In Today's Daily Reckoning:
*** Summer Rally continues...but hopes for a 'soft
landing' fade
*** Intel needs a 140% profit margin
*** Take me out to the ball game...
*** "Growth stocks are back in vogue," said one analyst
yesterday as the summer rally continued. He referred to
the shift in enthusiasm from the Dow to the Nasdaq.
*** The Dow rose only 5.3 points. But the Nasdaq managed
a 75-point increase.
*** As stocks went, so went bonds. The smart money seems
to be taking advantage of the summer rally to "go away"
from stocks, as George Soros put it.
*** There are two ways to rationalize today's
bullishness. Some bulls think Alan Greenspan is going to
deliver the much-hoped for 'soft landing' - in which the
economy drifts down and lands in the soft, warm sand of
summer...right next to the bear's beach blanket. No
inflation. No recession. But the combination of rising
stock prices and rising bonds (meaning, falling interest
rates) makes the soft landing less likely. As long as
investors believe in the 'soft landing,' it will never
happen. Because as long as they anticipate continued good
times, they continue spending, borrowing and driving up
stock prices. (see: A Synthetic Soft
Landing?
)
*** The other bullish argument is more daring. The Gov.
of Maryland, for example, is going around making speeches
in which he claims that the business cycle has been
overcome - by technology-driven productivity gains and
better financial management. This is the argument that
undergirds the entire New Era delusion - that
productivity gains offset the effects of inflation. Since
'overheating' no longer leads to inflation, there is no
reason for the Fed to attempt to restrain the economy...
and no need for cyclical downturns.
*** Jim Davidson is grappling with this issue, too.
Davidson: "I think it is meaningful that the ideas that
are so much a part of the digital economy are much less
susceptible to diminishing returns than tulip bulbs or
railroad cars." (see: Analog Bear, Digital Dreamer
)
*** Meanwhile, the WSJ reports today that "more companies
are raising prices than at any time in the past five
years," and "import costs continue to climb due to higher
oil prices." Oil rose again yesterday - $1.15.
*** Richard Russell reports from San Diego that "a 10,000
square foot home in San Diego on 5.6 acres sold last week
for $25 million cash, $5 million above the asking price
and the most expensive home ever sold in San Diego
County. In New York apartments and condos regularly go
for $5 million and up. These are apartments that used to
rent for $400 and $500 a month back in the '30s and '40s.
New Yorkers are now paying fortunes for Central Park West
apartments. Times change, but when I was a kid wealthy
people wouldn't consider living on the West Side - it was
'the wrong side of town' in those days. Now any side of
town is the right side if you can even find an apartment
under a million bucks."
*** If spending need not be constrained in the private
sector, there are even fewer inhibitions in the public
one. "Gray Davis signed [California's]$95 billion
budget," writes Doug Noland in Credit Bubble Bulletin.
"This budget, reportedly, calls for a stunning 18%
increase in spending over the current budget. According
to local papers, the budget is "packed with pork." From
the SF Chronicle, quoting an assemblyman, "It's
completely out of control. The governor has become Santa
Claus for every legislator with visions of boondoggles
dancing in their heads."
*** Jack 'be nimble' Welch did it again. The GE CEO
announced earnings higher than expected. Guess how much
higher. One penny, as usual. Isn't it amazing that the
world's largest company, with operations all over the
world, in hundreds of different currencies, all changing
relative value on an hour-by-hour basis, can be so
precise about how much it will make? The stock fell $1.50
yesterday...but Jack got a $7 million advance for a new
book.
*** Investors cannot do arithmetic. Intel is now as big
as GE. It has only $30 billion in revenue, but a market
cap of $500 billion. The company saw an increase of
operating income of only 2% in the last 27 months - so it
could hardly be called a growth company. With no premium
for growth, the company would have to have a profit
margin of 140% of gross revenues in order to justify a
standard p/e of 12. At a p/e of 20, its earnings would
have to be 83% of its revenues.
*** Commentators are referring to recent market activity
as "rotation" from one sector to another...or
"Darwinian," in which the strongest companies advance
while the weaker ones fall behind. But in this kind of
choppy market everyone loses...because meters are
running. Interest has to be paid - and so do brokers,
analysts, and fund managers.
**** "The head office realizes with uncharacteristic
speed that 'no new projects' means good-bye to bonuses,
executive jets and country club memberships." Says Dan
Ferris, describing the profit cycle for mining stocks.
"When commodities prices begin rising - as they are right
now - the 'head office' sends out a team to scoop up
existing junior mining companies who are already in the
ground. If you happen to own shares in the junior mining
company... you can do very well - very quickly." One of
his picks in a global exploration and mining portfolio is
up an annualized 152% in just 9 months.
(http://www.dailyreckoning.com/body_headline.cfm?id=233)
*** Addison reports from Paris that Bastille Day
celebrations are underway. A parade of tanks, missile
carriers and other military hardware has been going up
the rue de Rivoli, near our new office, all morning.
Today is the day when the French recall the storming of
the Bastille by a Paris mob, and the subsequent mass
murder and expropriation of aristocrats and sentimental
traditionalists.
*** I was called onto the field at Camden Yards and pawed
by the Orioles' mascot last night. This indignity was
perpetrated before a crowd of thousands as I was given an
autographed baseball to thank me for bringing more than
250 people to the game. The people were the employees,
friends, and family of our publishing business in
Baltimore. We enjoyed the game ...even though the O's
lost.
*** The controversial John Rocker pitched, briefly, for
Atlanta. When asked what he might do if he were booted
out of baseball, Rocker replied that he might become a
stockbroker.
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"Don't write about this in the Daily Reckoning,"
pleaded my host. (Honoring his request - I will get
the facts even more messed up than I usually do.)
It was almost un-American. At last night's Orioles-
Braves game I barely saw a single play.
Instead, I was doing business that couldn't wait.
In a sign of the times, start-up tech and Internet
companies are so desperately low on cash that they
must make their pitches to investors wherever and
whenever they can - even at the O's stadium.
Without giving the details, the context is worth
examining. It shows how people gain real knowledge
in the real world - as opposed to what Hayek calls
the 'pretense of knowledge,' which, so far, is the
most ubiquitous new product of the Information Age.
The young men I met last night have exciting ideas.
They have brains and energy. They have new
technology...and the gumption to turn it into
successful businesses. But their timing is
unfortunate.
Had this been AD 1999 rather than AD 2000, they
might have been sitting in the plush offices of
Alex Brown a few blocks away - where, only a few
years ago analysts, venture capitalists and
investment bankers listened to a presentation by
Bill Gates, explaining the business plan for a
company few had heard of. Twenty-four people had
been invited to the meeting - in which they were
offered MSFT shares at pre-IPO prices. But only 15
showed up. The others thought they had better
things to do.
Last night, the Bill Gates of the future, whose
real name I am not at liberty to reveal, had to
make his presentation to a group of hard-drinking,
argumentative contrarians looking for a bargain.
Christopher Byron tells the story of how Salon.com
went public on Bloomberg.com. The Internet fad du
jour was "content." Investors were willing to
believe that good content on a website could
generate enough eyeballs, which in turn would
generate enough advertising revenue, to make money.
People in the publishing business didn't believe it
was possible. But that didn't stop the underwriter,
W.R. Hambrecht & Co., from dumping this on the
public at $10.50 a share almost exactly one year
ago.
"For a brief and glorious moment," Byron reports,
"Salon.com touched an intraday high of $15.12,
giving [it] a market value of $162 million, as all
involved congratulated each other on their
collective financial genius...while leaving for
another day the annoying problem of what to do when
the $24.9 million in IPO proceeds ran out."
Well, now the proceeds are running out. Salon is
firing people - including the writers who were
supposed to provide the "content." The stock is
down more than 90 % from its high - and the
principals are probably at another stadium on the
other side of the country pitching their business
plan - stripped down and much-more realistic - to
an equally distracted and equally skeptical bunch
of investors.
"I'm seeing dozens of these deals," said a lawyer
in our group, whom I will only identify as John
Tilghman Dunbar of Venable, McGruder and Howard,
233 North Ave. Baltimore 21205...410 325 7788.
Social Security number: 213 56 0985. Mother's
maiden name: Lucy. "These companies are re-
structuring, re-financing, merging, disappearing -
you name it."
What went up like a Bastille Day rocket came down
like Louis 16th's head. The Information Age seemed
to offer little knowledge or wisdom to guide
investors. A company that was worth a billion
dollars one day was thought to be worth less than
5% of that a few days later. The "efficient" market
seemed to have no idea a stock should really be
worth.
Broad.com was considered a $100 stock last
December. By March, the market judged it worth
$250. A month later, the collective wisdom of
investors sent it back to $100. And now...guess
what...it's at $240 again.
There are only two sources of knowledge - as I
pointed out a day or two ago. But investors ignored
them both. New investors had no personal experience
with booms and busts. Nor did they rely on the
experience of others, embedded in the rules and
customs of stock market investing. They didn't know
a P/E from a rhubarb pie. And they could care less.
Nor was logic much help. "[S]imple arithmetic,"
says Byron, "didn't stop ...W.R. Hambrecht." Why?
"Fee-obsessed underwriters...couldn't say no to
seven-and eight-digit commissions. [They] set the
merry-go-round whirling to create a market for
deals that had crash and burn tattooed all over
them."
Freed from the arithmetic of reason (which is
unreliable in any case) and the deaf to the voice
of experience...investors, as well as investment
pros, were left prey to the basest human emotions -
fear and greed.
We have seen plenty of greed over the last few
years. The fear is still ahead.
Until Monday,
Bill Bonner
P.S. The excitement of the early stages of the Internet
revolution has come and gone. Heads are beginning to
roll. The Terror is next.
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Last modified: April 02, 2001
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