*** Mr. Bear backs off...for now! Is this the big
bottom...or another little bottom?
*** America doesn't rig its markets, does it?
*** One of America's ugliest companies...foot and mouth
disease confirmed in France...Marc Rich... and more!
*** Mr. Bear must have had the same idea I had yesterday
...you don't want to spook the campers too much or they'll
pack up and go home.
*** So, he backed off. The Dow recovered 82 points. The
Nasdaq rallied 91.
*** The big winners yesterday were the Internets. The big
losers, wouldn't you know it, were gold mining companies.
*** Dell and Cisco were both up about 12% each. GE CEO Jack
Welch assured Wall Street that the company would meet its
earnings estimates and will continue to grow "in any
foreseeable economic scenario." You can recognize nonsense
when you see it, so I will not call attention to it. But
most investors, apparently, cannot. GE rose 7%. Sell the
rally.
*** And once again, investors think they can see the 'big
bottom' they've been looking for. But stocks are no
bargains.
*** "We can say with reasonable conviction that this could
well be 'a' bottom," writes Kevin Klombies, "but it isn't
likely 'the' bottom. As Barrons pointed out, Intel was
trading at 45 times earnings at $75 per share and was still
trading at 45 times earnings at $29 per share. That hardly
suggests that valuation levels are being wrung out of this
market." (see: Quick Profits From A Bear
Bounce, Anyone?)
*** "Usually, falling prices mean stocks are bargains,"
says a WSJ article. "But earnings are falling at an even
faster clip than prices lately - so price-earnings have
actually been going up. A week ago, the price-earnings
multiple of the Nasdaq was 121, according to Birinyi
Associates, below the current 154 figure, meaning that
investors are paying more for a dollar of earnings than
just a week ago. [Whoever wrote this sentence needs an
editor even more than I do.] Even if the money-losing
stocks are taken out of the Nasdaq calculation, the P/E
ratio is 35 - an historically high level."
*** But not all stocks have rising P/Es... I noticed a note
this morning in the Richmond press about a local company,
Ethyl, laying off 40 employees after profits fell 77% in
the last quarter. Keep an eye on Ethyl simply because it is
one of the 'ugliest' companies in America. Its main product
is a lead additive for gasoline that is being banned all
over the world. The stock has been hammered since 1998,
when it was selling for more than $8. You can buy it today
for less than $2 - a price only 2.2 times earnings.
*** Markets do not go straight down. After hitting a high
in 1966, for example, prices went up and down for years...
while inflation lowered their real values. Finally, the
market fell apart in 1973 and did not recover in real terms
until the early 1990s. Investors waited a quarter of a
century to get even.
*** Daily Reckoning readers will remember just 2 weeks ago
Lynn Carpenter forecast the Nasdaq would reach 1800 by
summer. Will she be right? We'll see... we'll see...
*** "The break below the important psychological benchmark
2000," says John Myers, "will prove troubling - very
troubling - for the journeyman investor and his 401(k). By
contrast the Canadian gold and precious metal index is at
the cusp of breaking long-term resistance and is
threatening to break through its 52-week high. The index,
which touched below 3500 last November, is now standing at
4700."
*** "The Japanese may do it...But America doesn't rig its
markets," writes John Crudele, rhetorically, in the NY
Post. Or does it? Crudele points to Peter Fisher, an
important member of the Federal government's Working Group
on Financial Markets (a.k.a. the Plunge Protection Team) as
the man who can save the day for Wall Street. How? "He and
the Bush administration need to inject money directly into
the market," advises Crudele. "They need to buy the heck
out of stock index futures contracts, which will give a
lift to the entire equities market." More below...
*** MSNBC surveyed the nation's reaction to the slump,
finding that "business leaders...say they are weathering
the storm." The storm they must be referring to is the one
that has not hit yet. "Consumers Still Spend" says the
International Herald Tribune headline. "The bear market in
equities so far has had surprisingly little impact on the
broader economy," the article says... "largely [reflecting]
the fact that the stock market weakness has been
concentrated in a technology sector that most analysts now
agree was vastly overvalued." Those analysts...always on
the job.
*** Yet, "we think it's virtually inconceivable that the
stock market's plunge won't lead to a significant weakening
in consumer spending," said an economist to the IHT
reporter.
*** Debt as a percentage of disposable income for the
American consumer has risen from just over 15% to nearly
22% since the last recession in the U.S. In part, the
increase is driven by aggressive marketing of credit cards
by companies actively engaged in 'adverse selection'.
"Capital One," for example, writes Eric Fry, "increased its
account base by over 40% last year, to 33.8 million
accounts. Providian did not trail far behind, boosting its
account base 31% last year, to 16.3 million accounts." But
as the economy slows payment delinquencies on these
accounts are on the rise. Look for these 'cyclicals' to be
the next round of companies to miss their numbers. (see: Cracks In The Plastic)
*** "Trading with pariah states, manipulating the market
for huge personal gain, hiding profits in a thicket of
offshore companies...He sees himself as a citizen of the
world, unencumbered by the laws of sovereign nations." Thus
does the IHT describe Marc Rich. Sounds like a decent
enough fellow; too bad he had to get tangled up with Bill
Clinton.
*** "Hoof and Mouth Disease in France!" screams today's
Figaro's headline. Frantic efforts to prevent an outbreak
in Europe failed as the first case was confirmed yesterday.
The US banned animal imports from the EU. The EU banned
imports from Argentina. Uh oh...I may have to smuggle my
pigs home under cover of night.
*** Daily Reckoning readers, while certainly not as astute
as your average IHT reporter, are proving themselves quite
adept at just the kind of pseudo-intellectualism I admire.
Currently, on the discussion board on the DR website,
readers are debating the proper way to conjugate Latin
verbs, an inquiry into the derivation of the symbols "Bear
and Bull" as pertains to stock market prejudices and a
correction regarding my use of a quote by Ecclesiasticus
Maximus... not exactly the kind of profitable stocks tips
most 'investors' are wont to find on these boards, but
entertaining all the same... http://www.dailyreckoning.com.
How does a small, almost never talked about group of
presidential advisors - appointed, not elected - guide the
White House in almost every major financial and economic
decision made? Better yet, how do their covert decisions
affect your money!?! You can't afford to miss the answer...
Click here and learn 6 Ways to Bullet-Proof Your Portfolio
Now - a must-have checklist for evaluating your holdings
BEFORE you get swamped by the market slowdown.
"The single hardest concept to get over to investors is
that there are tidal movements in the market. The bull tide
takes stocks from undervalue to overvalue. The bear tide
corrects the bull movement as it takes stocks back to
undervalue again.
Why can't people accept this? Probably because it too
simple, too basic, and too theoretical."
Richard Russell
Warren Buffett's success in the investment markets are
testament to the power of humility. Instead of trying to
predict the future, outsmart the market, or figure out
which new technology is going to be a hit in the years to
come...Buffett sticks to simple principles and 'immutable'
rules. He favors a bird in the hand over two in the bush,
for example.
Even so, Buffet errs: "Obviously, we can never precisely
predict the timing of cash flows in and out of a business
or their exact amount. We try, therefore, to keep our
estimates conservative and to focus on industries where
business surprises are unlikely to wreak havoc on owners.
Even so, we make many mistakes: I'm the fellow, remember,
who thought he understood the future economics of trading
stamps, textiles, shoes and second-tier department stores"
But Buffett's mistakes are small mistakes, correcting
relatively small exaggerations of his pride and prejudices.
Larger excesses require larger mistakes and grander
illusions that can puff up a bubble until its ready for its
pin.
Today's letter focuses on a huge blunder - an illusion
grand enough to correct not only the exaggerations of the
Nasdaq...but those of the Dow too...as well as the other
historic excesses in the U.S. economy.
Savings have almost disappeared in America. Since WWII, the
world has come to rely on America as the spender of last
resort. America does not sell enough goods and services
abroad to pay for the many things it imports. Instead, the
entire system rests on three things which have become
exaggerated to the point of becoming grotesque: the dollar,
debt and deficits.
As a result, "despite the illusion of prosperity over this
past decade, most American workers haven't shared in the
new wealth..." writes Stephen Gottdeiner in the Letters
page of Barron's. "But they have engaged in conspicuous
consumption of life's luxuries at the higher cost of
credit," he continues.
"Since 1990, average credit-card debt has risen from $3,000
to $8,000. Filings of bankruptcy have more than doubled.
Home refinancing may have only prolonged consumption and
inevitable termination of the debt cycle."
How could people have allowed themselves to sink into a bog
of debt - at the very time the economy was supposed to be
making everyone rich?
But that is the pernicious joke that Mr. Market plays:
"Speculation is most dangerous," says Warren Buffett, "when
it appears easiest." And it is the very moment that you
think you are getting rich quick that you are most likely
to go broke in a hurry.
"Speculation buys up, in a very practical way," wrote John
Kenneth Galbraith, "the intelligence of those involved."
Thus, as prices rise, people convince themselves that they
are geniuses for getting in on it. They turn their brains
to thinking of reasons why prices might rise even more. The
smarter they are, the more easily they can convince
themselves that there is a marvelous opportunity to get
rich just waiting for those investors smart enough to seize
it. They embrace an illusion... and thereby make the
mistake needed to bring things back in balance.
America's bubble market of the 1990s was made possible by a
single over-riding conceit: that America's new Information
Economy is different from every economy that ever came
before and doesn't need to follow the same old rules.
The illusion is so far-reaching that it has led Americans
to believe that they actually got richer over the last
decade.
But while Americans celebrated their "information economy"
and thought it was making them rich, they were actually
getting poorer - a fact which cannot be ignored forever.
"What is pushing the United State into a recession is an
unbalanced economy. There's simply too much debt
accumulated by working-class families, and insufficient
income growth to pay for it," Mr. Gottdeiner concluded.
Meanwhile, "corporate America has created the crisis of
overproduction. Thus, as the rate of profit falls, layoffs
will accelerate as well. Our economy will experience a
deflationary spiral that interest rate cuts can't cure.
Time has run out, not only for the debtor, but the creditor
as well."
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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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Last modified: April 01, 2001
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