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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 30 APRIL 2001 

 

Today:  Dow 2500

*** Is the Pain Over? Is the world a nice place,
after all?

*** Bond Vigilantes Ride Again!

*** Earnings down...inflation ahead?...Cisco has a
problem...California dreamin'...and more...

*** "Is the Pain Over?" asks this week's Barron's.
The financial media seems to think so. The GDP is
still thought to be increasing. Stocks are rallying.
What more could you ask for?

*** Maybe the Fed's rate cuts and aggressive money
creation is paying off. The Dow rose 117 points on
Friday. The Nasdaq ended the day up 40 points. Twice
as many stocks hit new highs as new lows.

*** But bonds fell. Yields on 10-year notes rose to
5.31%. And the gap between the yield on a regular
bond and one indexed against inflation - the TIPS -
has widened to over 2%. Bond buyers are worried
about inflation.

*** The bond vigilantes seem to be getting back
together and saddling up. You remember the bond
vigilantes? They were supposed to prevent the Fed
from inflating the currency, by dumping bonds
whenever Fed policies seemed too loose.

*** The Fed has been creating new money and credit
at a record pace - desperately (and recklessly)
trying to avoid a further sell-off on Wall Street.
Until a month or so ago, bonds paid no attention.
But now the spoil sports seem to be getting ready
for action.

*** "S&P 500 earnings should rise 4% in 2001 and
about 14% in 2002," says a Morgan Stanley report.

*** Are they dreaming? Business Week surveyed 122
'bellwether' companies and found that profits had
fallen 19% in the first quarter - even though sales
rose 14%.

*** Says BW: "The second quarter is likely to be
just as humbling, and analysts widely predict third
quarter profits will be down too." The BW article
tells us that S&P's own economists project an 18%
first quarter decline for the 500 companies the
group tracks...which follows a 5% drop in the last
quarter of last year. They expect another 10%
decline in the second quarter.

*** The Nasdaq is still down 60% from its high of
last year. Investors continue to look to the "long
run" to get even. But "the long-term prospect for
equity in general," wrote Warren Buffett recently,
"is far from exciting."

*** Buffett is in the news after Berkshire Hathaway
held its annual meeting in Omaha over the weekend.
Berkshire shares have risen 12.5% since last March -
which the NY TIMES describes as "Vindication for
Buffett and 'Value.'"

*** "There is now $540 billion in cash in circulation,"
writes John Myers, "double the outstanding cash of
1990. With monetary pumps full bore we hinge on the
break between inflation and deflation. The Great
Depression was so bad that America has never had another.
Does that make today's Fed smarter than the Fed of 1929?
No. But they are more aggressive." (see: Speculation Kills)

*** Also taking place over the weekend, G-7 leaders
got together. U.S. Treasury Secretary was reported
to be "optimistic," but IMF chief Horst Koehler had
this comment: "I don't think we are in a very nice
world."

*** The world may not be a very nice one, but it is
the only one we have. Besides, it is very nice to
central bankers - who have rarely been allowed to go
hungry.

*** My invitation to the G-7 meeting must have
gotten lost in the mail. So, I don't know all that
happened...but my guess is that the most intriguing
question was not even asked: how long will it take
for before the dollar self-destructs?

*** The dollar rose slightly on Friday. And the
price of gold fell. But gold stocks continued their
stealth advance.

*** What gives? How far can stocks rally in the face
of rising long term interest rates and falling
earnings? I don't know, dear reader, but as Keynes
put it, "The market can stay irrational longer than
you can remain solvent."

*** "[Cisco's] 4.1 billion inventory of unsold -
and, it would now appear, almost completely
unsalable - routers and what-have-you," writes
Christopher Byron, "not only represents 17 percent
of Cisco's tangible net worth, it also amounts to a
Mont Blanc-sized indictment of Mr. Chambers' ability
to manage his company...in little more than a year,
Cisco's stockholders have now become stuck-holders,
with nearly a third of their gains having been wiped
out, even as the company's growth rate has
stagnated."

*** Also from Business Week: California "is being
battered by a tech crash and an energy crisis.
That's not all. Growth is imperiled by failing
schools, soaring costs, and economic troubles in
Asia. Will it drag down the U.S. economy?"

*** Likewise grantsinvestor.com's Mary Levai
contemplates the imperiled California economy. She
writes, "California is first in the good life, first
in nouvelle cuisine, first in whimsical style. And
now, seizing the trend-setting reins once again,
California finds itself at the head of a less-
revered line: the unemployment claims line." She
continues, "Though at 12.8%, California's total
output comprises less of the nation's GDP than it
did in the early 1990s, bad news in the Golden State
can only be bad news for the country at large."

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DOW 2500

Over the last few years, no introduction of James K.
Glassman would have been complete without mentioning
that he co-authored a bull market best-seller: "Dow
36,000."

But we all do things from time to time that we would
like to forget. Even curriculum vitae get rewritten
as Wall Street fashions change. In today's
International Herald Tribune, a large article,
"James K. Glassman's World of Investing," merely
notes that the author is a "fellow at the American
Enterprise Institute." No mention is made of "Dow
36,000"...or Dow 26,000...or even Dow 16,000.

The Dow may someday hit 36,000. Adjusted for
inflation, that may be more...or less...than today's
Dow. A chart of the Dow over the last 70 years shows
a clear trend - the Dow has been going up. But that
trendline also suggests a possible low point for
this bear-market cycle: 2,500 - a long way from
36,000.

In the IHT article, Mr. Glassman turns his attention
away from preternatural equity growth to the joys of
diversification. He believes he has found a way to
spread out your investment risk by buying a single
preternatural stock - General Electric.

"If you could only buy one stock to keep for the
next 20 years, what would it be?" he asks. "General
Electric Co., no doubt about it."

I have doubts. And I write today to suggest that Mr.
Glassman may soon want to omit this IHT article from
his resume, too.

GE is a great company, Glassman tells us. It is now
the largest-capitalization stock of the world's
largest stock market - worth almost half a trillion
dollars, far more than Exxon at $307 billion.

Glassman: "For the fourth straight year, GE was
named Fortune's 'most admired company in America'
and for the third straight year was recognized by
the Financial Times as the 'world's most respected
company.' Business Week ranked GE's board of
directors No. 1, and the company was first among
Forbes' Super 100 companies."

GE has made investors a lot of money, no doubt about
that. It has produced annual returns of 28% for the
10 years 1990-2000. $10,000 invested in GE back in
1990 would have grown to $125,000 at that rate.

GE is active in many different industries, both old
and new - power systems, aircraft engines,
locomotives, plastics, television, lighting and
appliances. Jack Welch says the company is going to
make a fortune on the Internet - largely just by
cutting costs. This year alone, $1.6 billion is the
projected savings from "digitizing work processes"
and ordering supplies via web-based auctions. This
may turn out to be correct, dear reader, but if you
are given a choice between $1.6 billion and GE's
real savings from information technology this
year...my advice is to take the cash.

And don't worry about an economic slowdown, says
Glassman, "it could help by weakening competitors."
(No explanation is offered...as though none were
necessary...for why GE would not be weakened, too.)

But who can argue with success? As if GE needed
further recognition, Internet Week gave the company
its "business of the year" award.

GE has been paying dividends since 1899 and is not
likely to stop soon. Value Line Investment Survey
gives it an A+ rating for financial strength and a
perfect score for earnings predictability. Earnings
have risen 13.5% for the last five years...and Value
Line predicts that they will increase at a 14% rate
for the next five.

GE has not exactly been an undiscovered secret in
the investment world. Au contraire, investors have
flocked to it with the enthusiasm of a pederast to a
playground.

Shares rose to $60 last summer - up from just $12
(adjusted for splits) in '96. Since then, it has
fallen, and trades today at $49.95. Even at this
more modest price, GE has a P/E about 50% higher
than the rest of the S&P 500. Does GE...with its
340,000 employees and hundreds of operations in
dozens of industries worldwide...deserve to be
priced 50% higher than the rest of the S&P 500...and
more than 100% higher than that the S&P's average
P/E over the last 50 years? "Ask me something
tougher," Glassman challenges.

Okay. Why would anyone in his right mind buy a stock
so favorably viewed for so long that every possible
potential buyer already owns it? What happens to a
company so widely admired that its reputation
couldn't be better? How do you make money buying
what everyone else already owns? To whom will you
sell your shares?

Far from being a 'one decision' investment success
in the years ahead, GE is likely to be a singular
disaster. In a slump, GE's earnings will go down
with everyone else's. Sooner or later the magic will
wear off; people will realize that GE executives eat
the same breakfast cereal as the rest of us. The
combination of lower earnings and lower P/E should
send GE's shares back to $12 - for a capital loss of
$300 billion or so.

Your correspondent, on the train to London...

Bill Bonner

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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 30, 2001

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