dumbest mistake of a military
commander: he kept switching his objectives.
I give you this brief review, dear reader, not merely to
recite what we discussed last week -- but to provide a
common point of departure. The question raised on Friday
was whether these "mistakes" were the causes of Hitler's
defeat...or whether they were merely the means by which it
was achieved.
And lest you think I am wandering way beyond my beat, I will
phrase the question in financial terms: Did Henry Blodget
just make a "mistake" when he failed to notice that
investors might want companies that couldshow a profit?
Or was he merely an accomplice to Mother Nature, an
instrument by which the fools were separated from their
money?
Philosophers among our Daily Reckoning readers may recognize
the question as a familiar one: Does man control his own
destiny...or not? For the purpose of this letter, I will take
the latter view.
The question, at some level, is absurd. How could the course of
human history be the product of anything other than the action
of man himself? And yet people seem to make such obvious and
moronic errors that it seems as if they were driven to it by
some instinct of self-destruction -- like lemmings
periodically exterminating themselves in a march off the cliffs.
What's more, this diabolical instinct seems to report for duty
at the very moment when the future seems the brightest -- that
is, when it ismost needed! Just when men are most proud, most
confident, most expansive in their ambitions and hopes...that
is when they make the most lunkheaded judgments.
And who but Mother Nature herself would design such a world?
Men are encouraged to apply all their strength, will and
intelligence to a given situation. They see it yield before
their efforts, thereby flattering their pretensions. And thus
puffed up do they strut their way towards a humiliating
destruction.
Charts of various manic markets, presented by Marc Faber in
his excellent "Boom, Doom and Gloom Report," all share the
same pattern. Prices go up on the left side of the chart and
down on the right. They tend to go up and down at more or less
the same angle...and the lines tend to end up more or less where
they began. Even as the lines near their peak, people continue
to buy -- even though it is obvious that they are committing a
kind of financial suicide.
What's more, the buyers actually feel good about it -- they
are convinced that they are smarter than everyone else and
that they are going to get rich.
"At one point," the International Herald Tribune quotes a
man named Tim Martin, "I was one of those Nasdaq dreamers
who thought I was literally a few months away from being a
multimillionaire. I saw the pot at the end of the rainbow
and then right before my eyes it was obliterated."
"How Smart People Make Big Money Mistakes" is a book by
Gary Belsky. It describes the many mistakes that an investor
can make if he were eager to ruin himself. One of the most
common is the unwillingness to take a loss. Instead of taking
a small loss, investors will take even greater risks to
"get even."
A study by Terrance Odean, for example, found that investors
were 70% more likely to sell winning stocks than losing ones.
In a declining market, holding losing stocks is an invitation
to disaster. But disaster seems to be what investors want.
They had considered themselves geniuses a few months earlier
...now, they must ride the market down to the point where they
feel like total fools.
Describing the situation following the bull market of the
1920s, the IHT comments: "Investors eventually looked back
and wondered whether they had been party to a massive self-
delusion and misallocation of capital."
Hitler's campaign against France was brilliant. The Fuhrer
considered himself a genius for following von Manstien's plan.
Then, at the beginning of the Russian campaign, the inept
Soviet Army made him look like a genius again. But it was
only a matter of months before the Germans were on the
defensive. The sensible route was clear -- withdraw and
sue for peace. But Hitler would not sell his losing
positions. Instead, he chose the maniacally suicidal
route: he forbade his generals from giving up an inch
of ground.
A year ago, Yahoo!, Cisco and Intel looked unstoppable.
But what mistakes did these companies make? Maybe none.
And yet, they too have been reduced as if by forces
completely beyond their control.
The manias of human history -- empires, enterprises and
markets -- are all corrected by time and "mistakes."
But so are the non-manias...even the everyday
exaggerations of fear, anger, pride and self-satisfaction.
Finally, life itself is corrected too. By the ultimate
correction -- death. Exeunt Omnes.
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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.
Copyright � 1998-2002 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
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Tulips and Bears LLC
Last modified: April 01, 2001
Published By Tulips and Bears
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