Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 3 MAY 2001
*** Tech is still rallying...
*** Why so much excess inventory? What went wrong?
*** The most expensive bottom ever...Japanese
consumers ready to spend?...nuclear power makes a
|*** Yesterday's close makes 4 in a row to the upside|
for the Nasdaq - up 52 points on the day. Big Tech
*** Its coattails weren't quite long enough to pull
the Dow into positive territory, however. The index
shed 21 points. The Nasdaq is 60% above its low but
still 56% below its all-time high.
*** Gold, meanwhile, continues to inch its way
forward - up an even $1 for the day..
*** Even so, gold is still only $13 above its lowest
point in the last 22 years, $252 set in August 1999.
Bear markets can last a very long time, dear reader.
Many thousands of gold investors have gone to their
graves while waiting for the price to come back. So
too did many thousands of stock investors, after
1929, find their final reward in heaven or hell long
before their stocks recovered a quarter of a century
*** Everyone knows that tech companies have more
widgets in their warehouses than they can sell. But
how did they get there? Tech companies were supposed
to use information-age systems to eliminate excess
inventories...What went wrong? USA Today writes,
"Companies ranging from Cisco Systems to EMC to PMC
Sierra were so gung-ho going into 2001, they ramped
up for what they expected to be a banner year. How
could they resist? After all, Cisco CEO John
Chambers just in August told investors: 'The second
Industrial Revolution is just beginning.'"
*** A companion story in USA Today strikes an
uncharacteristically skeptical tone. Writer Adam
Shell proclaims, "As nice as the resurgence in
technology stocks might seem, the fact is that it
has boosted many [formerly] leading tech stocks back
to the kinds of valuations that got them in trouble
in the first place."
*** Naming names, Shell notes the recent PE multiple
expansion of a few highly esteemed S&P 500
constituents. "Software behemoth Microsoft's PE has
risen to 39 from 29. Chip leader Intel's multiple
ballooned to 55 from 33. PC giant Dell Computer's
multiple is up to 33 from 28."
*** "This is the most expensive 'bottom' ever,"
James Chanos, one of the nation's most enduring
(ergo, successful) short-sellers, told investors at
Grant's Spring Conference in Manhattan, reported to
us by our man on the scene, GrantsInvestor.com's
Eric Fry. Chanos pointed out that on the day of the
April 4th bottom - heralded retroactively by the
market seers on CNBC - the S&P 500 sold for 22 times
earnings, 5 1/2 times book value and in terms of the
index's negligible dividend yield Chanos simply
said, "Never mind."
*** Today, the Ante-bottom S&P 500 finds itself
selling for an even more distended 28 times
earnings. As for the NASDAQ's PE - never mind.
*** No bargains at the gas pump either. "Barely
May...barely driving season...barely warm in the
U.S...and yet, gasoline prices are soaring to new
contract highs," notes Weldon's Money Monitor. "The
precious pink liquid is now above last year's
wholesale price highs."
*** While no single reason accounts for the price
spike, Weldon points out, "Refinery outages continue
to plague the US market, and is causing major
summer-supply anxiety [although "SSA Syndrome" is
not yet officially recognized by the American
Psychiatric Association], as nobody wants to be
caught without product heading into May."
*** The only investors almost as thoroughly fatigued
as gold bulls are the bulls on Japanese stocks. For
more than a decade, too many false dawns have
produced nothing more than continuing darkness. But
now, with the ascendancy of Japan's new prime
minister, Junichiro Koizumi, hope radiates from the
horizon once more in the "Land of the Rising Sun."
*** "Junichiro Koizumi is different," the Far
Eastern Economic Review pronounces. "He doesn't
mince his words. He wants to do away with the
factions that divide his powerful political party.
He wears gray suits. He doesn't die his salt-and-
pepper hair jet-black. He has a fire in his belly.
None of these things will make him a great prime
minister, but they all set him apart from the three
candidates he defeated to lead the ruling Liberal
Democratic Party and, by extension, Japan."
*** "Now Koizumi has to deliver and...there is no
shortage of issues demanding attention," the Review
writes. "[P]ublic debt is approaching 130 percent of
GDP and bad debts continue to clog the banks'
*** But the Review paints a hopeful portrait
nonetheless, quoting political science professor,
Kuniko Inoguchi, of Tokyo's Sophia University who
says, "The public is quite ready to embrace
him...The public has finally come to embrace this
idea of reform and support strong reform
initiatives." But will the public start spending?
"Japan is a mirror image of America," observed James
Grant at yesterday's conference, "in that it has had
10 years of low consumption, everybody's in cash
instead of stocks...Nobody buys a golf shirt
*** On why this might be a good time to buy a golf
shirt in the U.S.A. Grant noted, "The Fed is cutting
interest rates in the face of the rising inflation
rate. This is something new. We think that great
things lie ahead for the CPI," he quipped.
*** "I do think inflation has picked up a bit,"
commented Fed Governor Robert Perry, "I think you
could make a case that inflation has accelerated. Is
that a major concern for the future? I don't think
so." The Fed isn't worried about inflation. Another
good reason to buy your golf shirt now. It will be
more expensive later.
*** "Now comes the aftermath of the credit boom,"
writes my friend John Pugsley, chairman of The Sovereign
Society. "In the past year, household assets have fallen
by some $4 trillion, or Americans have seen about 20% of
their nine-year gain dissolve. Rather than taking their
80% winnings and going away happy, however, we hear cries
for the "hair-of-the-dog" antidote: lower interest rates."
(see: Taking Shelter From The Coming Economic Storm)
*** Yesterday's New York Times presented a fine
story about the resurgent nuclear power industry.
Almost unimaginable even one year ago, numerous
utilities are submitting applications to construct
new nuclear power plants.
*** In contemplating the unimaginable some three
months ago, grantsinvestor.com's Andy Kashdan wrote,
"Nuclear power will probably never be as popular as
Britney Spears, but in the Western world, it trails
even the much maligned brussel sprout. The
California debacle, however, may change American
tastes - at least in the longer term. It's much
easier to be an environmentalist when the lights are
*** As a way to cash in on the not-yet-evident
trend, Kashdan recommended Saskatchewan-based Cameco
Corp., the world's largest producer of uranium, the
fuel used in nuclear reactors to generate
electricity. Cameco (Toronto: CCO; NYSE: CCJ)
accounts for about a third of global uranium
production. The stock has advanced about 20 percent
since Kashdan made his call. "Of course, it's
rallying off truly stunning declines, and the index
still sits 56% off its all-time high."
* * * * * * * * * * Advertisement * * * * * * * * *
Don't Get Caught With Your Pants Down
Bad news reigns. But carnage on the Nasdaq, S&P
500...and the DOW is just the beginning. Still, it
seems that no one is watching. Not here in America
at least. Most investors don't have a clue about the
dangers that lie ahead.
Even more dangerous...most don't care. Their apathy
could entangle you in the greatest economic disaster
in 70 years...unless you are well-prepared. Read
your copy of The Crisis Almost No One Sees Coming -
yours free today.
The Crisis Almost No One Sees Coming
* * * * * * * * * * * * * * * * * * * * * * * * * *
"It is rare, one is told, for an American to invest,
as many Englishmen still do, 'for income.' And he
will not readily purchase an investment except in
the hope of capital appreciation...The American is
attaching his hopes, not so much to its prospective
yield, as to a favorable change in the conventional
basis of valuation."
- John Maynard Keynes
Warren Buffett is a remarkable man. He is, off and
on, the richest man in the world. And yet, he has
built no company...won no World Series... nor has he
invented anything...nor even hit a record.
Buffett has made his fortune by investing. He took
over a small textile mill in 1965 to use as his
investment base. Since then, he has averaged 24%
annual growth in the stock price. You could have
bought the stock for only $12 in '65. Today, you
will pay $67,000 per share.
So doing, Buffett has become an inspiration to
millions: the world's ultimate capitalist. Any fool
can pick up the phone and buy a stock. Many do. And
all hope to get rich, just like Buffett.
George Soros, by contrast, is a speculator, not a
capitalist. Unlike Buffett, he doesn't try to own
the means of production. He merely guesses about
which way prices are likely to go and makes his bets
Sometimes Soros is right and makes money. Sometimes
he is wrong - as he was last year, loading up on
tech stocks just months before they crashed.
Speculators have to be smart, or lucky, to make
money. They need to bet against the crowd
(otherwise, the odds are unfavorably short) - and
guess right. A speculator only wins when others
lose. He will only win big when many others lose.
Buffett is not a gambling man. He does not bet on
the direction of stock prices.
Berkshire Hathaway held its annual meeting over the
weekend. Recording devices weren't allowed. Still,
there were many reports in the press. Plus, a fund
manager who attended typed up his notes and sent
them to me.
Investors hoping to get in on the current bear
market rally might want to reflect on Buffett's
comments. To that end, I give you today's letter.
"People will always do stupid things," observed the
Sage of Plains. "Over the next 20 years, I guarantee
it. The question is, will we be able to take
advantage of it?"
One of the stupid things they always do is to try to
bet against the pros. Another stupid thing they do
is try to bet at all. And a stupid thing they are
doing right now is betting that the U.S. stock
market has just put in "the most expensive bottom in
history"... a 'bottom' so high that - even at its
lowest point - stocks were still more expensive than
ever before in the market's history.
You may recall that James Cramer was both astonished
and delighted as the amateurs beat the pros in the
Great Tech Bubble of '98-2000. The pros just didn't
seem to understand that it was a New Era. Or, as
Keynes put it (above) a "change in the conventional
basis of evaluation" had been made.
Of course, no such thing had happened. Instead, Wall
Street had laid a trap for unsuspecting investors:
"Wall Street monetized the hopes and dreams of
millions," said Buffett. "Lots of money was
transferred from the gullible to the promoters," he
continued. Wall Street gathered dumb money unto
itself like a cult leader collects teenage airheads,
"not by great performance," said Buffett, "but by
great promotion...it's been a huge trap..."
This is "the way to make a huge amount of
money...the biggest money made on Wall Street in the
past few years," he added.
Investors buying stocks today face huge risks.
Greenspan may not find the perfect fed funds rate -
it may not even exist. The economy may not rebound.
Earnings may not recover - they may get worse.
Layoffs may continue. Consumers may be unable to
keep spending. The dollar may fall. Inflation may
rise. Any, all, or none of these things may
contribute to a collapse in stock prices. A return
to the 70-year trendline of the Dow, for example,
would mean a loss of three-quarters of the Dow's
value. And the Nasdaq - well, never mind.
But the average investor - baited by Wall Street and
egged-on by the financial media - seems to be sure
that the 'Worst is Over.' The latest polls show that
he expects annual stock market gains from 12% to 20%
over the next 10 years.
Buffett investors are anticipating an unnatural act:
"The probability of us achieving 15 percent growth
in earnings over an extended period of years is so
close to zero it's not worth calculating," said
Buffett. "And nor do we think any large company in
the United States is likely to (post such growth)."
Of the Fortune 500 firms, he added, only 2 or 3
might be about to sustain 15% annual growth rates
for an extended period.
"Fifteen percent (return on stock investments) is a
dream world," he warned.
"It's simply crazy to have such very high
expectations," added Charlie Munger, Buffett's 77-
year-old partner at Berkshire... "Years ago 15
percent return was regarded as impossible, now they
say 'so what'?"
While Soros jumped into tech stocks at nearly the
worst possible moment, Buffett avoided them. Soros
thought they were going up and didn't want to miss
the move. Buffett didn't care where they were going.
You see, Buffett does not try to guess the market's
direction. He doesn't really care what direction his
own stock goes - except that he is happy to be
recognized as a genius when it goes up.
"People who bought tech stocks, or any other kind of
stocks, because they think it's going to go up next
year, or because their neighbor told them to do it -
they should get out of the investment world," Munger
explained. "That is not a way to make money over
Buffett understands how to make money over time: buy
businesses that make money...and use the money to
buy other businesses that make money. Buffett
prefers to buy whole businesses, not stocks. "Forget
the stock market," he says.
The stock market is for suckers, Buffett might have
said, had he not been addressing an audience of
5,000 of his own shareholders. The stock market is a
place to sell businesses, not buy them. But those
listening to the Oracle of Omaha surely missed the
point. Their enthusiasm for Berkshire shares has
driven them up along with the rest of the market, to
the point where they are no bargain.
Berkshire shares pay no dividends. Investors can
only hope that they go up. Buffett's shareholders
are doing exactly what Buffett cautions against:
speculating on the direction of the share price.
Would Buffett buy them himself? Not a chance, dear
reader, not a chance.
* * * * * * * * * * Advertisement * * * * * * * * *
Porter Stansberry had just put the finishing touches
on his "Virtual Jamaica" website, which was built to
display the transcripts from the first Pirate
Top CEOs, technology experts, scientists and
industry professionals gathered to share their
secrets for a very profitable future. On the website
you'll find the complete transcripts of the main
presentations, pictures of the
conference and a separate message board.
* * * * * * * * * * * * * * * * * * * * * * * * * *
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.