Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 25 APRIL 2001
*** The Great Rally lasted for all of 48 hours...rate cuts
seem to have less and less power...
*** Nasdaq falls for 3rd day in a row...Dow down too...
It was a nice little rally, while it lasted.
*** Who will rescue this market? Greenspan? Consumers?
Businesses? Using your haid...
|*** The Great Rally sparked by Greenspan's surprise 50 bps |
rate cut lasted for just 48 hours. The Nasdaq fell again
yesterday - its third drop in as many days. Down 42 for the
*** The Dow also fell - 76 points.
*** Of course, there are still 450 basis points Mr.
Greenspan can try. But it could be that there is something
different about this slowdown - something that makes rate
*** Alan Abelson of Barron's: "The bubble has burst and
it'll take a lot more than ever a series of pale imitations
like last week's eruption to replicate it. And money, no
matter how cheap and abundant, isn't inducement enough to
get companies groaning beneath an awesome burden of
overcapacity to pile on more of the stuff."
*** "Who cares if it's cheaper to buy another server when
you already have tens of thousands [of them]," a strategist
at Salomon Smith Barney elaborated. "Should we really
believe [consumers and businesses] will be willing to make
big expenditures just because Alan Greenspan want them to?"
adds John Crudele of the N.Y. Post.
*** Consumers are broke, Crudele explains. They can't spend
more, even if they wanted to.
*** And businesses? Earnings are going down...and there is
no reason to think they'll turn around any time soon.
Pundits continue to describe a "second half recovery." But
why? Earnings might just as well go down further in the
second half - and stay down for years. Why? Because both
consumers and businesses need time to work themselves out
of debt - before they can begin spending again.
*** Even if the Fed pushes down the rate at which banks
borrow, that doesn't necessarily mean you or I will be able
to borrow at lower rates. One of the perverse curiosities
of the last few weeks has been rising yields on long-term
bonds. While the Fed is dropping the fed funds rate,
investors are demanding higher yields - forcing up long-
term interest rates. Bond yields rose again yesterday - to
5.18% on a 10-year T-note.
*** What are investors afraid of? A falling dollar, maybe.
Or inflation. "The U.S. Consumer Price Index (CPI) rose
3.5% in February," writes James Grant in Forbes, "one of
the fastest rates in nine years..." Grant quotes columnist
Robert Novak whose advice was unequivocal: The Fed, he
wrote, "must add liquidity to the economy - in blunt terms,
*** Yet, "on the evidence of the late boom," writes Grant
in the NYTimes, "the Fed for many years set the rate too
low. A comprehensive measure of investment - including
residential construction - has been soaring. Last year, it
amounted to more than 18% of gross domestic product, the
highest percentage since the late 1970s."
*** "Throughout the 1990s, fixed investment in the US
economy surged from just over 12% to around 19% of GDP,"
writes the Fleet Street Letter's Robert Miller from our
London office. "Any recovery in the US stock market
engineered by rate cuts should be viewed with suspicion."
(see: Market Puppetry = Tangled Mess)
*** The dollar, so far, has held steady. Yesterday, for
example, it rose very slightly against the euro. The dollar
has no intrinsic value. And its extrinsic value is being
undermined... by those who are supposed to be protecting it
- rather like a young woman entrusted to the care of a
relative who turns out to be a pimp.
*** But a quick look at today's headlines helps explain why
the dollar retains its appearance of virtue: "Argentina's
Economic Plight Deepens," says the International Herald
Tribune. "Brazil's Real Hits New Low," says the Financial
Times. "Chilean peso at record low," records another FT
headline. In a world of easy virtue, a slip once in a while
hardly gets noticed.
*** And gold, whose virtue is unblemished? Gold rose a mere
40 cents yesterday to $264 per ounce - a price the metal
has visited off and on ever since Jimmy Carter was
*** Besides all of these considerations, most stocks are
not cheap...and even those that are cheap may become
cheaper still before the market finally arches its back and
sticks out its Big Bottom. About which, more in future
*** Amazon is still in business. In fact, the e-tailer
announced last night that its results were better than
expected. It only lost 21 cents per share. Recently in the
single digits, Amazon is now trading at a dizzying $15.
David Dreman, in Forbes, illustrates how the shares could
be worth even more. Making some optimistic growth estimates
(ignoring the fact that Amazon's core business - selling
books & CDs - only increased 2% over the last 12
months)...and discounting the future income stream by 15% -
he comes to a possible value of $17.89 per share. Not a lot
of upside for a company that may run out of cash before the
year is over.
*** Yesterday, I asked Dan Ferris if he was selling his coal
stocks: "Consol closed yesterday at 31 times earnings," he replied.
"The surprise is that coal will become more, not less,
widely used in the next 31 years. I saw the WSJ article. I
like Merrill Lynch's bearish comments on the coal stocks.
They tell me there's plenty of room on the upside. Coal is
so easy not to like and we can't live without it...the
perfect investment." Maybe so. But here at the Daily
Reckoning, we stick to the essentials. We buy low and sell
high. Coal stocks are high.
*** Our energy man, John Myers reports: "We have electronic
gizmos for every part of our lives. Our houses are stuffed
with TVs, computers - electric toothbrushes. But the
proliferation of power-operated devices only tells part of
the story. Industry and commerce burn up more than half the
nation's power... and transportation accounts for more than
a quarter more. That's why companies like Ballard may have
such a great future. The company has made a nice bounce
from its 52-week low of $32 set just a few weeks ago."
*** "How about Marjorie Scardino?" writes a friend who
keeps an eye on The Mighty Fallen, "She's head of the
Pearson group which owns the Financial Times and other
esteemed journals? Her bold, and expensive, Internet gambit
at Pearson lost 113 million pounds last year, more than
erasing the company's 81 million pound profit. Once dubbed
"the City's favorite pin-up girl," The Spectator quips,
"Scardino faces a year in which her pin-up pictures will be
widely used as City dart-boards."
*** The kids went back to school on Monday, after a two-
week spring break. "I don't want to go back to school,"
Henry, 10, said to me on Sunday. "I think I already know
enough." Henry can read and write in two languages. He
knows basic math. Neither Mark Twain, Abraham Lincoln,
William Shakespeare (if you believe he was the merchant
from Stratford upon Avon), or Jesus Christ had much more
formal education than that. Maybe Henry's right.
*** Years ago, I read about an uneducated Black man who had
made a fortune in banking in the Deep South. Asked how it
was possible, he replied: "When you hain't got no
education, you got to use your haid."
*** But as Bertrand Russell observed, "most men would
rather die than think. Many do."
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"Your first hour in Hong Kong brings home to you forcefully
the immense vigour of Asia and the investment opportunities
it provides," writes my friend Martin Spring. "The new
airport and its high-speed rail link to the city centre are
models of modern efficiency in both design and operation.
The container yards stretch for kilometres, construction
sites are alive with cranes and helmeted workers, financial
services operate with the slick professionalism for which the
former British colony is famous."
Construction begets over-construction just as booms beget
bubbles. Asia has had more than its share of both. But
economic growth is relative as well as cyclical. Coming
from Europe or America, the pace of activity in Asia is so
strong that even down seems like up.
"Asian Economies to Slow Through 2001," warns an Associated
Press headline from last week. The news item refers to a
report from the Asian Development Bank estimating growth
rates for the region.
The headline might be alarming, but if you continue reading
you discover that "growth in the industrialized Asian
economies - Hong Kong, South Korea, Singapore and Taiwan -
is forecast to drop from 8.4% in 2000 to 4.3% this year
before rising to 5.6% in 2002. China's expansion will slow
from 8% in 2000 to 7.3% this year but will again grow by
7.5% in 2002."
The cause of the growth slowdown is, of course, the slump
in the U.S. - the major overseas buyer for Asian exports.
Both India and China, however, are relatively immune. They
have huge internal markets and very cheap labor pools - so
they depend less on exports and may be even helped by price
Still, booms and busts are a fact of life throughout the
region. Lynn Carpenter recalls the last bust, begun in 1997
when Thailand suddenly devalued its currency.
"The Asian Tigers crumbled one after another within a matter
of day. Currencies fell brutally in Malaysia, Thailand and
Singapore. Their stock markets crashed. Capital pulled out."
And then, the boom:
"The turnaround was miraculous. In 1997, Mohammed Mahatir,
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 GDP's respectively). Only Switzerland with a 9.1%
current account surplus is doing as well as these Tigers."
(see: Will The Asian Cure Work Here?)
Is it time to buy in Asia?
Martin Spring reports a conversation with Robert Conlon,
chief investment officer in Hong Kong for Investec Asset
Management: "Even in a global recession, Asia will continue
to gain market share. When multinationals look to cut
costs, Asia is the top prospect for outsourcing supplies."
"Growth in China, driven by a growing middle class wanting
consumer goods, will mitigate some of the problems we see
emanating from the US," added Sandra Lee, head of strategic
planning at J P Morgan's JF Funds.
"One sign that international investors expect Far East
equities to fall less in a global bear market," Martin
continues, "is that in the first quarter the Emerging Asia
index only fell 4 per cent in dollar terms, over a period
when the US fell 13 per cent, Euroland 12 per cent and the
UK 10 per cent."
"While I am not wildly enthusiastic about Asia's economic
prospects in the near term," says old Asia hand and DR Blue
Team member Marc Faber, (who is unlikely to be confused
with Henry Blodget), "I feel that, compared to Europe, the
U.S. Latin America and Japan, the Asian region, including
China and India, has at least moderate appeal."
"In Asia," Marc continues, "corporate earnings and stock
markets are by historical standards still very depressed
(not Hong Kong, however), and have, since 1990, grossly
under-performed the European and American stock markets. In
addition many stocks have a higher dividend yield than
local interest rates, a condition that is rare in the
developed stocks markets of the West.... [A] shift of money
away from the US towards Asia may already have begun and is
supported by the fact that, year-to-date, the Asian
emerging markets are up, whereas the S&P 500 is down. Thus,
some kind of decoupling seems to have taken place, and I
strongly recommend our readers to shift part of their
equities exposure from the U.S. to Asia."
China's B shares - those designated for foreign investors -
have been the one of the best performing investments in the
world; up 138% last year. But the B shares, at about 22
times earnings, are no cheaper than the U.S. Dow. On the
other hand, in Shanghai as in New York, there are
One petro-chemical company, Sinopec, traded at a P/E of
only 5 recently...but has even more recently risen to 10.
What's the story at Sinopec? I don't know. But at least the
price is ugly enough to make it worth another look.
Another company, Global Bio-chem, makes corn-refined
products in China and trades on the Hong Kong exchange.
Sales and profits are growing at 20% and 10% respectively,
but the stock traded recently for only 4 times earnings.
Phoenixtec is a small Taiwanese company that makes
uninterruptible power systems (UPS). It has 40% of both the
Taiwan and China UPS markets and also trades at about 10
Readers may recall that once upon a time, the U.S. was the
dominant manufacturer of electrical appliances and
electronic gear. But if you check your TV set, your
cellphone or your CD player today you are likely to find
that they were made in Asia, rather than Trenton, N.J.
Could the information technology industry be the next to
make the move to Asia? "I have no doubt," Faber elaborates,
"that the continuous flow of foreign direct investments
into China, and the transfer of technology as well as know-
how in all sectors of the economy will transform China into
a high-tech manufacturing powerhouse. Thus, with the help
of Mr. Greenspan's easy monetary policies, over-capacities
and cut-throat competition in the high-tech sector are
assured into the foreseeable future... It's not
unreasonable to assume that the day of America's high-tech
hegemony are numbered, and that both India and China will
become fierce competitors in the electronics and software
Could it be, dear reader, that the best way to protect
yourself from a bear market in America, as well as take
advantage of the next phase, whatever it is, of the
information revolution, is to buy Asian technology
Kingdee International Software Group is a Hong Kong
company, the leading developer of software products in
China. It has a huge domestic market...not to mention
the rest of the world. Sales and profits are doubling each
Just a thought...
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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.