In Today's Daily Reckoning:
*** Rally slows...the descending peaks of a bear market
*** Stocks are likely to return less than 5% per year
*** Bricks fight back...tobacco companies become
government utilities...the EMH dis-proven.
Who's Having Dinner With Bill Bonner? What's on the menu?
What's on the table? Where in the world? Could a simple
supper open the door to your exciting new future? You may
never know. But you can get some immediate answers in
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*** The summer rally in the Dow seemed to stall yesterday
- 11 points below the peak of the last rally on June 5th.
Richard Russell (http://www.dowtheoryletters.com) notes
the following pattern:
The June 15 peak was 119 points below the May 16 peak
Which was 210 points below the April 25 peak.
Which was 163 points below the April 14 peak
Which was 435 point below the highest point ever achieved
by the Dow - on January 14, 2000.
*** These descending peaks are typical, he believes, of a
*** Also, yesterday, the trend in the advance/decline
ratio turned around. Three were only 1314 stocks
advancing, while 1517 declined.
*** So, even in the middle of this 'Summer of Love,' it's
important to remember what is really going on. We appear
to be working our way down from the biggest bull market
top of all time. Every major index has topped out. And
the most absurdly priced bubble stocks - those dot.coms I
wrote about yesterday - have crashed.
*** Wall Street and nave investors seem to think the
worst is over. Even though some of the foam has been
blown off the top, stocks are still preposterously
overpriced. Which is not to say they couldn't become even
more preposterously priced. But buying them now is
speculating on the future - not serious investing.
*** The Dow and S&P are at nearly twice their normal
P/Es. And the Nasdaq 100, though lower than it was 6
months ago, is still trading at 144 times earnings.
*** "History shows," writes Lynn Carpenter, "that when
the S&P is selling as high as 22 times earnings (it's now
selling at an unheard of 29.6 times earnings) over a ten
year period you will make only about 5% a year by holding
stocks. But this was calculated on an historically
average dividend return of around 4%. Today the yield on
the S&P is only 1.07%. This means that over the next ten
years you would probably earn less than 5% per annum on
your money by holding stocks."
*** "Against this," she continues, "a ten-year Treasury
note (as of today) yields 6% free of state taxes. Thus,
the odds say that if you assume and hold a position in
stocks over the next ten years, you will probably NOT do
as well as if you had simply purchased 10-year T-notes."
*** Perhaps the most important top was the one that went
unreported. On May 19th, the Dollar Index hit 112.07. It
declined to 105.50 on June 15th. Since then, it's come
back to 108. The dollar rose again yesterday, for
example. If it continues, it may surpass the May 19th
high. I'm watching, because the whole shebang rests on
the dollar - stocks, bonds, the economy...inflation -
everything that doesn't really matter.
*** Gold rose $2.30 to bring it to $284. At this rate,
the heartbreak metal will return to its high of two
decades ago sometime before the next millenium. Platinum
rose $14.80. Is gold finished? See below.
*** The Wall Street Journal confirms the death of the
Internet mania. May it rest in peace. In a supplement
section entitled, "Bricks Fight Back," it records a
rather predictable trend: "Today, established companies
are starting to recapture customers who had threatened to
leave them forever." How? By entering cyberspace and
competing with the "pure play" Internets. And guess who's
*** According to the WSJ - the "multi-channel" firms are
already bringing in 59% of the e-business...and gaining.
*** Another piece in the WSJ tells the story of the $145
billion judgement against the tobacco companies. Though
likely to be overturned on appeal, the judgement can only
be understood as another step towards turning the tobacco
companies into a regulated state industry, run for the
benefit of the lawyers in and out of government. The
tobacco companies are slated to pay out $6 billion this
year...and more the next...with most of the loot going to
*** "There's no question," said a spokesman for Value
Line Investment Survey, "our methodology refutes the
efficient market theory." The Efficient Market
Hypothesis, you may recall, is the notion that the market
as a whole is always better informed than any individual
investor. Thus, the prices set by the collective wisdom
of the marketplace will be superior to the guesses you
might make about what the prices should be. This being
the case, you will do as well throwing darts at the stock
pages as you will by laboriously poring over charts and
*** But the results of Mark Hulbert's 20 years of study
show that the market is not as efficient as academics
might think. Most people will do as well throwing darts.
But some will do better by actually studying the facts
and figures - such as Value Line. The stock picking
service sticks to a tight discipline based on known,
quantifiable information, "with no emotionalism in it,"
and is the only service Hulbert followed which managed to
beat the Wilshire 5000 over the two decade period.
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Yesterday brought news that a "single sheet study" by
Michelangelo sold for $12.3 million at Christie's auction
house in London. A new record.
And a DR reader, catching up on his email after slopping
the hogs out behind the trailer, reports that even in the
Ozarks property prices are rising smartly. Y2K escapists
may find they've made a shrewd move after all.
Doodles by great masters...backwoods property...what
isn't rising in price? Fact is, practically everything
and anything you might have bought in the last 20 years
has turned out to be a good investment.
"Let's say that for some reason you decided back in 1980
that you wanted to lose money on your investments over
the next twenty years," writes James Collins in the July
17 edition of the New Yorker magazine. "Succeeding in
this would have been a very difficult thing to do."
Collins set himself too easy a task - making fun of
'goldbugs.' Aficionados of the heartbreaker metal have
performed like circus clowns. Every year for the past two
decades has brought new pratfalls and punch lines. It has
been yucks aplenty as the world's ultimate money has
declined against almost everything else the world has to
offer - even the ersatz money printed at negligible cost
with the negligible backing of negligible governments in
negligible backwaters of the planet.
The Dow was at 800 in 1980. It's now near 11,000. Value
stocks, growth stocks, stocks with neither value nor
growth - all have gone up. High tech. Low tech. No tech -
you name it, virtually every scam and pipe dream has been
a big winner.
Bonds soared too. And real estate almost everywhere. Old
masters like Michelangelo and no-talents like Jackson
Pollack - all rose nicely. Antiques. Comic books.
Motorcycles. Kitsch. Manuscripts. The efficient market
hypothesis seemed to apply - not just to the stock market
- but to the entire world. If you'd launched a dart from
Cape Canaveral in 1980 and bought whatever it fell upon -
you probably would have made money.
Unless, that is, if it landed on a gold mine.
Yesterday, you could have purchased an ounce of gold for
$284. On January 21, 1980 - that is to say, two decades
ago...about the same time Mark Hulbert began tracking the
performance of investment advisors...you could have
bought that very same ounce of gold for $825. You would
have lost about 70% of your money over the period if
you'd been holding gold. (See: Special Presentaion: Gold
If that were the scope of the loss - gold bugs would be
delighted. Unfortunately, when the market gods decide to
destroy you - they don't do it by half measures. Two
hundred and eighty four dollars ain't what it used to be.
The suit that you might have bought with that money in
1980 now costs at least twice as much. The monthly rent
you might have paid during the Carter Administration is
now probably three times as much. For while the dollars
put out by the Bureau of Printing and Engraving rose
against the heartbreak metal...they fell against
An ounce of gold would have bought one unit of the Dow
when the year began in 1980 - both were at about 800.
Today, you will need about 33 ounces of gold to buy a
single unit of the Dow.
"Goldbugs tend to be more intellectual than other
investors," writes Mr. Collins, graciously, "more
interested in ideas and in history, and once they get a
theory in their heads they are incapable of letting it
The theory to which the author refers holds that, over
time, all paper currencies will be rendered worthless by
the people who produce them...but gold will retain its
value. The theory turned out to be perhaps the most
spectacularly imbecilic investment tool of all time. But
that doesn't mean it is wrong. And if there is any
justice in the world, those who were so thoroughly
infected with the goldbug for so long...and who suffered
such terrible losses for the last 20 years...might now
have built up a little immunity from further ailment.
They might have realized that trends are usually cyclical
- not permanent. And the very moment when something
appears as though it will go up forever is precisely the
moment that it is most likely to fall.
Twenty years ago, gold bugs were on the top of the world.
They are a laughingstock today. But they are by no means
the only clowns under the Big Top.
Andy Smith, a commodities analyst in London is quoted in
the New Yorker article: "We're going on a fifty-five or
sixty-year aboveground supply. Gold has been marginalized
because the world has changed. We have the most robust
financial system we've ever had. The thing undermining
the many-thousand-year myth of gold is progress!"
"Sure," the voice of progress continued, "gold is on the
periodic table. Why not choose boron? It's over. Of
course, it's over."
Is it really over? Have the lessons of thousands of years
been made irrelevant by the central bankers and f******
bond traders of the year 2,000? Have goldbugs been
betrayed forever by their own vestigial instincts? Is
today's robust financial system a major revolutionary
innovation - equal, say, to the introduction of the
internal combustion engine? Or just a cyclical top?
Tune in tomorrow for the exciting sequel to today's
episode of the Daily Reckoning.
Your unreconstructed goldbug in Baltimore,
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Last modified: April 02, 2001
Published By Tulips and Bears