*** Stocks could fall two-thirds...as Americans
scale back spending...the only woman in the French
Foreign Legion...and more!
*** Rally? What rally? Hardly had investors picked
up the phone to place their orders - eager to get
even (and perhaps get out) in the developing rally
- when the big techs stepped up to the microphones
and delivered more bad news.
*** Cisco dropped down to $15.75 - a loss of 80%
from its high, and the biggest single stock
disaster in history. Nortel lost $2.76 to end the
day at $14.
*** Chris Matthai of The Fleet Street Letter:
"What a difference a year makes! One year-ago this
week, on March 27, 2000, Cisco Systems, became the
most valuable company in the world, achieving a
market capitalization of $555.44 billion after
only 10 years as a publicly traded company. At the
time Cisco had a P/E ratio of 194.23. A month
earlier, an analyst at Credit Suisse First Boston
had forecast that Cisco would become the world's
first company worth $1 trillion. The sky was the
*** "Today Cisco can't find the floor. As of the
close March 27, 2001, Cisco has a market cap of
$131.9 billion....$423.5 billion worth of market
cap has disappeared in one year. That's quite a
haircut - and the market still isn't satisfied
that Cisco has reached a fair value yet. Cisco's
P/E is 44.21 and it is still overvalued relative
to its earnings growth."
*** Consumer sentiment might be brightening, but
the outlook for the big techs is as dark as a
dungeon. "Dot.com equipment floods the market"
says a headline from the Rocky Mountain Times. The
San Diego Union describes the former tech
millionaires as "Paper Paupers." "Stock options
used to be the coin of the realm," says the
article. Now they are mostly worthless.
*** But employees can call a lawyer as fast as a
shareholder. Qualcomm's option holders have a
launched a class-action lawsuit against the
company, charging that they were unfairly treated
when their options declined.
*** The Dow fell 162 points yesterday - with
almost twice as many stocks declining as
advancing. The Nasdaq suffered a 118-point drop.
*** But "Count on the Fed" says a report from
Morgan Stanley. "Don't Fight the Fed" say the
pros. And yet, fighting the Fed may be paying off.
The Fed has cut rates by 150 basis points so far
this year. But the stock market is down,
nevertheless, about 13% (as measured by the
*** As Ed Yardeni notes, that leaves 500 basis
points for the Fed to work with. Look for more
rate cuts - and further declines in the stock
*** "The greatest stock mania of all time will be
fully retraced," writes Robert Prechter, "probably
by 2004. The question is whether that move will
continue immediately or whether the Dow will make
a new high first. We shouldn't have to wait long
for an answer."
*** Mr. Market did not answer the question
conclusively yesterday, but his body language
suggested he was not intending to register a new
high anytime soon.
*** "How deep could the fall of the world economy
turn out to be?" asks Martin Wolf in the Financial
Times. He responds by noting that 1) stocks are
still overvalued, and 2) private sector debt has
never been greater. Each of these conditions is
unstable. And, together, they could resolve
themselves in a very unpleasant way. First, stocks
may go down further. "Because of overshooting,"
writes Wolf, "a loss of 2/3rds from valuations
would be within the bounds of experience."
*** A 2/3rd drop in the stock market would mean a
loss of about...uh...$6 trillion more, or more
than $10 trillion in total. This would certainly
make the consumer debt burden impossible to
sustain. In the United States, the private sector
runs a financial deficit (spending more than it
takes in) of 6%. Normally, the figure is a
positive 2%. In Japan, to make an odious
comparison, people run a surplus of 10% to 13%. In
the last 3 years, the savings rate in Japan has
been an astounding 19% of GDP.
*** How will Americans react to a declining stock
market? "Over the past half-century," continues
the Financial Times article, "there have been only
2 previous examples of significant declines, the
most recent being in 1974. It is probable that
households will respond to this by cutting
borrowing and spending."
*** What would this mean? If people merely went
back to their habits from the early 90s - before
the Great Bubble years - it would cut 10% from net
demand in the U.S. "The impact would be
devastating," says Wolf.
*** Despite Monday's boost in consumer confidence
readings, evidence is mounting that consumers are
cutting back. For example, "Americans Scale Back
Spending on Vacations" says a Bloomberg headline.
Only 41% of U.S. households plan to take a
vacation in the next 6 months - the lowest number
*** Coal traded at $22 a ton a year ago. Today, a
ton of coal will cost you more than $40. Arch
Coal, an ugly company a year ago, rose 4%
yesterday - to $29.
*** Gold lost $1.50 yesterday. It is down $12 for
the year. The dollar is up 6%. The euro dropped
below 89 cents yesterday. What gives with the
dollar? More below...
*** "Fifty years ago, the United States was
producing half the world's oil... now we can't
even produce half our own," writes John Myers.
"America, with only 4% of the world's population,
consumes 25% of the world's oil. Almost half of
that comes from OPEC countries. Each day, the
average American consumes more than a gallon of
Arab oil. Yet, the Mid-East is no more stable than
it was a decade ago." (see: America's Trojan Horse)
*** Whatever happened to Susan Travers, I
wondered? The remarkable woman was the only female
ever to become a member of the French Foreign
More than a year ago, I wrote about the battle of
Bir Hakeim. It was not a huge encounter - but it
was important. In May of 1942, Rommel was in North
Africa - rolling up all the British troops in his
way. But at Bir Hakeim, in the desert, a small
force of French troops under the command of
Colonel Pierre Koenig blocked Rommel's route.
France was an occupied, defeated country. It was
not completely clear that the French would fight
at all. What's more, the French foreign legion had
French officers, but most of the soldiers - and
especially non-commissioned officers - were
And Susan Travers? She was a young English woman
who had joined the Red Cross and was sent for duty
with DeGaulle's forces in North Africa. As things
developed, she became Col. Koenig's driver...and,
in the way the French do things, his mistress.
The later detail I learned just yesterday, in Le
Figaro, which interviewed Ms. Travers - now 90
years old and living in a nursing home near Paris.
The Germans attacked with planes, artillery,
infantry, tanks - everything they could bring to
bear. But Koenig and his 5,500 troops held their
ground. Surrounded, pounded day and night, the
French situation looked hopeless.
But when the Germans demanded a capitulation,
Koenig replied: "We are not here to surrender."
His troops never gave up an inch of ground.
Finally, after 15 days, their food, water and
ammunition was exhausted. The British radioed
orders to Koenig to retreat. But they were
surrounded...Still, during the night, Koenig
organized a surprise withdrawal - racing through
German lines while getting shot at from all sides.
More than 4,000 of his troops and most of his
vital equipment managed to escape. When the dust
finally settled the Germans had lost 3 times as
many men as the French.
The battle greatly lifted the morale of the
French...and it held up the Germans for two weeks
- giving the British 8th Army the time it needed to
prepare for the critical battle of El Alamein.
Ms. Travers and Col. Koenig continued their
relationship until Madame Koenig arrived in North
Africa. Later, Travers was inducted into the
Legion, in recognition of her extraordinary
contributions during the battle.
Bill Bonner was right. For months he's told us
stocks would head nowhere but south. He also
says the carnage is far from over. To make
money in this market you need to be on the short
side. That means jumping on share prices as they
plummet by selling short the most vulnerable,
overvalued companies. To learn how to capitalize
on these ripening opportunities please click here...
"Why doesn't the dollar falter?" asks a DR reader,
reminding me that I've been expecting it for more
than a year.
So far at least, Mr. Market has been unwilling to
go along with my forecast of a lower dollar and a
higher price for gold. Instead, as reported above,
gold has fallen $12 since January 1st...and the
dollar has gone up 6%.
There are two sides to every argument, of course.
To the extent that reason, logic, and facts are at
play - they are almost all on my side. The dollar
is overvalued by almost any measure you can think
of. The U.S. is running huge trade deficits.
Equities are falling. The economy may be on the
verge of a recession. The Fed is cutting rates.
And the money supply is growing at a rate that
should scare investors away, not attract them.
But arguing with Mr. Market is like arguing with
your wife. Once his mind is made up, it is
pointless to dispute the issue. You won't convince
him of anything, and you will get nothing but
misery for your trouble.
Still, "the strong dollar," pleaded Philip Bowring
in Tuesday's International Herald Tribune, "is the
latest 'irrational exuberance' produced by the
market. It is perverse and dangerous. It will
prolong U.S. problems and hurt the rest of the
world just when it needs stimulus to offset the
The high U.S. dollar makes no sense, Bowring
believes: "The yen has fallen 15% from a year ago,
the Korean won and Thai baht by 17% and the
Australian dollar by a stunning 23%. The story is
the same whether or not economies are technology
dependent, have trade surpluses or are politically
"This is perverse. U.S. interest rates are falling
and will probably continue to fall at least as
fast as those elsewhere, even though U.S.
inflation is almost the highest among member
countries of the OECD and is well above that in
most of Asia. The U.S. current account deficit, at
more than $300 billion, is unlikely to decline
significantly without a sustained U.S. slowdown."
Also, the U.S. is increasing its money supply
faster than almost anywhere else - at about 3 or 4
times the rate of GDP increase. Back in the 1980s,
this sort of increase would have panicked
investors out of dollars. But today, faith in
managed currencies is so strong that instead of
tarring and feathering Mr. Greenspan for
destroying the currency, investors have praised
him - and placed their bids for more U.S. dollar
assets. In fact, in the last few weeks, Mr.
Greenspan has been criticized for not cutting
rates fast enough. The great fear among economists
and columnists - such as Mr. Dionne, whom I quoted
here yesterday - is that people begin to consider
their dollars worthy of saving, rather than trying
to unload them immediately.
Compare the yen to the dollar: Japan has a zero
interest rate, but the yen is sold. Private debt
has been going down, and the growth of the money
supply is negligible. The country has huge savings,
low inflation, and very favorable trade surpluses.
This is not the case only in Japan - but
throughout Asia. Still, Mr. Market chooses the
The strong dollar helps boost up stock prices in
the U.S., but it hurts U.S. businesses in the long
run by making American products more expensive on
foreign markets. U.S. corporate profits fall as
foreign imports rise - hurting domestic suppliers
in the U.S. as well as exporters. American
manufacturers - the source of the 'things' in which
real wealth is actually measured - suffer.
This is part of the explanation for the
extraordinary figures I reported to you yesterday.
Despite the biggest boom in U.S. history, the mean
income of Massachusetts residents declined 10%
And, as reported earlier, last year the net worth
of the average U.S. household declined for the
first time since 1955.
How is this possible? An overvalued dollar
encouraged a run-up in debt and asset prices -
while actually undermining the ability of U.S.
workers to earn money. Throughout the '90s, people
borrowed money, spent much of it on foreign-made
products...and comforted themselves with the
knowledge that their stocks and real estate were
going up. Now that stocks are going down, they
find themselves poorer, not richer.
A fall in the dollar would be a good thing. It
would discourage consumption of imported items. It
would knock down stock and bond prices. It would
give U.S. manufacturers a boost on world markets.
And it would probably bring about a renewed
interest in savings on the part of American
But Mr. Market may not care.
"The answer is quite simple," says the
aforementioned DR reader. "Perception. The US
economy is [seen as] the world's most outstanding
economy: the most efficient, the most flexible,
and the most dynamic. What's more, it is led by
"THE FORCE is with the US economy..."
For now, dear reader, but not necessarily forever.
Mr. Market - resistant to logic, the facts,
special pleading, and abject begging -
nevertheless sometimes changes his mind.
Your reporter, sometimes right, sometimes wrong,
and always in doubt...
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May 4th, 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
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way to "inflation free" growth was finally revealed
for what it is - a complete and total sham. Now,
the smart money has moved on...click here to
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