Contributed by Bill
Publisher of: The
Fleet Street Letter
THURSDAY, 5 JULY 2001
*** A question for the 4th: Are Americans too cock-sure
of themselves and their future?
*** The sasquatch recovery...abominable sales numbers in
the telecom industry...hairy hotel figures...
*** Defunct dot.coms...airplanes that will never get off
the ground...setting barns on fire...and more!
|Have Americans become too complacent, too self-|
satisfied, too confident of the future?
Why else would consumers continue to 'hang in
there' while they lose jobs...incomes barely keep up
with inflation...and debt payments, mortgage
delinquencies, and bankruptcies soar? Even PSINet's blue
neon sign still graces the new Ravens stadium in
Baltimore. (PSINet went belly-up last month - one of 53
dot.coms that went out of business in June, bringing the
total of defunct dot.coms to 330 for the year.)
In 1995, Americans paid $100 billion on the
principle of their debts. This year, it is 4 times that
Yet, they continue to spend...as if absolutely
sure that the 'second half recovery' will be here any
day. Maybe it won't.
"If there's a surprise waiting for us in the
second half of this year," writes Mort Zuckerman in US
News & World Report, "chances are it won't be a recovery
of growth but, rather, a disappointment that the
combination of Fed easing and Tax cuts has failed to
jump-start the economy. Why? Because of the triple
whammy of weak consumer spending, declining capital
spending, and tumbling exports."
"America is hurting," he observes. "After the
booms in consumer spending, capital spending and
exports, the time for adjustment has now come."
Yes, that's the way it appears to us, here at the
Daily Reckoning. But let's see what Eric has to say...
Eric Fry reports from Wall Street:
- If Mr. Second-half-recovery has arrived, he is being a
bit reclusive. A few folks report sighting this economic
Sasquatch, but most of us have never laid eyes on him.
In fact, many of us do not believe he exists. And for
- Scarcely a day goes by that several large American
companies - 3M and DuPont being among the recent
examples - do not report both disappointing earnings and
a worrisome earnings projection.
- Five days into the second half, our recovery consists
of strong car sales and decent home sales...on average.
Of course, home sales are very sluggish in certain parts
of the country. Apart from these two bright spots, most
other indicators cast nothing but shadow.
- The US manufacturing capacity utilization rate, at
76%, has now dropped below the lowest level of the 1990-
91 recession (76.6%).
- Worldwide sales of semiconductors in May sank more
than 20% below year-ago levels, according to the
Semiconductor Industry Association.
- "Hotels are having their worst time in ten years,"
reports the New York Times. "Domestic airlines, with
their worst slump in 25 years because of the decline in
business travel that started in January and accelerated
in the spring, are so desperate to scratch up some
revenue that the five biggest ones this week are all
promoting special summer travel sales."
- If the recovery had arrived, would every major
domestic airline and hotel chain be complaining in
unison that business travel has evaporated? Delta Air
Lines even announced this week that in response to
slowing demand it will remove 10 aircraft from scheduled
- And don't expect any help from either the Japanese or
the European economies. Japanese business confidence
fell sharply in June, according to the Bank of Japan's
three-monthly Tankan report. Likewise, the euro-zone
purchasing managers' index fell to 47.9 in June, its
lowest level since December 1998.
- Yesterday, Marconi Plc, the U.K.'s largest phone
equipment maker, disclosed a 15 percent drop in sales
this fiscal year that will halve its earnings and also
announced plans to shed a total of 8,000 jobs. Chief
Executive George Simpson explained, "The biggest
difference has been a significant falloff in orders in
Europe." Marconi -- like Nortel, Alcatel, Corning and
all the rest of the myriad companies selling various
telecom products -- may find itself waiting a very long
time for demand to recover.
- Michael E. Lewitt, an astute hedge fund manager I
know, observed recently, "By the late 1870s, an
abundance of cheap financing led to a doubling of
railroad mileage...Two fifths of railroad bonds
subsequently defaulted. Sound familiar? Maybe it is an
historical accident that thousands upon thousands of
miles of dark fiber-optic cable were laid along railroad
lines." Or maybe it is simply poetry.
- As if the world doesn't already have enough debt
sloshing around, worldwide bond issuance totaled a
record $924 billion in the first half of 2001, according
to Deal logic Capital Data. For perspective, 1999 was
the first time that bond issuance topped $1 trillion for
an entire year. Corporate and government debt is
reproducing like rabbits, and just like these furry,
long-eared critters, many of this year's debt issues
will disappear into some black hole somewhere. Credit
quality is falling as bond issuance is rising.
- Still, the tidal wave of cash cascading onto US shores
from foreign investors is truly breathtaking. "During
the fourth quarter of 2000 and the first quarter of 2001
combined, the U.S. attracted more foreign capital inflow
than during any other two-consecutive quarterly period
ever," Greg Weldon observes. "The $373 billion in
combined net direct and net portfolio inflows amounted
to twice the current account deficit for the six-month
period." Perhaps this indicates a telling sign of the
recent strength in the dollar.
- But if the days of free-flowing foreign capital (not
to mention plenty of dumb money right here at home) are
ending, the dollar will suffer along with most other US
financial assets. America has yet to "come to grips with
its own structural excesses," says Morgan Stanley
economist Stephen S. Roach. The yawning current account
deficit is but one of them.
Back to Bill in Baltimore...
*** What really sets America apart from other nations?
*** "Everything seems to be a bit more extreme," said
Benoit, a young Frenchman I know who is doing an
improvised work/study program in Baltimore.
*** I saw more of what Benoit must have had in mind
yesterday, at the Scottsville, Virginia, Independence
Day parade. The very small town on the banks of the
James River put on a big show - displaying what Tom
Wolfe calls the 'baroque exuberance' of our nation.
There were cowboys and Indians, macro men in miniature
cars, marching bands and county fair queens, and one
zany enthusiasm after another...including a group of
bikers flying a "Motorcycle Ministries" banner.
*** "We had an even better one out our way last year,"
said my brother-in-law from nearby Lovingston. "Every
year they set off some fireworks... but last year was
special. Somehow, one of the roman candles or something
got into John Murray's barn and set it on fire. Of
course, the volunteer fire department was right there -
they were in the parade.
*** "The barn blazed up and sent sparks up into the air.
It was really impressive...so they just let it burn. And
everybody said it was the best fireworks show we ever
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CRAMER vs. CRAMER
"Exit, pursued by a bear."
William Shakespeare, (1564 - 1616),
Stage direction in "The Winter's Tale"
"Dear TSC community," begins a cheerful letter from
James Cramer of TheStreet.com. "I know what you're
wondering; 'When is everything going to turn around?'
"Everywhere I am, whether on CNBC, at my desk, or on
Wall Street, I'm asked the same thing, 'Cramer, when
will the market turn around?'"
How can Cramer be 'everywhere," a grammarian or
philosopher might wonder. But our beat is investments.
So what we wonder is this:
Why would anyone care what James Cramer thinks?
I also have an answer: because knowing what Cramer
thinks can be very rewarding...but only if you remember
to do the opposite.
"Cramer," reports Christopher Byron in an MSNBC article,
"...declared on the day after the Fed cut interest rates
for the first time on Jan. 3rd, 'I am now confident that
the bull is back. We have arrived. We have made it. Now
we can prosper. Nasdaq 1500 just ain't in the cards."
In order for the Nasdaq to sink further, said Cramer, it
would mean that his 'must own' companies of the
Information Age - such as Cisco and JDS Uniphase --
would have to "blow up."
"On the day he wrote that," Byron reports, "JDSU
Uniphase stood at just under $48 and Cisco stood at $41.
Today JDSU sells for $12.50 and CSCO sells for $18 - a
loss of 74% for JDS Uniphase and 44% for Cisco Systems.
In other words, they did exactly what he said couldn't
happen: they blew up."
[I understand Byron's point, but not his arithmetic -
the loss for Cisco should be more than 50%.]
"That same day," Byron continues mercilessly, "Cramer
said, after claiming to have 'touched base with a number
of my sources,' that he had identified three stocks that
'will still be standing' and won't be 'guiding down' in
their next quarter."
One of the three was the telephone giant Nokia, then
trading at $44 a share. But within 10 weeks, Nokia began
'guiding down' so often it might have been mistaken for
an air traffic controller. It said first quarter
revenues would not be what was expected. Then, it said
second quarter revenues would also be disappointing. And
then, last week, it announced layoffs of 1,000 people.
Nokia has been whacked to its knees - losing more than
half its value since Cramer assured us it would "still
What of the other two? Brocade fell 80% and Veritas
collapsed 57% "almost immediately after [Cramer] made
his predictions," Byron notices.
The Nasdaq, too, defied Cramer's forecast. It didn't
sink to 1500, but almost - falling 36% in the 3 months
following, to 1638.
There was a time, believe it or not, when people treated
Cramer, Abby Joseph Cohen, Henry Blodget, and Mary
Meeker as if they had they had not lost their marbles or
their scruples. Those were the days when you could pay
as much as $71.25 for a share of Cramer's TheStreet.com
and not think someone had misplaced a decimal. (Today,
shares can be purchased for only $1.42).
Cramer boasted that TheStreet.com would soon beat out
the Wall Street Journal as the leading source of
financial information and opinion. And many people
And they still believed him on February 29, 2000 when he
gave investors his list of "top 10 stocks for who is
going to make it in the New World."
The grammar got away from him, but not the pitch.
"You know what," he said, sounding like the manager of a
professional wrestling act, "I am going to give them to
you. Right here. Right now." He then named a list of
companies which sounded exciting then...but now reads
like a roster of the living dead: Ariba, Digital Island,
Exodus Commuications, Infospace, Inktomi, Mercury
Interactive, Verisign, and Veritas.
"Exactly two weeks later," Byron resumes, "the tech-
bubble popped. Since then, Ariba and Infospace have
fallen 96%, Digital Island and Exodus have plunged 97%,
Inktomi is down 93%, Verisign is down 76%, Veritas has
dropped 50%, and the best performing stock on his list -
Mercury Interactive - has fallen 'only' 38%."
Cramer's own dot.com has done no better. TheStreet is
down 98% from its high, and has never made a dime of
profit. Its latest-reported quarter showed losses of
$7.2 million on revenues of $4.4 million. Hard to
believe that investors once valued the company at more
than $1 billion.
But then, investors seem willing to believe anything...
and anybody who tells them what they want to hear.
And thank God for them...the Cramers, Blodgets and
Meekers! They've provided us with so many guffaws and
...and profits, too, for those who were able to ignore
Your financial pen-pal,
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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.