Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 9 JULY 2001
Stuff of Dreams
*** Consumers borrowing - against their homes! (Avoiding
recession in the 'worst possible way.')
*** Classic bear market on Wall Street?
*** Insiders selling heavily...job losses...consumer
sales falling...children disappearing (mine)...and more!
|"Borrowing was so heavy in the 1990s," says a |
Harvard University study called The State of the
Nation's Housing, "that home equity as a share of home
value dropped 10 percent, even as home prices rose
If Alan Greenspan wanted to avoid recession in the
'worst possible way,' he would encourage people to
borrow against their houses. This would put them at risk
of not only losing their jobs, but their homes.
Greenspan recently commented that rising home
values were adding to the wealth of consumers. He should
have added a modifier: rising house prices are adding to
the 'perceived' wealth of consumers. The house doesn't
change as its price goes up. The real value of the house
remains the same. But 'taking out equity' gives the
homeowner the illusion of spending profits instead of
merely borrowing money.
The situation is clarified for him, like so many
other things, in a genuine recession. The poor schmuck
finds that the part that he still owns is worth less
than before - while his debt has become, relatively,
more important. What can he do? Forget about spending
more...he struggles to make ends meet, until he loses
"The continuing jobless claims are at levels that
we haven't seen since November of 1992," said Wayne
Angell, chief economist at Bear, Stearns & Co., "so
there is no evidence that the employment recession is
ameliorating." U.S. companies cut 124,852 jobs in June,
56% more than in May. In the first half of the year,
777,362 jobs were lost, almost 31/2 times as many as the
same period last year.
Here's Eric's report from Wall Street:
- Ouch! It's starting to look an awful lot like a
classic bear market on Wall Street - a long, grinding
decline punctuated by sharp, short rallies.
- Last Friday, the Nasdaq plunged 76 points and the Dow
dropped 227 points. The technology sector topped the
list of casualties, as the Philadephia Stock Exchange
Semiconductor Index tumbled 9%.
- All of a sudden, the losses are starting to add up.
With last week's sell-off, the Dow has now given back
more than one-half of the 1,900 points it had gained
between April 4th and its May 21st peak.
- The dolorous global refrain of vanishing orders and
collapsing profits in the technology sector is hardly
the sweet music one expects to hear leading up to a bull
market. One standout loser last week was Manhattan's own
Multex.com. The online provider of investment research
suffered a "stock market stock split." In other words,
it lost about half its value by falling from $16.01 to
$8.22. The culprit: lower-than-expected earnings that
will necessitate pay cuts and job layoffs.
- Nor do the officers of America's public companies see
any fast-approaching economic rebound, at least judging
from their actions. "In recent weeks, U.S. corporate
executives have been dumping the shares of the companies
they work for," the Bank Credit Analyst (BCA) reports.
Among companies listed on the NYSE or Amex, BCA
calculates that over the last eight weeks, three
insiders sold stock for every one that purchased. This
3-to-1 sell-to-buy ratio reflects a high level of
bearishness in the boardrooms.
- A weak employment report contributed to the pervasive
sense of gloom on Wall Street last Friday. June non-farm
payrolls fell 114,000 jobs. As Addison noted over the
weekend, "The Dept. of much-Labored Statistics said the
nation's unemployment rate has risen to 4.5% [from 4.4%
in May]. Significantly, demand for workers in 'service
industries' - often cited as the savior of the new US
economy - dropped to its lowest level in 10 months."
The number of people on unemployment rolls has now
passed the 3-million mark for the first time since 1992.
- Moody's John Lonski points out, "From 2001's first to
the second quarter, initial state unemployment claims
might surge higher by a troubling 76% annualized. Be it
quarter-to-quarter or year-to-year, initial state
unemployment claims have been piling up in a manner that
is ordinarily associated with a recession."
- Deflation seems to be the order of the day. Lumber,
one of the most "knowing" of all commodities, has fallen
24% from its recent peak in May. "The 'standard beef
bowl' in Tokyo fell 30% last week," Greg Weldon tells
us, by way of the Blue Team's Dan Denning. "Deflation -
falling prices due to overcapacity - is wracking the
economy." (see: Surviving A Stock Market
- Are we about to learn the hard way what Japan has
known through experience for over a decade? Interest
rate cuts are no substitute for economic vitality. Most
American corporations have neither the means nor the
desire to increase - much less maintain - their current
levels of capital spending. Cutbacks and deferrals have
become the norm. As Lonski observes, "From the first to
the second quarter of 2001, real business investment may
contract by roughly 9% annualized for its steepest such
slide since the 9.7% drop of 1991's recessionary first
- About the only spending that has been going on all
year is that of consumers, using money they don't really
have for things they don't really need. But given the
rising unemployment rate and the falling stock market,
even America's heroic consumer may be starting to turn
tail and run.
- Many retailers will report June sales this week and
the news will likely not be pretty. Already, Federated
Department Stores and Neiman Marcus have warned that
sales are waning. If Federated is slashing its sales
forecasts, can Nordstrom, Dillards and May Department
Stores be far behind?
Bill from Baltimore:
*** "Where's Henry?" I asked Elizabeth on Friday
"He's visiting with his friend, Ethan," was the
"He's visiting his friend, Andy."
"Well, where's Maria?"
"She's down with Aunt Margaret."
"How about Edward?"
"He's staying with Benjamin and Lynn tonight."
"What kind of family vacation is this - everyone is
gone," I observed rhetorically...
"Don't worry," comes the reply, "they'll all be back
tomorrow. Now, I'm going out with Liddy. See you later."
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STUFF OF DREAMS
Our revels now are ended. These our actors,
As I foretold you, were all spirits and
Are melted into air, into thin air;
And - like the baseless fabric of this vision -
The cloud-capp'd towers, the gorgeous palaces,
The solemn temples, the great globe itself,
Yea, all which it inherit, shall dissolve,
And like this insubstantial pageant faded,
Leave not a rack behind. We are such stuff
As dreams are made on, and our little life
Is rounded with a sleep.
(The Tempest V.i. 148-158)
The more equity you 'take out' of your house...the less
you have left. While this seems obvious, a fuller
awareness of it may lie ahead.
Of course, borrowing against equity is nothing new. Nor
is the demand for it constant. Instead, the fashion for
'taking out equity' has merely reached a cyclical peak -
soon to retreat to more normal levels. At least, that is
For, on or before this coming Thursday, from the cloud-
capped towers of Waltham, Massachusetts, the nation will
get a small preview - I think - of where borrowing
against equity can lead. It is not likely to be pretty.
But let us back up a few years.
In the late '60s, a group of companies emerged that were
known as the 'Nifty Fifty.' What was so nifty about
these companies? They had everything going for them -
brand names, patents, top management, spectacular sales,
and solid profits. They were thought to be 'one
decision' stocks...that is, you could make the decision
to buy them just once, and that was all you needed to
do. These were the stocks dreams were made of - stocks
for the very long run.
They had such a big lead on their competitors that they
could afford to hire the best managers and buy the
latest technology. What could go wrong?
But popularity is as much a curse on Wall Street as it
is in high school. The 'nifty fifty' stocks were soon
trading at levels not seen again until the late '90s.
And then, in the bear market of '73 - '74, they crashed,
dropping in the esteem of their peers faster than a prom
queen caught at a Bible class.
Prominent among the 'nifty fifty' was one company that
seemed invulnerable. Polaroid showed up more often at
family picnics than ants. For two generations, hardly a
birthday, wedding or graduation ceremony was complete
without a Polaroid product.
Even today, the company seems like a winner. "Last
year," reports James Grant, "it sold the most instant
cameras in its history; 13.1 million. And it sold 1.3
million digital cameras, occupying the No. 1
Yet, at a recent price of about $2.50 a share, you could
buy the entire company for just a little more than $100
million. That is just 7% of sales and not even half of
And on or before July 12, a consortium of bank lenders
are expected to decide whether or not to force the
company into bankruptcy.
What went wrong?
Here at the Daily Reckoning, we do not attempt to offer
managers free advice nor even to critique their
performance. Had we been running Polaroid, we have
little doubt that the banks would have lowered the boom
Still, we have an opinion.
In a recent trip to a convenience store, your editor was
surprised to find how cheap the disposable cameras had
become. In an expansive mood, he bought more than one.
While this attack of big spenderism may have helped
Polaroid stave off the day of reckoning, it probably
wasn't by much. The disposables must have profit margins
as thin as celluloid.
And the digital versions? The competition is fierce.
Worse, there are no film sales, hence, no repeat
business. In your editor's experience, a digital camera
lasts until it breaks...and then it is replaced with a
A debt-free company might have been about to ride out
the storm of innovation. Polaroid might have bobbed its
way throughout the sea change in the picture-taking
industry...and its shareholders might have continued to
enjoy dividends for another generation.
Instead, the firm borrowed heavily. Today, Polaroid
carries nearly $1 billion in debt. Bond investors have
marked the debt down to such a low level that "at 50
cents on the dollar," according to Grant, "they hold out
the hope of a yield to maturity of 193%."
Whatever bond investors actually end up with, it is
likely to be more than the stock buyers. They are buying
equity in a company with little or no equity to sell.
Polaroid 'took out the equity' when taking out equity
was in style. Now, there may be nothing left.
Thursday, Polaroid's bankers may round out its little
life...by putting the company to sleep.
Your correspondent, with his mind on this 'insubstantial
pageant' and his body in hazy, hot, humid Baltimore.
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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.