Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 22 MAY 2001
Will the Fed
*** The Nasdaq is back...Cisco up 13%...Party time on Wall
*** Nasdaq up 41% since low - are tech investors getting
even? Not quite...
*** Score one for the Blue Team...gold...how mother nature
settles her accounts...a darned cheap hotel chain...and
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*** The Nasdaq is back! The index punctuated its fifth
straight winning session with a 106-point advance. The Dow
edged ahead a modest 36 points, as if to avoid stealing the
*** Typifying the Nasdaq rally, Cisco Systems attracted
many admirers yesterday...just like old times. Investors, as
if unable to tame their desires, had another fling with
their former tech darling. Although lacking some of that
youthful passion, the tryst was enrapturing nonetheless, as
the stock soared more than 13% on the day.
*** It's party time on Wall Street. "Fed's welcome wagon is
stocked with lots of bottles of champagne," writes Ed
Yardeni, "and the speculators are drinking the liquidity
with gusto. The bubbly is bringing back irrational
*** "One the best things about working on Wall Street are
the 'launch parties,'" grantsinvestor.com's Eric J. Fry
relates. "Last week, Krispy Kreme moved from NASDAQ to the
Big Board, and to celebrate its matriculation into the
highest echelon of stock trading, sponsored a launch party
in front of the New York Stock Exchange. The 'party'
occurred under a block-long tent on Broad Street where
legions of smiling Krispy Kreme employees dispensed fresh
donuts and coffee to everyone who passed by.
"Although utterly irrelevant to the investment process,
launch parties have become de rigeur for any company
listing on the exchange. Krispy Kreme claims to have given
away 40,000 doughnuts in all. Mine was delicious."
*** "Just how have speculative stocks been?" the Wall
Street Journal asks. "The most speculative technology
stocks rose 48.2% between April 4, when the NASDAQ
Composite Index bottomed, and last Monday (May 14),
according to numbers crunched by AQR Capital Management.
The firm found that more-pedestrian tech names - those
trading at less than 50 times their trailing 12-month
earnings - were up 29.8% during the period, while non-tech
stocks in the index returned 9.9%."
*** The Nasdaq has now rebounded 41% from its April 4th
low, while Cisco has soared an even more impressive 67%.
One might imagine therefore, that both Cisco and the tech-
laced index to which it belongs have nearly reclaimed their
all-time highs. Not quite. Cisco has recouped barely one
quarter of its record-high valuation. The Nasdaq has
reclaimed less than half of its record levels.
*** In any given year, the stock market is more likely to
go up than down. Why not just stay in stocks, buy the
indexes, and forget about timing and stock selection? Would
Mr. Market reward such a simpleminded approach? Would
Mother Nature design a world in which the pleasure of
rising stock prices always surpasses the pain of falling
*** The Wall Street Journal provides an answer. In a story
entitled, "Doing the Math: Tech Investors' Road to Recovery
is Long," the Journal provided a long-overdue public
service by explaining the widely misunderstood mathematical
truth that recovering from a large loss requires large
gains...very large gains.
*** For example, the Journal cites the Pro-Funds UltraOTC
Fund, which fell a stunning 94.7% between March 2000 and
the April 4th NASDAQ low. Since then, the fund has risen by
a slightly greater percentage - 95.6%. "But at that point,
an initial $10,000 was valued at just $1,035, still down
89.7% from its March 2000 level. To return to one's
original stake after a 95% tumble requires a 1,900% gain."
Yes, stocks usually go up...but when they fall the pain is
especially sharp and deep.
*** And when stocks fall, newly impoverished novice
investors seek to relieve the pain...pulling up to Wall
Street curbs with lawyers-in-tow... USA Today introduced us
to Cynthia McNamara who alleges that she lost $632,000
because her Merrill Lynch broker concentrated her assets in
tech stocks and borrowed money on margin to make purchases.
Cynthia tells USA Today, "If you had asked me what margin
was a year ago I didn't know. Now I know, but everything is
gone." Information is cheap. Knowledge is dear.
*** Stephen Roach, the bearish chief economist at Morgan
Stanley Dean Witter & Co. remains unconvinced that the Fed
rate cuts will prevent recession. "We went to excess in the
late 1990s are many counts - investing in information
technology, depleting personal savings, relying on foreign
capital - and the overarching excess, the stock market
bubble, capped off by the NASDAQ folly. At some point, you
purge the excesses and revert to the norms, and that is
generally triggered by recession."
*** Gold yielded a little ground yesterday by "giving back"
$2.00. However, most gold stocks finished on the plus side.
Gold bottomed out at 255 (June contracts) on April 2nd.
Since then, it has gained $37.
*** Remember Michael Martin? We quoted him in the Daily
Reckoning as saying, "It wouldn't surprise me to see gold
jump out of here, up $15 to $20 in a single day." Fresh
from his prescient call, we just had to check back in with
Mike to see if he wanted to tempt fate with a follow-up
*** "The best rally in two years leaves me paralyzed," he
says. "After 20 years of watching these rallies get snuffed
out, I think caution is warranted short-term. But if you
will allow me to hedge, I remain convinced that gold is in
the process of beginning a long-term turnaround to the
upside. I can safely predict, however, that it's not going
to happen in one day."
*** The Blue Team has only been in business for a few
weeks, but it already has a big win in its gold share
recommendation. Franco Nevada is up 20%... Dover Corp.,
while not a gold, is up 11%... (For more on the DR Blue see:
*** No more Mickey Mouse investments for Warren Buffett.
His Berkshire Hathaway sold the last of its Disney stock
during the first quarter. Other notable recent sales by the
sage of Omaha include Citigroup, Freddie Mac and General
*** While I was in Santa Fe, I stayed at Marriott's
Residence Inn. The accommodation was more like an
efficiency apartment than a hotel room, designed for
longer-term guests. Grants recently reviewed, favorably, a
competitor in the extended stay market: Innkeepers U.S.A.
or, to be more precise, Innkeepers U.S.A. Trust (KPA) an
REIT. The company has 67 hotels, with 8,131 suites. It
appears to be a good business, but the REIT, selling at a
recent price of $10.26 per share, yields a dividend of an
extraordinary 11.7%. 'There must be a reason why this REIT
is so cheap,' I can almost hear you saying, dear reader.
The thought occurred to me too. It turns out that 28% of
the company's revenue comes from properties in Silicon
*** Could the flood of income from Silicon Valley turn into
a trickle this year or next? Yes, it could. But Sheila
Stoltz, a fund manager with a stake in the company says
"the thing about Innkeepers that's particularly attractive
is that they have a very strong balance sheet and they have
a very high dividend, and a dividend that is easily
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WILL THE FED SUCCEED?
I must have left you sitting on the edge of your chair,
Last Thursday's letter ended with a couple of provocative
question marks: will Alan Greenspan become the most
successful government employee since WWII?
Will the Fed, which has debased the currency it was
supposed to protect, now turn out to be the savior of the
economy it is supposed to ignore?
The Federal Reserve System was chartered to protect the
nation's money. This it has failed to do. Instead, it has
acted like a security guard gone bad...sharing out the
nation's savings - rewarding debtors, bankers and
bureaucrats at the expense of savers, pensioners and
bondholders. It is robbery. But it is more subtle than
taxation and it pays a lot better than sticking up cab
Fed officials don't even have to worry about hailing cabs.
They have a fleet of limousines to cart them from one
price-rigging meeting to the next. Still, Fed officials
were not satisfied with their lot.
Nowhere in the Federal Reserve enabling legislation is
there any mention of a "chicken in every pot." Nor is there
any discussion of "protecting Wall Street's commissions;"
nor of "bailing out underwater businesses;" nor of
"stimulating consumers to buy;" nor of "helping Americans
go further into debt;" nor of "re-inflating leaky bubbles."
Yet, those are the things the Fed now aims to do. Without
ever taking white-out and pen to its public mission
statement, nor appealing to Congress for authorization, the
Federal Reserve System, under the management of former-
Randite, goldbug Alan Greenspan, has expanded its mandate.
The dollar appears stable. Remarkably, against its main
competitors, it has barely budged in the last six months.
During that same time, consumer price inflation has risen -
with energy costs hitting new highs and home prices rising
as much as 1% per month in some areas. Gold, which
unreliably clocks the pace of the dollar's decline, has
risen 14% against the greenback since April 2nd.
It's not as if short term rates were unacceptably high at
the end of last year. At 6%, subtracting the rate of
consumer inflation, 3%, yielded a net real rate of return
of 3% - about what real rates of return have averaged
throughout the last century.
Still, rather than raise rates to head off what appears to
be an increasing risk of inflation, Mr. Greenspan chose to
lower them. Not gently. Not tentatively nor cautiously -
but dramatically and aggressively.
Mr. Greenspan's new focus may be found, according to Martin
Wolf of the Financial Times, in the words he uses in his
appearances before Congress. In his most recent three
presentations, the guardian of the nation's currency
discussed money and credit not a single time. But he
"mentioned productivity 42 times," remarks Wolf.
Thus I come to the point of today's letter which - I hope
you won't be disappointed - is yet another question: Does
this expanded new role of the Fed's presage a period of
even greater neglect of its old one?
And another question: Is the dollar destined to fall -
perhaps even in our lifetimes - at a faster rate, now that
the Fed is no longer even pretending to protect it?
To this latter question I offer a helpful response: I don't
know. But it seems like the sort of thing a prudent
investor might want to protect himself against.
"The clear and present danger," writes James Grant, "is
that the chairman, being mortal, will miscalculate. It has
happened before. Perhaps, he...has underestimated the
strength and the persistence of domestic inflation.
"Perhaps, by overstimulating, the Fed will push bond yields
and mortgage rates higher. Possibly, by perpetuating a
belief in the Federal Reserve's capacity to control
essentially uncontrollable events, Greenspan will embolden
American investors and precipitate even greater market
"The risk," says Albert Friedberg, of Friedburg
Mercantile Group, "is that external and internal inflation
will begin eating away money, savings. There is an attack
on both sides: the internal attack is already on, with the
inflation rate in the U.S. creeping upwards and upwards,
and the U.S. has been lucky because the dollar was strong
and the dollar held down imported inflation. When the dollar
now begins to weaken, I think that we will begin to see
inflation get a little worse because external inflation
will come in. You won't want to sit through the dollar
declining 15% or 20%, which is likely to happen in our
Ian Campbell, writing for UPI, puts the risk a little
higher. "Only the consumer," he writes, "with cheap
mortgage in pocket and array of credit cards in his hand,
is keeping the economy going. Perhaps someone should tell
him now is not the time to overspend. This is a crossroads
for the world economy. The U.S. economy is going to head
down further. And when the markets see evidence of that the
Dow will fall again. In the next few weeks the euro is
vulnerable to losing 3 more cents. In coming months the
dollar could lose 30 cents."
Neither gold, nor euro bonds, nor inflation-adjusted
treasury notes (TIPS) have been the greatest investments
over the last few years. Perhaps they will not be the
greatest over the next few years either. But I doubt they
will be the worst.
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.