Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 18 APRIL 2001
A Funny World
*** Oh Cisco! The router business isn't what it used
*** A screaming SELL! Stock option bankrupts...And
households go deeper into debt...
*** 'Brace yourself' for more ugly earnings
reports...Bubbles don't end by retracing 2 years'
growth...the 'Unloved' mutual fund strategy...
|*** Oh Cisco! The company warned Wall Street Monday|
night that sales were falling. But investors didn't
seem to mind - cutting the stock by only 3% in
*** "Almost one year ago, " explains Lynn Carpenter,
"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. On that same
day, General Motors, a 91-year stalwart of the Old
Economy, had a market cap of about $88.19 billion.
"General Motors' lower value, about 16% of Cisco's,
came despite the fact that GM had earnings per share
of $7.66 versus Cisco's $0.31 in 1999. Yet the P/E
ratio on GM's earnings of 6.54 was far below Cisco's
P/E of 194.23. GM's price/book ratio at the time was
2.55, Cisco's was 33.35. Across the board, GM's
fundamentals represented a better value than Cisco.
Furthermore, GM had assets of $274.73 billion on its
balance sheet compared to Cisco's $21.39 billion.
Yet, in terms of market capitalization, GM's 10
times as many assets in an accounting sense only
generated one-sixth as much value. A truly
"In February 2000, an analyst at Credit Suisse First
Boston had forecast that Cisco would become the
world's first company worth $1 trillion. Not quite.
It's been downhill ever since March 2000. The
company's market cap is now $100 billion...Cisco's
claim to fame these days has changed slightly.
Investors have lost more money on Cisco than on any
other stock in history!"
*** One particularly unfortunate soul, former Cisco
Systems engineer and erstwhile paper millionaire
Jeff Chou, owes the IRS $2.5 million. As reported by
AP, Mr. Chou triggered the new economy-sized tax
liability last year when he exercised his Cisco
stock options - in the process producing a $6.5
million paper profit that the IRS recognizes as
taxable income. Unfortunately, he didn't sell his
stock. (Everyone knew that Cisco was going higher,
right?) "There's no chance I can pay the government
back within my lifetime," moans Chou.
*** "This may be the fastest any industry of our
size has ever decelerated," John Chambers, Cisco's
chief, told the IHT yesterday.
*** But it was not a bad day on Wall Street. The Dow
rose 57 points. The Nasdaq managed to climb 13
points. 1857 stocks advanced on the NYSE, compared
to only 1163 that declined.
*** And while Cisco fell, competitor Juniper rose
5%. Hmmm... investors must see something I don't.
Cisco's shelves are groaning with unsold inventory.
Among the items is, for example, the Cisco AS5396
dial-in modem for ISP, with a list price of $44,000.
Yet, the item is available at www.usedrouter.com for
just $13,500. Likewise, you can get a 2610 Cisco
Router at a 31% discount and a WS-C2924-K-XL-EN
switch for 23% off. Juniper can't hope to maintain
its margins in the face of this flood of used and
unsold equipment. At 50 times earnings, Juniper is
*** The Nasdaq, down 68%, has given up nearly two
years' worth of growth. Is that all there is?
Investment Biker Jimmy Rogers comments: "No bubble
ends with 2-year lows. Bubbles end with 10-or
*** "Be warned: The other shoe is yet to drop,"
warns Friedburg's Commodity & Currency Comments...We
are referring to the fact that equity funds are
experiencing the first outflows in over two
years..."February 2001 showed an outflow of $3.1
billion," Friedburg writes, "compared with an inflow
of $53.6 billion in February 2000; and March 2001
showed a preliminary (based on the Trim Tabs weekly
survey) of $20.2 billion, compared with an inflow of
$39.3 billion in March 2000."
*** "Brace yourself," warns another news item, "over
the next several weeks hundreds of U.S. companies
will report profit and loss statements that are
going to look ugly." Second quarter earnings are
expected to be off about 7%...following an estimated
9% drop in the first quarter.
*** "The market has ignored earnings chicanery in
the short term, but over time negative fundamentals
erode stocks," Bill King notes. "Oil topped in 1980
and didn't bottom until April 1986. Mucho dinero was
lost, many reputations ruined, and renowned money
management firms disappeared over that period. In
1984, Barron's featured ex-Gov. John Connolly
bragging that he was buying oil properties for
pennies on the $. Two years later, just months
before the oil bottom, Connolly's personal
possessions were auctioned in a bankruptcy action.
[Friends took up a collection to buy 'Big John's'
saddle and give it back to him.]"
*** And while consumers continue to borrow and
spend, there is evidence that they are now borrowing
just to stay even. "Households are not increasing
their consumption nearly as quickly as they appear
to be increasing credit card debt," observes the
Dismal Scientist. "It is reasonable to surmise that
many households are taking down debt to make up for
income shortfalls." An accompanying chart shows
unemployment rates going up as credit card repayment
rates go down.
*** More from the Dismal Scientist: "Household
balance sheets have been deteriorating at a
quickening pace for some time now. The household
debt service burden, which is equal to the
percentage of disposable income devoted to interest
and principal payments on both consumer installment
and mortgage debt, rose to 14.3% in the fourth
quarter. This is up from an early 1990s low of
11.7%, and about even with its mid 1980s peak.
"So what households are getting into trouble? Survey
data from the Survey of Consumer Finances indicate
that debt burdens are highest among middle and lower
income households. Nearly one-fifth of households
who earned less than $50,000 in 1998 had debt
service burdens that were greater than 40%. This
compares to a consistent one-sixth of such
households found in previous surveys (see chart).
This also stands in striking contrast to households
earning over $50,000, for which only a consistent
less than one-twentieth labored under such high debt
*** "In 1997, Mohamed Mahathir, president of
Malaysia, wanted to try currency speculator George
Soros as a war criminal. Today, Malaysia, Thailand
and Singapore sit atop world trade again with the
world's largest current account surpluses - 13.6%,
9.1% and 25% of their GDPs, respectively. It is
eminently possible to export deflation and turn the
current account back to surplus as the Tigers have
shown. But can the United States do it? No. One
thing the United States cannot export is its stock
market." (see: Will The Asian Cure Work Here?)
*** The Nasdaq may be rising, but so are the number
of readers asking NY Post columnist, John Crudele,
how they can sue their broker. Crudele's column
answers some of the essential questions of our time
like, "I watch CNBC constantly and bought a number
of stocks because of recommendations I heard on that
station. Can I sue the pundits who recommended them?
How about the station?"
*** Remember Michael O'Higgins' "Dogs of the Dow"
strategy? The idea was to buy the five cheapest
stocks with the highest dividend yield on the Dow.
Now, Lynn Carpenter reports on Morningstar's
"Unloved" mutual fund strategy: "This strategy is
similar to the "Dogs of the Dow" strategy, but with
a twist. Instead of investing in the worst
performers over the past year, this strategy
involves investing every year in whatever three fund
categories attracted the least amount of money over
the previous 12 months. Morningstar says an
investment in the Unloved has beaten the average
equity fund in 75% of all three-year periods since
*** It is a holiday week for the children, the
second week of the Spring vacation. Last night we
went out and saw the film "Traffic" at a local
theatre. The movie describes a sequence of events in
the drug wars along the Tijuana/San Diego border,
reminding me of Henry Kissinger's comment on the
Iran/Iraq war: It's a pity both sides cannot lose.
*** And this from a Daily Reckoning reader
(referring to my admiration for Pierre's work on the
forge): "Blacksmithing can improve upon one's
Christianity, you know. Gazing into that intense
white hot fire can discourage a fellow from visiting
Hell in a hurry."
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A FUNNY WORLD
"It is a funny old world," said Maggie Thatcher in a
And it is getting funnier and older all the time.
What makes it especially amusing is the willingness
of people to swallow almost anything, if their
gullets are sufficiently lubricated by the popular
Thus do wars, collective myths, bubbles and mad
delusions spring up - for our entertainment. The
'drug war' is one such fantasy. We imagine brave and
true law enforcement officers battling it out to
protect the nation, much like Lincoln's conscripted
soldiers fighting at Gettysburg "to preserve the
"You guys are so stupid," (or words to that effect)
explains a drug dealer to the attending DEA agents,
"you think you are fighting a war against drugs. But
what you're really doing is helping the Juarez mob
against the Tijuana mob. Funny, isn't it? You're
working for a drug lord too."
Yes, dear reader, the drug enforcement apparatus is
a part of the drug industry. The federal government
squeezes $15 billion per year out of taxpayers and
spends the money helping to reduce supplies -
keeping the price margins on illegal drugs at least
as high as those on penny stocks.
High margins encourage other entrepreneurial efforts
- which result in new supply, and thus the funny old
world keeps turning around.
There are many ways to take a loss - either personal
or financial. You can buy stocks when everyone says
it's a good idea. Or you can buy drugs when everyone
says it's a bad one. Or, you can just watch
television all day.
But there is something magical and preposterous
about big ideas. People who are otherwise
intelligent and successful can hold ideas that make
absolutely no sense when reduced to specific
Warren Buffett's favorite cause is a campaign to
reduce the number of human beings. Which human would
he eliminate? I can think of a few - quite a few,
actually - without whom the world might be a better
place. But targeting specific individuals or entire
groups for extermination went out of fashion in
1945. Instead, we are not supposed to know or care
which future people are eliminated. And yet, some
must not exist - or the cause of population control
is a complete fool's errand.
As a big idea, "reducing population growth" has a
certain superficial appeal - like a high school
marching band in full dress uniform. But you can't
reduce population growth without eliminating
specific people. Who? The drummer? The tuba player?
The majorette? Would the world really be a better
place without them?
I don't know, dear reader. But it is not for me to
say. Just as it is not for me to say if someone else
should use drugs or watch television.
But Buffett can stop worrying.
"Where have all the children gone?" asks a headline
in the 'Courier International.' The article,
translated from 'Foreign Policy' magazine, describes
a world with falling birth rates. "Never in world
history has this ever happened before," say the
authors. Throughout the developed world people are
not having children. Fertility rates have fallen
below replacement levels in Europe...and are
dropping sharply in other countries too. If it were
not for immigration, populations would be falling.
Even more surprising, women in countries such as
Iran, Bangladesh and Mexico are having fewer
children. Neither illiteracy, religion, nor poverty
seems to stand in the way of the worldwide trend
towards fewer children. The population of these
places are still expanding, but much slower than
More to come...I have to catch a train...
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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.