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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
THURSDAY, 12 JULY 2001 

 

Today:  One Long, One Short

*** Investment advice for the day: Learn to like raw 
fish...

*** Popularity is poison...airlines falling from the sky

*** Prices for data storage are collapsing...waiting for 
flower pots...boy, can you get stucco...and more!

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Learn to like raw fish. That's my advice.

"The financial assets of Japanese households fell in 
fiscal 2000 for the first time since 1964, the first 
year the statistics were recorded," Eric reports. 

"What policy option is available for Japan?" asks 
Kumhara Shigahara in the Japan Times. "...The world's 
second-largest economy and is now undergoing the world's 
most rapid process of population aging with projected 
huge increases in social expenditure - after years of 
fiscal stimuli that have already turned its public-
sector debt position into the worst among advanced 
economies?"

Zero interest rates have failed to lure the Japanese 
into becoming spendthrifts. Billions in government 
spending have failed to ignite the economy. Neither a 
fiscal stimulus nor a monetary one has worked. What else 
is there? 

The problem in Japan cannot be cured by central banks 
nor by central government. Because it is not a problem 
at all - but a fact of life, like the corrosion of base 
metals and politicians' souls. Busts follow booms. And 
youth yields to maturity. Both of these circumstances 
have beset the Japanese economy and neither responds to 
rate cuts.

The Japanese are getting older. They been shaving 
expenses...saving money....and selling assets. That's 
what older people do.

Could the same thing happen here? The NY TIMES, the WSJ, 
CNN, MONEY, WORTH, CNBC, Merrill Lynch, Alan Greenspan, 
Goldman Sachs, Abby Joseph Cohen, Henry Blodget, Paul 
Krugman, Michael Murphy, and practically every economist 
and financial analyst in the world says 'no way.' 

But here at the Daily Reckoning, we say, "who knows?"
We don't know. But we noticed that yesterday, on Wall 
Street, the indexes rose - but only 1344 stocks advanced 
on the NYSE, while 1747 declined. After two years of 
losing money, people are getting discouraged and selling 
stocks.

And we noticed something else too - the gap between 
inflation-indexed TIPS and 10-year T-notes has dropped 
to a new low - 1.82%...another signal of Japan-style 
deflation. 

And, as reported yesterday, Americans are borrowing less 
money.

Are Americans beginning to act like the Japanese - 
shaving expenses, saving money, and selling assets? 
Maybe... Let's see what Eric has to say:

*******

Eric Fry reports from the concrete jungle:

- Americans are an optimistic lot. And American 
investors, in particular, are experts in the art of 
making silk purses from sows' ears. After Wall Street 
rang the closing bell yesterday, three well-known 
companies reported news of some kind: Microsoft, 
Motorola and Yahoo. Was it good news? Not exactly. But 
the silk purse manufacturers went right to work and all 
three stocks soared higher in after-hours trading.

- Before rushing in with the masses this morning to buy 
some of these popular stocks, consider what constitutes 
"good news" these days.

- Microsoft announced that its revenues for the quarter 
would be slightly higher than what it had previously 
predicted, somewhere around $6.5 billion. Nevermind that 
the company will take a $3.9 billion write-off to 
account for its losses in various venture capital 
investments and other equity holdings. Microsoft's stock 
climbed 6% in after-hours trading.

- Motorola reported a quarterly loss of 11 cents a 
share. But hey, the loss was a penny better than the 
consensus estimate. Nevermind that cell-phone revenues 
dropped 25% and that its semiconductor sales plummeted 
38% from the year-ago totals. The stock gained 5% after-
hours.

- Yahoo, for its part, reported one whole penny per 
share in earnings instead of the breakeven result that 
Wall Street had predicted. Nevermind that revenues 
collapsed 33%. The stocks soared 8% after-hours.

- By comparison to the after-hours action, the regular 
trading day seemed fairly mundane. The Nasdaq Composite 
Index gained 9 points in the regular session and the Dow 
moved up 65 points to 10,241.

- It almost never pays to chase after popular stocks.

- "Popularity is poison," cautions The Babson Staff 
Letter. "If, starting in 1982, an investor bought the 
most popular stock [defined by Babson as the highest PE 
stock on the NYSE] each year and held it up to today, 
the 19 stocks together would have earned only 40% as 
much as if yearly investments had been made in an S&P 
500 index fund."

- Notable losers on Babson's "most popular" list include 
last year's entry, Cisco Systems, and the most popular 
stock of 1998, Coca-Cola Enterprises. Since making 
Babson's list, Cisco and CCE have produced losses of 73% 
and 67% respectively. I guess there's a reason why the 
time-worn strategy for success on Wall Street is not, 
"Buy high, sell low."

- With reports like this circling about...business isn't 
exactly booming in my neck of the woods either. Wall 
Street profits fell nearly 40% in the second quarter 
from a year ago, according to a Securities Industry 
Association study released today.

- But it's not for a lack of trying. A friend of mine 
who is an institutional stockbroker for a major Wall 
Street firm told me something very interesting last 
night. His firm's "storage analyst" (i.e. the analyst 
who researches data storage companies like EMC and 
Brocade) had been telling clients to sell EMC several 
days before EMC's recent earnings shortfall 
announcement. 

- Why is this interesting? Because this same analyst 
rated EMC a "Buy," even though he was telling some 
clients to sell. As my friend explains, "You've got to 
have a buy on something." My friend added, "The analyst 
thinks that every storage stock he covers is an outright 
'sell.' Pricing for storage is simply collapsing."

*******

Back to Bill, in Baltimore, Maryland, hon...

*** Popularity does have some advantages. "In 2000, the 
TV series 'Temptation Island' was set in Belize," 
Barbara Periello of IL Discovery Tours tells me. "Today 
property values have skyrocketed as much as 80% on 
Ambergris Caye. This year, FOX TV is taking their show 
to Honduras' Bay Islands. We suspect there will be a 
similar, immediate boost in values." (If you're 
interested, you can join Barbara as she investigates 
potential sites first-hand this coming September... 
request more information by sending an e-mail to: 
tours@gate.net)

*** What's going on in Baltimore? The city seems much 
livelier than before. 

*** Elizabeth took the kids to visit her family in New 
York - leaving me alone in the city. I feel a little 
like Jack Lemmon in "The Seven Year Itch." waiting for 
Marilyn Monroe to drop a flower pot. But the city is not 
that lively. 

*** I went to look at a big, old rowhouse for sale 
yesterday in the historic Mount Vernon area. At $450,000 
the price may be derisory in New York or San Francisco, 
but it is outrageous for Charm City. After a hundred 
years of declining in real terms, could Baltimore 
property have bottomed out?

*** And last night, I went out to dinner with some 
friends - we decided to try a new restaurant, but 
discovered that it was full! This never used to happen 
in Baltimore. We had to go to yet another new 
restaurant.

*** My friend, Thom, with whom I dined, is in charge of 
the company student intern quarters.

*** "Not a single intern has disappeared since I've been 
on the job," he declared, proudly.

*** "But what about that German girl who fell down the 
elevator shaft," I reminded him.

*** "Hey, that wasn't my fault..."

*** Miraculously, the girl was unhurt and now works for 
our partners in Bonn.

* * * * * * * * * Advertisement * * * * * * * * * * 

Martin D. Weiss, Ph.D., who warned of last year's Nasdaq 
crash 2 1/2 months in advance and helped his clients 
more than QUADRUPLE THEIR MONEY while the techs wrecked, 
answers your most pressing investment question now: 

IS THE CRASH OVER?

Click on the link below to find out his answer:

http://safemoneyreport.com/agora71201
* * * * * * * * * * * * * * * * * * * * * * * * * * 


ONE LONG, ONE SHORT

"You can get any style house you want. You can get wood. 
You can get brick. You can get stucco. Boy, can you get 
stucco."

Groucho Marx, 
on an early Florida land development project, 
in "Coconuts"


Popularity is poison, as Eric points out above.

Today, I bring you a poison stock...and a possible 
antidote.

Since we always like to walk on the sunny side of the 
street here at the Daily Reckoning, we will begin by 
strolling over to a stock featured in this week's 
Barron's - Consolidated Tomoka. I believe I mentioned 
this company to you several months ago - as an example 
of a 'darned cheap stock.'

If I did not, I should have. Because 'darned cheap 
stocks' can be as hard to find as congressional interns. 

Greg Jahnke reports in today's Prudent Bear that he 
subjected 2,000 companies to a series of simple value 
tests. They needed to be priced at less than 1 times 
sales. They needed a ROE of at least 15% over the past 
12 months. And they could have debt equal to no more 
than 25% of capital. Only 45 companies passed the tests, 
or fewer than one in 40.

Tomoka was probably not even considered by Jahnke, 
because its value does not appear on its balance sheet. 
Instead, it lies in central Florida - including six and 
a half miles straddling Interstate 95. 

In the same era in which tycoons spent huge sums to 
build Baltimore's great mansions, the forefathers of 
Tomoka were buying scrub land in and around Daytona 
Beach for $125 an acre. Baltimore was popular at the 
time. Florida was not. 

But Baltimore property peaked out - in real terms - 
before the crash of '29. Daytona Beach, on the other 
hand, grew more popular with each passing winter - and 
got a huge boost after the Carrier company brought 
residential air conditioning to Florida in the 1950s.

Today, Tomoka's 15,000 acres are worth more than they 
were 100 years ago...but are they worth more than is 
reflected in the stock price? At a recent price of 
$14.90 a share, Barron's reports, "the market is saying 
the land is worth $5,570 per acre." The difference 
between that number and the amount it could be sold for 
represents the 'margin of safety' and a measure of the 
potential profit from buying Tomoka shares.

"If you value all the property at last year's average 
sales price - a hardly extravagant $34,215 an acre," 
figures Barron's, "the stock should sell at $91 a 
share."

While we offer no opinion on the future of Florida land 
prices...we suspect that an investor has a much better 
chance of making money with Tomoka than he has with 
shares whose value is less close to terra firma.

One such company is IBM. Grant's Interest Rate Observer 
notes that IBM's CEO, Louis Gerstner, Jr., has been made 
a knight of the British Empire. One doesn't see many 
knights on the streets of Manhattan any more. Sir Louis 
is an anachronism. But so is IBM. The company is priced 
as though there were still a bull market in technology.

IBM operates in 7 different, but related, technology 
industries: services, servers, semiconductors, storage, 
software, hosting and personal computers. In every one 
of these industries, the competitors' stock prices have 
been knocked down by bad business conditions, but Sir 
Louis has been untouched except by praise. By 
agglomerating all these bad businesses together, could 
IBM have created a good one?

In software, for example, Goldman Sachs' index has been 
cut in half over the last two years. But IBM is actually 
higher. The Nasdaq, too, has slumped to only half what 
it was 24 months ago, while IBM is stands as erect and 
tall as a Buckingham Palace guard. 

Sun Microsystems, a competitor server company, trades at 
barely a quarter of what it did two years ago. Computer 
Sciences, which competes with IBM in the services 
market, is about 50% off. While EMC, a storage company, 
has lost 60% of its value. 

Meanwhile, the competitive hosting firm, Exodus, must 
have left for the promised land...its shares are down 
98% since the seas parted in March 2000. But, somehow, 
IBM has suffered no damage.

Laying itself out on a bed of quicksand, IBM has - so 
far - avoided sinking. The shares, which trade at 23 
times earnings, are still as popular as a bum who just 
won the lottery. 

Abby Joseph Cohen recommends the stock. That alone may 
not be reason to go short. But Big Blue announced 
layoffs last week, and more yesterday. And next week, 
IBM will report results for the last quarter. Most 
analysts and investors will accept IBM's numbers without 
question. But a few may ask questions.

Sir Louis will need some very good answers.

Your correspondent...whose popularity has never been in 
question...


Bill Bonner

 
About The Daily Reckoning:

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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Last modified: July 13, 2001

Published By Tulips and Bears LLC