Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 24 APRIL 2001
*** The end of the rally...or just a pause?
*** Fed 'pushing on a string?' Or dropping a
lifeline to banks?
*** Amazon up! To $16! Oracle down....Techs at 166
times earnings...still plenty of room on the
downside...racy ads...and more...
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*** Yesterday, stocks gave back some of last week's
gains. The Dow was off 47 points...the Nasdaq
*** Will we get a rerun of what happened in January
- when, after the Fed's last surprise rate cut, the
market soared for few days...and then fell further?
Or is this just a pause in a major rally...or even a
new bull market?
*** The cover of the Economist has a picture of a
lifeguard with the head of Alan Greenspan.
"Greenspan to the Rescue" declares the headline.
Faith in the fed chairman, in stocks, and the
benevolence of the universe still dominates the
*** "For those of you worrying that the Fed is
pushing on a string," writes economist Ed Yardeni,
"repeat the following mantra: 'There are still 450
basis points between the fed funds rate and zero.'"
*** "Pushing on a string" is a metaphor used by
economists to describe what happens when a central
bank lowers rates, but people still fail to borrow.
Japan's central bank, for example, has been 'pushing
on a string' for years. In fact, it's pushed the
string all the way to zero interest rates - and
still people do not borrow in Japan.
*** Will Americans also fail to borrow? I don't
know. But the existence of 450 basis points between
the fed funds rate and zero is not likely to make
much of a difference. People have already borrowed
too much. Debt is their problem, not the absence of
*** SmartMoney.com provides an insight into why the
nation's banking cartel decided to cut rates last
week: "The fourth rate cut in as many months will
certainly help lenders in one critical area:
managing the rising tide of bad loans on their
balance sheets. Lower rates not only encourage
people to borrow - they also reduce the rates at
which banks borrow money. Naturally, bankers don't
pass the entire savings on to their customers.
Instead, they keep some of the difference to cushion
against future loan losses and thus bolster
earnings. And if lower interest rates spur more
business activity, they should help prop up some
shaky commercial borrowers, too - making it less
likely that they'll default on their bank loans in
the first place. That adds up to an improving profit
picture and, perhaps, higher prices for bank stocks
down the road.
"And not a moment too soon. A sharp rise in
commercial-loan defaults is the main reason first-
quarter profits for many of the nation's biggest
banks were down anywhere from 8% to 20% on a year-
This article included a chart showing that non-
performing loans at Bank of America increased 69% in
the first quarter of this year, compared to the same
quarter last year. For Bank One the figure was 129%.
*** Among the shaky credits held by big banks is a
slug of telecom debt. The telecom industry borrowed
$255 billion in '98...another $326 billion in
'99...and a whopping $655 billion last year. As
mentioned yesterday, the industry has been so over-
built that it uses only 2.5% of its capacity.
*** Lipper reports that $15.4 billion was taken out
of stock funds in March. This was the 2nd month in a
row of net withdrawals, something that has not
happened since the 1990 Gulf War.
*** But looking at the first quarter as a whole,
investors put more money into equity funds than they
took out. January was a very good month for the
funds. And the most recent 2 weeks of April have
also been positive - investors put $5.2 billion more
into stock funds than they took out.
*** Amazon doubled in the last 2 weeks. It rose
again yesterday after an analyst upgraded his
recommendation for the company. He set a target
price of $20.
*** Oracle, on the other hand, was downgraded by a
Lehman analyst, from "strong buy" to "buy," and fell
10%. "Investors are beginning to think about
fundamentals such as price-to-earnings multiples,"
explained TheStreet.com article.
*** Better late than never. The fundamentals should
have scared investors away from the techs two years
ago. But even after a 70% decline, the tech
fundamentals are still pretty scary. The hundred
companies in Merrill Lynch's Tech Index, for
example, are priced at 166 times trailing earnings.
*** The only thing that could make sense of such
high prices would be spectacular growth rates -
which is precisely the thing for which the Techs are
famous. But Gretchen Morgenson, in the NY TIMES,
reports the results of a 20-year study of 1800 tech
companies. Only half were able to maintain even 30%
annual compound growth in revenue for any 3 of the
20 year period. Only 28% were able to keep it up for
5 years. And only 7% could do so for 10 years. New
technology is rarely new enough for long enough to
justify 100 + P/E ratios.
*** Tech investors, of course, are looking beyond
the current valley of economic decline to the lush
pastures of the future. They might consider this:
General Motors was the hottest new tech company of
1929. But when sales collapsed following the crash
they did not recover for the next 20 years.
*** "US Gas Prices Soar Higher" says an AP headline.
Prices have risen 13 cents per gallon in the last
two weeks - the largest increase in 50 years.
*** King Coal has been a merry old soul. "The Dow
Jones Coal Index is up an amazing 279% from a year
ago," Barron's reports. Arch Coal has risen
sevenfold from its low of last May. But Arch is now
selling at 60 times 2001 earnings estimates. It is
time to sell.
*** "Now that Microsoft's stock has fallen to about
half its peak," writes the New York Times, "Seattle
is abuzz with other stories, those of Microsoft
employees deep in debt and filing for bankruptcy.
Mike Fitzgerald, the trustee overseeing Chapter 13
bankruptcy filings by individuals in the western
district of Washington, estimated that he had recently
seen 25 cases filed by Microsoft workers related to
*** "International investors seem incapable of ending
their love affair with the dollar," the Economist
reports. "America's economy has slowed sharply this
year, yet its currency has risen to a 15-year high
in trade-weighted terms."
*** The fashion ads in Paris have gotten so racy that
even the French find them shocking. One ad shows a
woman - naked except for a pair of underpants - on
all fours next to a sheep. "I think I need a
sweater" she says. Another shows a woman, completely
nude, in the throes of some sort of ecstasy...an ad
for a perfume. With this sort of advertising and the
dollar at a near-record high - it is a great time to
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Whining, kvetching, recriminations and blame. The
same investors who complimented themselves for being
the architects of their own good fortune, now look
for someone to blame when their fortunes get
They blame stockbrokers, the Bush Administration,
Alan Greenspan, or the companies they bought -
anybody but themselves.
"In more recent months," reports the Washington
Post, "as the economy has stalled and the stock
market has tumbled, letters have poured in to the
Fed from individuals complaining bitterly that the
central bank's actions over the past two years have
ruined their retirements."
What happened to the New Man...homo digitalis? You
remember him. He was the guy who "got it." Who
bought Amazon when Henry Blodget said it was going
to $400...and stayed fully invested because Abby
Cohen said the market was going higher this year. He
knew that stocks would go up and down, but he was
"in it for the long run." He would never have to
take a loss - because he would never sell!
The New Man was thought to be an improvement on the
older model - he understood the transforming grace
of the Information Era... and he was supposed to be
willing to put aside his own selfish ambitions in
favor of the limitless potential of new technology.
He put his money at the service of companies such as
Amazon, CMGI, and Cisco - not because he expected a
decent return on investment (which was as unlikely
as a tort lawyer in heaven)...but because he knew
that these companies were building a better world
and that somehow it would pay off - if not in this
life, perhaps in the next...
Remember New Man, James Cramer? The self-proclaimed
market sage wrote in a January 28, 2000 column, "It
drives me crazy...The professionals got it wrong,
not the amateurs. Any methodology that
systematically excludes the Qualcomms and the
Yahoo!s while embracing the Goodyears and the
Washington Mutuals is a failed methodology...It
"Since James Cramer wrote that scathing critique of
traditional valuation analysis," observed James
Stack's Investech, "the stock of Goodyear is
unchanged and Washington Mutual is up over 100%,
while Qualcomm and Yahoo are down 52% and 89%
Stack also pokes a little fun at SmartMoney for its
March 2000 "Ultimate Tech Portfolio." As one might
expect the results have not been pretty. Names like
Ariba, JDS Uniphase and Lucent Technologies adorned
the promising list of tech darlings that have
produced sickeningly severe losses - many greater
Do the ex-New Men and New Women take their losses
with dignity and grace? No, they sue!
Who would have thought one year ago that the
quintessential tech-stock icon, Cisco Systems, would
become a defendant in a class-action shareholder
Alas believers in the perfectibility of man must
contend with recent evidence. "When the markets go
south, litigation goes up," said Frank Penski, a
partner at the law firm of Nixon Peabody.
The evidence will show, dear reader, that the Post-
New Era man is not much different from the homo
sapiens with which we were so familiar before the
Bubble - that is, grasping, self-centered and
foolish. These words describe not only the
perpetrators of fraud and chicanery - but the
victims and their lawyers, too.
"There's no question that as the market falls there
are more lawsuits," continued Mr. Penski. Why?
"Unhappy stockholders don't instigate many of these
lawsuits at all," explains an article on
Internet.com. "Law firms themselves keep track of
technology companies, watching public filings for
discrepancies between positive 'forward-looking' and
bad stock performance. And when they find the
examples, attorneys close in."
"The make the claim on behalf of shareholders and
then they go out and find them," Mr. Penski added.
"These claims are really more generated by the
Lawyers have little trouble finding targets. For
example, a class-action suit was filed after a 23-
year-old sent out a false press release regarding
Emulex's financial condition. The young man made
almost $250,000 trading the stock as a result.
Attorneys sued Bloomberg and Internet Wire for
passing along the bogus information.
Razorfish, Inc. was the subject of a class action
lawsuit two days after it announced it would miss
4th quarter estimates. The lawyers filing the suit
claimed that company officials made "false and
misleading statements" about the company's
The same charge was leveled against MarchFirst -
whose share price is down 95% from its high of
Meanwhile, enterprising lawyers for the government
are getting into the act too. The U.S. Attorney's
Office in Silicon Valley has become "very
aggressive" in finding people to charge with
securities fraud. They are "trying to make a name
for themselves," explains a local lawyer.
One case involves a couple of Cisco employees who
found a way to transfer shares in the company to
their personal Merrill Lynch accounts. But Merrill
Lynch tipped off Cisco and the two were found out.
In another case, a pair of executives is "accused of
figuring out how many more sales were necessary
to meet the company's quarterly projections and then
simply making them up," says a report in the
International Herald Tribune.
But the mother of all ambulance chasers, Peter
Angelos, has launched a different sort of attack -
not against the tech companies directly, but against
their products. He is taking on the telecom industry
as he once did the silicon breast implanters. He
made so much money on those bogus cases that he was
able to buy the Baltimore Orioles and now hopes for
a similar outcome.
The case against the cell phone makers is so puerile
and opportunistic that even the Washington Post is
"Here is a case in which a trial lawyer goes after
an industry that produces gadgets people love and
that is central to the high-tech future. He goes
after it claiming not that the industry definitely
has caused harm but that it may do so...The lawyer
seeks to punish the industry by assembling millions
of unconsulted consumers into a vast 'class' and
demanding a remedy that makes no sense."
No proof has ever been offered that cell phones
cause health problems. In fact, a Danish study
involving 420,000 users over a 13 year period found
no higher rates of cancer than in the rest of the
population. And the remedy proposed by Angelos - in
addition to billions in attorneys' fees - is to
force consumers to buy headsets along with their
What a disappointment the New Man turned out to be.
Stripped of his Gilded Age rhetoric and his Bubble
profits, he is just like all the rest of us -
a greedy parvenu...and a sore loser.
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.