Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 30 MAY 2001
*** Consumers still spending more than they can afford...
*** The 'wealth effect' revisited...why stock market losses
have not nipped off consumer spending.
*** A "head fake" for investors...the second half
approaches...profits down...and more!
|Market Watch |
This section of the Daily Reckoning is written by Eric Fry,
editor of Grantsinvestor.com. You can watch Eric on TV this
week - he's the guest host on CNN-FN, 9:30 - 11 E.S.T. My
notes and letter follow, as usual.
*** The consumer is OK so far. The Conference Board's
consumer confidence index jumped to 115.5 in May, from
109.9 in April. The University of Michigan index went the
same way, from 88 to 92.
*** In keeping with the upbeat mood, Americans spent more
than they earned in April. Spending on goods and services
grew 0.4% in April, slightly higher than the month's 0.3%
personal income growth.
*** So, Americans are still living beyond their means. But,
despite the encouraging news , most stocks lost ground
yesterday. In particular, the NASDAQ fell more than 75
points. Blame Goldman Sachs analyst Laura Conigliaro!
*** Before the market opened, Ms. Conigliaro issued some
unflattering comments about Sun Microsystems and data-
storage company EMC. Citing fierce price competition in the
data-storage business, she reduced her earnings estimates
for both companies.
*** Someone needs to take Ms. Conigliaro aside and explain
how the game is played. Shares of the two tech companies
stumbled from the opening bell and dragged the NASDAQ down
with them. Goldman can't earn much money that way.
*** The Dow Jones Industrials bucked the trend with a 33-
*** Most of the visiting on-air commentators I encountered
at the CNN studios yesterday expressed optimism that the
U.S. economy and stock market are recovering, thanks to the
indefatigable American consumer. We consumers will keep
spending, the optimists say, even if we must borrow to do
it, and yes, even if we're losing our jobs.
*** Well, I'm a consumer and I'm not buying that prophecy.
Allow me to offer a different one: the rising unemployment
trend is, unfortunately, just beginning. And . those
without jobs and those who fear losing their jobs will not
be visiting shopping malls in their spare time, no matter
how many credit cards Capital One tries to give them
*** Remember the 'wealth effect?' Stocks went up and people
felt richer. Their portfolio statements told them they were
richer. So they spent more money and invested more freely.
But what would happen when stocks went down? Would there be
a 'poverty effect?'
*** Alan Greenspan wondered the same thing. So he pulled
together a panel of economists to study it. Well, it turned
out that the 'wealth effect' was highly concentrated among,
guess who...the wealthy! They were the ones who owned the
stocks that went up. And when stocks went down, the wealthy
didn't exactly begin to scrimp and save. But they did cut
back - which is why you can get a beach house in the
Hamptons for $10,000 less this year than last year, even
though most consumer spending remained unchanged.
*** But the study also found that while most consumers had
never benefited from the 'wealth effect' they still acted
as if they had. They stopped saving and went further into
debt. Now, half of all U.S. households have less than
$17,500 in financial assets. Those in the middle income
range have only enough financial reserves to sustain
spending for 2.2 months. And the bottom 40% of households
have NO RESERVES whatsoever. If these people lose a job -
or even overtime pay - they must cut back on spending.
*** The U.S. economy at the moment is like the economists
who plunges one hand into ice water and the other hand into
boiling water and proclaims, "On average, the water is
warm." Although U.S. GDP registered a tepid 1.2% growth
rate in the first quarter, our economy contains elements
that are both red-hot and stone cold. Moody's reports, "An
index of lumber product prices recently posted stunning
gains of 91% for 2001-to-date, and 17% year-over-year." But
at the same time, Moody's observes, "April's record 40.9%
monthly decline in semiconductor equipment bookings broke
the previous record drop of 25.3% set just two months
earlier. Semiconductor equipment bookings have dropped 45%
year-over-year thus far in 2001." Warm...on average.
*** Despite the 5 rate cuts by the Federal Reserve, we are
in the middle of what the folks at International Strategies
and Investments (ISI) term an economic "head fake." ISI's
research uncovered two such head fakes in the last 30
years. The economy firmed briefly in the middle of the 1970
recession and, similarly, strengthened briefly before
heading into the 1990 recession.
*** "The U.S. economy may be doing a touch better," ISI
concludes, "but we seriously doubt it's about to take off
because it's facing a number of headwinds including:
* Declining corporate profits.
* Declining employment.
* Collapsing tech activity.
* An over-extended consumer (as to much spending, too much
debt, negative savings rate).
* Slowing global economic activity.
* A weakening California economy."
And a few notes from Bill:
*** The 'second half recovery' that investors have been
talking about so eagerly is now only a month away. Will it
arrive on schedule? As Eric points out above, if
unemployment continues to rise, consumers will be forced to
cut back their spending. And if they cut back, the recovery
will have to wait - maybe for years.
*** But what would make unemployment increase? A slowdown
in consumer spending, of course! Hmmm...I'll have to look
at this more closely..I'm not getting anywhere. More
*** "Despite its 296-point loss for the week last week, the
Dow has risen 17% from its March 12 low of 9389," write
Blue Teamers Addison Wiggin and Dan Denning. "That's what
is seen. What is unseen? Corporate profits have dropped two
quarters in a row. First-quarter 2001 after-tax profits
fell over 3% in the first quarter. They fell 4.3% in the
"Even worse, business investment is falling too, " the team
continues. "Business investment fell 2.6% in the first
quarter. It fell 3.3% annually in the fourth quarter. Those
are the first back-to-back declines since, you guessed it,
the recession 1990-1991. Investment is what creates
profits. And without new investment, profits will continue
to fall." If you're interested in Blue Team forecasts or
investment advice be sure to enroll: http://www.agora-
*** The Internets were the big losers yesterday - with the
index down 10% on the day's trading. Even the U.S.
government is doing e-commerce - selling such things as
wild mustangs and WWII ships. Doing business in a fashion
described as "haphazard," Bloomberg reports that the Feds
still took in $3.6 billion of sales last year - more than
the $2.8 billion sold by Amazon.com. Jeff Bezos just keeps
drifting down that big lazy river of no returns.
*** I reported recently that the euro probably had about 3
cents worth of downside risk (while the dollar could go
down 30 cents). Well, already the euro is down more than 2
cents. It is now at just a bit above 85 cents..and nearly
at its all-time low.
*** Edward, 7. packed his bags and set off on his class
trip cheerfully this morning. He seemed happy to go..but I
thought I saw a tear welling up in the corner of his
mother's eye as her 'petit dernier' went out into the wide
world without her.
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[In honor of Memorial Day, the Daily Reckoning presents
American Hero, first written and aired May 22, 2000]
"It looks just the same as it did 56 years ago," said
Colonel Flamm Dee Harper, USAF (Ret.). "France is a
beautiful country...as beautiful now as I remember it.
Except you don't have to worry about running into a German
patrol around every bend in the road." Col. Harper, a
small, handsome man of 80 years, stood on the hillside
speaking into a microphone to a crowd of about 200 people.
At his right was a young lieutenant, the USAF attache from
Paris who served as his interpreter. Further down the hill,
a group of about a dozen French officers were formed up
into a square, starched and grave...with enough gold braid
to back a currency.
On his left were two flags, hoisted on recently implanted
poles - the Stars and Stripes and the French drapeau - and
a marching band of about 40 pieces, resplendent in dark
blue suits with white insignia. They were the municipal
band of little Montmorillon, the sous- prefecture about 10
minutes away from my house.
Montmorillon was celebrating the return of Col. Harper, an
American pilot who crash-landed in this field in 1944.
In front of me, a blonde woman had tears in her eyes. She
looked as though she was about 55 years old. I did the math
twice to make sure - she had to be at least 70.
"I want to thank Jacqueline Thomas, who saved my life,"
said Col. Harper.
For more than half a century, Jacqueline Thomas, who stood
before me, had wondered whatever happened to the young
flyer she found in her grandfather's vineyard in 1944. It
was the vineyard, as much as Jacqueline, who saved him.
Born in Albion, Idaho, Harper was 21 years old when America
entered WWII. Like so many pilots, he was fascinated by
machines and speed. And when a group of P- 38s flew over
Utah in 1943, Harper saw them and knew what he wanted to
do. He enlisted in the air force and was sent to flight
school. A few months later, he was already flying his 29th
mission over France. His target was the German ammunition
depot at Sillars, about 20 miles from here.
But something went wrong. A time-delay bomb went off and
ignited the powder magazine just as he was passing overhead
- at an altitude of only a hundred feet. The debris hit the
aircraft, putting one engine out of action and damaging the
other. Worse, Harper had been struck in the head by flying
glass. So much blood streamed down his face that he could
no longer see. Smoke filled the cockpit.
Harper undid his harness and started to bail out. Then he
realized that the ground was only about 50 feet below. So
he sat back down in his seat and prepared to crash.
Seeing the field again, for the first time since the event,
Harper turned to me: "I don't know how I survived. A P-38
can't glide at less than, say, 130 miles per hour. I should
have been killed."
But the wires that held up the grapevines slowed the plane.
Harper jumped out of the cockpit with no further injury. At
first, Jacqueline Thomas thought he must be a German. She
started to run away. Then by some instinct she decided to
go to his aid. His face was covered with blood. And the
Germans could arrive at any minute.
She led him to her grandfather's house. No one was home.
She tended his head wound in the only manner she knew -
dousing it with "eau de vie," strong spirits that hurt so
much that Col. Harper recalls the pain to this day.
Not long after, Jacqueline's father arrived. He had seen
the plane go down and was concerned for his daughter.
Taking command of the situation, he had Harper take off his
clothes and dressed him as local farmer.
The two grabbed fishing poles and went down to the river
where, pretending to fish, they made their way to a cave
where Harper was hidden.
Eventually, Resistance leaders were contacted. Harper was
driven to a farm where another woman took charge of him - -
Denise LaBrousse. She was there yesterday, too. Nothing
seemed to have changed. Harper was vigorous - with a sense
of humor and a friendly smile. Jacqueline still seemed like
the teenaged girl who found him in the field. And Madame
LaBrousse looked like she's probably always looked. She
looked like she could make a good omelet - which is just
what she did for Harper.
As the story was told, each of these people made their way
up to take their places alongside Col. Harper... Denise
LaBrousse walking with difficulty with the aid of a cane.
And there they stood. The mayor of Montmorillon had invited
me to the ceremony as a representative of the local
American community ("I not only represent it," I explained
to Col. Harper, "I am it. Apart from my family, there are
no other Americans in the area.") and as an interpreter. He
now presented Col. Harper with a medal from the town.
A representative of the French Air Force gave him another
medal - a set of wings. The band struck up the Star
Spangled Banner...and then the Marseillaise.
Tears welled up in many eyes. Many of those present had
fought in the war. Others had vivid memories of it. My
friend, Gilbert Mining, was there. He had made his way to
North Africa to join the Free French Forces of de Gaulle.
He'd made friends with an American soldier...whom he has
never seen again. Another old soldier sat next to me at the
dinner following the ceremonies in the field. He had been
with the French army at the Maginot Line. They were driven
back by the Germans and finally pinned against the Loire
"I asked my commander for permission to desert," said the
retired schoolteacher. "He told me to go ahead. So I swam
across the river. Then I fought in North Africa...and then
back to France."
Harper, meanwhile, went on to glory. He joined the local
S.A.S. forces, Britain's underground operation that
coordinated resistance activity throughout the war. John
Fielding, an Englishman who was part of the local unit, was
also at yesterday's ceremony.
Together with the local French resistance, they blew up
train lines to keep the Germans from moving troops from the
south of France to the front in Normandy.
But Harper did not remain on the ground, or under it, for
long. Scarcely three weeks after the local paper in Utah
reported him "missing in action," he was back in England
and back in the cockpit on various missions.
Later, in Korea, he was shot down again. His ribs were
broken, but he managed to kill two North Korean soldiers
with a handgun and was rescued by helicopter. He became the
only pilot to get shot down in two wars and keep on flying.
But the most remarkable phase of his career was probably
during the period following his rescue in North Korea.
While he was recovering from his injuries, Harper directed
the activities of his unit of flyers. One of his pilots
reported a massive build-up of supply trains in the sector.
Harper was unable to get permission for an attack, but
ordered it anyway. The pilots went to work. They discovered
that the boxcars were loaded with ammunition. The whole sky
lit up, brightened by the explosions. Encouraged, they just
kept hitting the train, which just kept blowing up.
Some military historians believe this attack was the key to
ending the war. The ammunitions train was meant to supply a
massive million-man Chinese army. Without supplies, the
offensive was called off, and the North Koreans decided to
resort to the bargaining table.
But world politics were a long way away from the thoughts
of those assembled here in Montmorillon this weekend. "I'm
just glad to be alive," said Harper.
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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.