Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 16 APRIL 2001
Tides of Fortune
*** Is the Big Rally still on? Hard to say...
*** The Cisco Kids warn Wall Street - sales
off...plenty of spare parts...
*** Gurus are bullish...but consumers, brokers, and
bankers are feeling squeezed...a child's funeral in
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*** The Big Rally may not be dead, but it had a
little trouble getting back to work after the long
*** The Dow climbed only 31 points. And the Nasdaq
fell 51 points.
*** "The stock market had always been closed on Good
Friday," observes investment advisor Richard G.
Leader, "until one day, business was so good, with
the Dow Jones averages setting successive all time
highs, that the Solons of Wall Street decreed that
the market would remain open. That year was 1929,
and trading has not occured on a Good Friday since."
*** Leader, who remains skeptical despite last
week's impressive action, quotes George Santayana:
"Skepticism, like chastity, should not be
relinquished too readily."
*** Douglas Cliggott, J.P. Morgan Securities Inc.'s
chief investment strategist, remains the firm's chief
investment skeptic. "Much optimism still remains in
large-cap tech stock prices,'' he said. "The growth
rates these stocks would need to justify their
prices are somewhere between very optimistic and
*** One of the stocks Mr. Cliggot may have had in
mind is Cisco. The company warned last night that
its sales are down 30% and that it will lay off
8,500 workers. What's more, the company will write
off $2.5 billion in excess inventory.
*** Another might be Juniper Networks - a
competitor, making even more of the routers and
other devices of which Cisco has too many. Earnings
are expected to more than double this year. But the
stock has fallen from 244 to 50. Good company maybe.
But still a bad price. Even after an 80% collapse,
it's still selling at 50 times earnings.
*** Intel is expected to make 15 cents a share
versus 36 cents last year. "Dividends have never
been a problem for tech investors," says John Myers.
"They loved the way profits were plowed into
research and development that in turn spurred more
growth and outlandishly high stock prices. Slowing
economic growth? No problem. Inflation rising? Again
no problem. But an earnings crunch? Big problem.
Without earnings there isn't growth and without
growth there is nothing special about technology."
*** 68% of Wall Street strategists are bullish - the
highest level ever recorded. Most seem convinced
that "the worst is behind us." Or, "the bad news is
all out." They think they've seen the bottom and are
urging clients to get back into the market at
*** "Never in my memory (which goes back 50 years)
have I seen such crass ignorance, arrogance and
stupidity coming from Wall Street's so-called
gurus," says Richard Russell. More from Russell
*** Bonds sold off again on Tuesday. Is the bond
market trying to tell us something? Inflation ahead?
Or, is the dollar on its way down?
*** Three dollar per gallon gasoline is looking
increasingly possible this summer, according to
International Strategy & Investment. The lumber
price is also bouncing off of five-year lows.
*** The 'dollar bubble' continued yesterday. The
euro was forced below 89 cents. But gold rose $3.20.
*** Grantsinvestor.com's Andy Kashdan writes, "Yes,
the dollar is strong. Yes, it has side-stepped
numerous pitfalls. No, we are not persuaded of its
invincibility. King Dollar still reigns - for now.
Despite a yawning current account deficit, a slowing
economy, the plunging stock market and lower interest
rates, the sturdy greenback has managed to keep its
sure-footedness. But even the nimble ballet master
Rudolf Nureyev stumbled on the way to the light
switch once in a while."
*** "The bottom line for the dollar," says David
Tice, "is that 'credit excesses' have essentially
allowed the currency to benefit from the bubble
economy. In just 10 quarters the current account
deficit has ballooned from 2 1/2% of GDP to 4 1/2%.
The U.S. may have been a safe haven in the past, but
there will come a time when the dollar eventually
breaks - and our foreign brethren will be reluctant
to send their hard-earned savings to the U.S." (see:
*** Debt, debt, debt. U.S. non-financial corporate
debt has reached 46% of GDP - its highest level
ever. Consumer installment debt is up to 21.7% of
disposable income - which might also be the highest
level ever. The average household has a credit card
balance of $5,800 - an amount that would take 30
years to pay off if you made only the minimum
payments. Debt counselors say they see clients with
as much as $60,000 in credit card debt.
*** And the International Herald Tribune warns that
the big telecom players alone are almost $700
billion in debt. Analysts believe they may default
on as much as $100 billion worth of junk bonds.
*** Belts are being tightened all over the world.
"Consumers are finally beginning to feel the pain,"
says a Bloomberg headline. "The Economy has actually
begun losing jobs...and household wealth has fallen
dramatically," the article explains.
*** "Across the world, consumer sentiment is
flagging," explains the Financial Times.
*** "The disappearance of $5 trillion in equity
value has to impact someone at some time," writes
Kevin Klombies. "The financial sector makes money in
many ways but if the combination of reduction of
fees for assets under management, reduced
commissions, curtailment of activity and reduced
margin value - hence loans - were to cost this
industry a percentage...the hit would come close to
*** Even the big banks are thinning out their soup a
bit. A memo circulating at Credit Suisse First
Boston warns employees not to spend over $10,000
when going out to dinner to celebrate a deal.
*** And stockbrokers are feeling their own version
of misery now that stocks are selling less quickly
than they used to. Lee Munson, a former broker with
Bear Stearns, explained his $350,000 annual earnings
to a reporter with the NY Observer: "There was only
one thing you could do other than being drug dealer
to make that much money: selling stock."
*** Drugs, sex and stocks have always been high
margin businesses. But Yahoo announced that it was
not getting into hardcore porn after all.
*** Morgan Stanley downgrades the REIT sector due to
"mounting anecdotal evidence." An example: Jim
Sullivan of Greenstreet Advisors says, "The thing
that's really spooked us is the big blue chip tech
companies who were out looking for space and are now
canceling those requirements - announcing layoffs
for the first time."
*** A recent study entitled "Boys will be Boys,"
published in the Quarterly Journal of Economics by
Terrance Odean, found that when it comes to day
trading, the weaker sex excels. Based on a study of
35,000 accounts at a discount brokerage firm between
1991 and 1997, Odean found that the women in his
study earned a risk-adjusted return and 1.4 percent
greater than the men. Single women produced even
better results, outperforming single men by 2.3
*** Day-trading facilitator Ameritrade announced a
fresh slew of layoffs and a reduced advertising
*** Some families seem to have more than their share
of misery. I have mentioned Madame de Thierry to
you, dear reader. The poor woman was widowed before
she was 40 - with six small children and a huge farm
(in debt) to run.
One of the children was so severely brain damaged
that she could neither speak, nor see, nor move. "A
vegetable" said her brother. But the girl lived for
15 years in that condition. The family cannot
help but remember her today - as Madame de Thierry's
granddaughter is interred at the Lathus cemetery.
The baby was born with severe problems and died 8
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TIDES OF FORTUNE
"There is a tide in the affairs of men,
Which, taken at the flood, leads on to fortune:
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures."
from Julius Caesar,
"We're still in the early part of Stage 2 [of a bear
market]," says Dow theorist Richard Russell,
interviewed in this week's Barron's.
There are three stages to a bear market, according
to Dow Theory as elaborated by Robert Rhea:
"A primary bear market is the long downward movement
interrupted by important rallies. It is caused by
various economic ills and does not terminate until
stock prices have thoroughly discounted the worst
that is apt to occur. There are three principal
phases of a bear market. The first represents the
abandonment of the hopes upon which stocks were
purchased at inflated prices. The second reflects
selling due to decreased business and earnings. The
third is caused by distress selling of sound
securities, regardless of their values, by those who
must find a cash market for at least a portion of
I keep an eye on Dow Theory because it attempts to
tell us the essential thing: are stocks moving up or
'A rising tide raises all boats,' goes the
"It isn't the waves that make you or break you in
this business" explains Russell, "it's the great
ocean tide of the market.
I cannot recall the numbers, but Mark Hulbert's two
decades of research confirmed that the allocation
decision was much more important to investors than
individual stock selection. If an investor had been
fully invested in stocks throughout the '80s and
'90s, his portfolio would probably have risen about
1,000%. If, instead, he had followed the advice of
certain strategists and remained in gold during the
entire period, his coins and bars would be worth
about 75% less today than they were in 1980.
Technology, the Federal Reserve, and tax policy may
influence the market from time to time, temporarily
damming up the supply of credit or flooding the
market with cash. In this way, an expansion may be
extended or retarded beyond its natural limits. But
sooner or later the tides of greed and fear cannot
be held back.
We watch the tides here at the Daily Reckoning. We
look for things that seem particularly loony,
especially foolish, or tellingly exaggerated.
Ordinary behavior tells us nothing; it is only at
the extremes that we gain an advantage. Dow Theory
tries to do the same thing, but with more precision.
Richard Russell has been studying the market,
through the lens of Dow Theory, since 1958. "The
long-term track record of this technician is
impressive at major turning points," writes Barron's
Peter Du Bois. "He nailed the exact bottom in
December 1974, and has been rather prescient ever
But market timing fell from favor during the long
bull market of '82-2000. Investors came to believe
that all they had to do was "buy and hold for the
long run." Stocks may go down in the short-term,
investors told themselves, but there is no long
Now that the Nasdaq has fallen 68% in 12 months,
however, investors are taking a renewed interest in
what the market might do next. Russell says the
subscriptions to his Dow Theory Letters are pouring
People want to know when to jump back into the
Neither Russell nor your humble editor have much
faith in being able to predict where the market is
going. The secret to successful investing - a lesson
learned at great expense in both time and money - is
that, rather than attempt to foresee the future, you
are better off trying to figure out the essential
rules...and then sticking with them.
Don't take big losses. "When in doubt, get out," he
says. It is very difficult to recover from big
losses - both financially and psychologically.
Understand the power of compounding. Get rich,
little by little over time, without taking big
"Learn some history," Russell advises. "Learn what
overpriced stocks look like. Learn about bull and
Ignore Wall Street gurus. They are "amateurs,"
Russell believes, who "only care about your money."
"Value is the key to Dow Theory," Russell explains.
"Even though popular indexes have fallen sharply
over the past year, stocks are still very expensive
by historical standards.
"Studies have shown a relationship between current
price/earnings ratios and dividend yields and the
likely future performance of equities. With the P/E
for the S&P Index now at a lofty 23 and dividends
below 2%, stocks aren't priced to even match the
return on T-bills over the next 10 years.
"I believe we've entered a period that will play out
like 1966-74, with a series of mini-bull and mini-
bear swings. Over this span, the market on balance
will go nowhere for years, then collapse in the
third or 'give-up' stage. The final phase hasn't
arrived yet, and likely won't for some time. In
other words, we're nowhere near the bottom of this
How low will the market go?
"At other major bear-market bottoms," Russell
continues, "the Industrials have tended to sell at
10 times earnings and yield 6%." Yields have dropped
as low as 10% - in 1932. But the other bottoms of
the 20th century - 1949, 1974, 1982 - have been
graced with P/Es of about 6%. In order to get 6%
dividends out of Wall Street's current earnings, the
Dow would have to fall below 4,000.
There is no guarantee current earnings will hold up
for very long. Earnings tend to fall in a recession
- which would force the Dow down even lower in order
to reach the 6% yield. Russell thinks the Dow could
drop as low as 2500 before finally bottoming out.
When the Dow falls to 2,500, with a dividend yield
of 6%, it will be time to buy stocks. But not
because we think we know that a bottom has been
reached and stocks will head up. Instead, we will
buy stocks because they will be very cheap.
Your correspondent, watching the tides...
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.