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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
TUESDAY, 19 JUNE 2001 |
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Today:
Ironic Twists
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*** Consumers suffer biggest wealth loss in 50 years...
*** "Beware the Tech Rally" - techs still overpriced...
shorting the New Era's 'pretty-boy' pick...
*** Capitalists exploited by over-paid
CEOs...Argentina's 'major' hair-brained currency
scheme...the 'Duffer Index'...and more!
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*** Capital spending (new orders) fell 4.6% in
April...with a 10.3% drop in spending on computers and
electronics.
*** And no wonder. A front-page report in the
International Herald Tribune tells us that the telecom
industry, for example, has laid 100 million miles of
fiber optic cable in the last few years. 97% of those
lines are still 'dark'...and most may never be used.
Apparently, even after they are in the ground, it takes
a lot of money to light them up.
*** Cisco's sales dropped 30% quarter to quarter.
Yahoo's sales fell 42%. In Silicon Valley overall, sales
are expected to be off by 50% in the first half of this
year.
*** Yet, nearly three quarters of analysts who cover
Cisco, for example, now recommend buying the stock.
Cisco is down about 80% from its high, but almost all
analysts seem convinced that, in time, it will come
back...
*** "Of course, if you're holding tech stocks for years
and are willing to wait out the many ups and downs to
come," writes John Futrelle in Money, "you need not
concern yourself with whether the absolute bottom comes
next quarter or even next year." That's right, John,
sooner or later you will lose money...
*** Investors still have faith...that this little storm
will soon blow over and things will be back to normal.
The trouble is, their vision of what is normal has been
distorted by nearly two decades of above normal stock
market returns. Alas, those good old days may never
return...and most tech stocks may never return to their
previous highs.
*** But let's see what happened on Wall Street
yesterday... over to you, Eric:
- The NASDAQ rolled craps - scoring its seventh losing
session in a row. The tech-heavy index, which fell 39
points, had not posted seven consecutive daily losses
since 1998. The Dow eked out a 22-point gain.
- The drone of tech company CEOs warning about an
"unexpected earnings shortfall" is becoming white noise
on Wall Street. Yesterday, Oracle, Solectron and Level 3
Communications all weighed in with downbeat comments.
- Only about one-third of the companies in the S&P 500
will survive over the next twenty-five years, authors
Richard Foster and Susan Kaplan estimate in their book,
Creative Destruction. Yet, as professional investor
Richard G. Leader sees it, the board members of these
ill-fated companies will still "pay huge sums to the
very managements responsible for leading these companies
to their deaths."
- Nortel Networks, for example, made headlines last week
for taking a colossal $19 billion write-down in the
current quarter. The company's stock price and earnings
prospects are both on life-support. Yet, Nortel
President and CEO John Roth shared the company's pain
last year by making $6.9 million in base pay...and
another $135 million by cashing in Nortel shares as it
plummeted from $89 to $9. Leader observes: "Mr. Roth now
plans a very comfortable retirement...as 30,000 former
Nortel workers look for new jobs."
- And that's just the beginning. "Nextel shareholders
saw their stock plummet from $73 to $14 - as their
president cashed in $31 million of stock options. The
president of JDS Uniphase put $25 million in the bank...
as [the company's stock] declined from $140 to $12. The
list goes on and on..."
- Here's a suggestion from The Daily Reckoning: rather
than accept huge bonuses, CEOs losing that kind money
ought to go the way of the samurai...and commit ritual
disembowelement.
- "Working from last year's Golf Digest listing of
Fortune 500 CEOs ranked according to their golf
handicaps," writes grantsinvestor.com's Jay Akasie, "we
came up with some screaming sell signals."
- It's called the "CEO Duffer Index". In short, there's
a stunning correlation between suffering companies...
and CEOs who post impressive golf scores. Scott McNealy,
for example, had his 3.3 handicap trumpeted in print - a
year later? Sun's stock price was buried in a sand trap,
having plummeted 58.1%.
*** "Argentina's famed economist Domingo Cavallo has
pulled out all the stops," notes my friend, Steve
Sjuggerud, today on the Daily Reckoning website. "On
Friday - despite the illusion that Argentina is moving
in the right direction and that someone competent is at
the reins - Cavallo announced a major hair-brained
scheme, which is not only strange, it's ripe for
corruption and abuse. Now, the 18% we were enjoying on
Argentine bonds is only suitable for those with an iron
stomach for risk... " (see: Argentina Shocks Me - Time
To Move On)
*** And...Lynn Carpenter has had a hot hand lately.
"Enron has been burning cash in a hot market while the
other oil majors were making money..." she wrote
recently. "Debt was increasing fast and dangerously
while its competitors have hardly any. And Enron was the
New Economy gurus' pretty-boy pick -- they were
predicting its web ventures would make it rich. Wrong."
Last Thursday, Lynn says she waited until her charts
showed the smart money where to go... by Monday she and
her readers pocketed 71%.
*** "More U.S. household wealth evaporated in the first
quarter of 2001 than in all of 2000 - which was the
first year in half a century in which American net worth
declined," Reuters tells us.
*** How can consumer spending hold up? Consumers'
spirits may be willing. But their purchasing power is
getting weak...more below...
*** "When is the new economy coming back?" my dinner
companions asked me last night. Elizabeth and I were
dining with French neighbors. On their minds was the
same question that must occur at dinner parties all over
the world: when will this little downturn be over?
*** "Forget it," I replied, putting a damper on the
conversation. "The new economy is history. We'll have to
wait for the new new economy... and that won't come
along for many years..."
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IRONIC TWISTS
"It is the most aggressive monetary easing by the Fed in
such a short period of time since 1929-30," reports Dr.
Kurt Richebacher from his home in Cannes, France.
Dr. Richebacher follows with the obvious question:
"Will it work?"
Here at the Daily Reckoning, we have no ready answer.
But we believe that great markets work like great novels
- with a plot that involves an ironic twist or two. We
cannot imagine a great novel in which the dramatis
personae get exactly what they expect. (Suppose Scarlett
had married Ashley Wilkes and lived happily ever after?
Margaret Mitchell would have sold a few copies to her
friends and relatives and that would have been the end
of it.) Nor would we want to live in such a world; it
would be as sincere and earnest as a poem by Maya
Angelou.
And so, with our accustomed optimism, we look forward to
a twist or two in the story of 'Alan Greenspan, Public
Servant or Master of the Universe?'
In today's letter, we think we have found one.
A story in yesterday's USA Today tells us that credit
card customers are still paying high rates of interest
on their balances - despite 5 rate cuts in 5 months. Mr.
Greenspan can cut rates further, but the credit card
companies have already reached the minimum interest
rates at which they are willing to lend. Bank One's
platinum Visa, for example, has a minimum interest rate
of 15.9%.
Also in yesterday's news was an item describing the
stiffening of the yield curve. Not usually a subject for
polite conversation, the yield curve tells us what rates
of return lenders require over what periods of time.
Greenspan has been able to push down short-term rates -
by making money available to member banks at real rates
approaching zero (the nominal rate less the rate of
inflation). But long-term lenders seem to have long-term
memories. Perhaps their recollections reach back even to
the 1970s, when inflation effectively wiped out many
years of interest earnings, not to mention capital
values.
Long-term lenders, as wary of inflation as the credit
card companies are of credit risk, try to leave a few
points between themselves and ruin.
And thus consumers, looking for relief from high debt
levels, will find little succor from the Fed. Neither
short-term credit card interest rates, nor long-term
mortgage interest rates are falling.
But that is not all.
Yet another report from yesterday's news told of a Fed
governor's comments on the dot.com bubble. Inexperienced
entrepreneurs went to sophomoric venture capitalists, he
explained, to raise money for unproven projects that
were soon touted by amateur analysts and sold to novice
investors. "Thank God, the banking sector stayed out of
it," he concluded.
But why, for perhaps the first time in history, did the
banking industry miss an opportunity to lose money in a
financial aberration? Have bankers gotten a lot smarter
since they financed the stock bubble of '20s or the
Emerging Market loan bubble of the '70s, or the Texas
oil bubble of '80s...or nearly every real estate bubble
that ever happened? Probably not. The answer, dear
reader, lies in the character of the financial markets,
not in the character of the bankers themselves. The
former, we will wager, has changed; the latter has not.
Instead of borrowing from banks, entrepreneurs and
businesses were able to raise capital from investors.
The banks, always ready to throw good money into a bad
deal, were bypassed.
And so it turns out that Mr. Greenspan, Master of the
Universe, cannot really control even the one thing that
is supposed to be within his domain: the cost of credit.
The banking system, through which his reflationary gas
is pumped, no longer works the way it used to. The tubes
have been disconnected. The result: Mr. Greenspan
pumps...but the vapors go where they were not expected.
"Outright worrying, if not frightening," writes Dr.
Richebacher, "is the total absence of any effect of this
quick succession of rate cuts on the U.S. bond market...
this interest rate [the fed funds rate] has lost its
former central importance in the financial system simply
due to the fact that the activity of borrowing and
lending in the U.S. ...has shifted heavily away from the
banks and towards the markets and a huge panoply of non-
bank financial intermediaries that largely fund
themselves in the money market."
The fed funds rates has been cut 2.5%. And the money
supply, as measured by M2, has been increasing at rates
from 10%-14% so far this year. What has happened so far?
The economy has gotten worse. Sales are falling. Profits
are disappearing. Productivity has collapsed. Jobs are
becoming scarcer and consumers are getting poorer.
But, stocks rallied. From April 2nd to June 2nd, the
Russell 2000 gained 22%. Now that rally seems to have
run its course.
Analysts are still bullish. Economists are complacent.
Consumers are optimistic. All seem to believe that the
boom of '82 - 2001 will go on forever, with only minor
setbacks. What kind of ironic twists awaits them, dear
reader?
We will find out.
Your commentator,
Bill Bonner
P.S. If bankers as a class are no smarter today than
they were, say, in the Texas Oil Boom, could the same be
true for central bankers? "Following the steep fall of
stock prices in October-November 1929," Dr. Richebacher
explains, the Fed lowered rates not just 5 times - but 6
times... "twice in November and four more times until
June 1930, always in 50 basis point steps. In response,
the stock market rapidly recovered, ending 1929 up 25%
from its low of Nov. 13."
But Wall Street was not looking ahead, it was looking
backwards, wistfully. After the spring rally, stocks
fell again and did not recover until 1956. Many of the
most popular of the stocks from the late '20s never
recovered. The great boom of the '20s ended, ironically,
in a Great Depression.
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| About
The Daily Reckoning: |
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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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