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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 25 APRIL 2001 

 

Today:  Asian Values

*** 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 
day.

*** 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 
cuts irrelevant.

*** 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, 
inflate."

*** 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 
president.

*** 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 
Daily Reckonings...

*** 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." 
(http://www.realassets.com)

*** "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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ASIAN VALUES

"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 
competition.

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 
opportunities:

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 
times earnings.

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 
industry."

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 
companies? 

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 
year. 

Just a thought...

Bill Bonner

For investment ideas and insights consistent with those you 
read in The Daily Reckoning, please visit our website: 

http://www.dailyreckoning.com

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About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and 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 up—not 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 ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication 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 25, 2001

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