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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
THURSDAY, 20 JULY 2000 

 

Today:  Darned Cheap Stocks

In Today's Daily Reckoning:
*** Almost everything fell on Wall Street yesterday
*** Intel down, Microsoft down...with much more downside 
to come
*** Hedonic measures...

*** Everything fell in price yesterday - well, almost 
everything. Bonds were down. Henry Kaufman says bond 
yields will fall to 4% in the not-too-distant future. 
Bond traders didn't seem to care. They were focused on 
Greenspan's testimony today. If the Harry Potter of 
central banking seems worried about inflation - bonds 
might fall further.


*** Yesterday, I reported the latest inflation figures 
from the Bureau of much-Labored Statistics. Bill King 
reminded me that even the alarming number put out by the 
BLS - showing inflation at a 7% annualized - probably 
understates the situation. 


*** The price of computers has gone down 24.4% year over 
year, says the BLS. As I've explained to you before, the 
numbers aren't crunched at BLS - they're extruded. The 
figure for computers depends on a "hedonic adjustment," 
in which product quality is calculated as though you 
actually paid for it. More computing power for the same 
price is regarded as the same as a lower price. 


*** And then, the quants decide that people shift their 
purchases towards lower prices - so the computer number 
is weighted more heavily...because it is declining. The 
numbers that finally emerge are no more reliable than 
sworn testimony from the president.


*** I landed in Paris this morning, after an 
uncomfortable flight from Washington. If the BLS applied 
its hedonic measures to air travel, prices would be 
rising steeply. Air travel seems to get less and less 
pleasant - or maybe it's just me.


*** Paris is beautiful... And the dollar rose yesterday - 
knocking the euro briefly below 92 cents. The dollar 
still has not made a new high - but it's not far off. 
With the dollar at 7.1 francs - it's summertime and the 
livin' is easy here in Paris. More about the dollar... 
tomorrow, after I wake up.


*** "Periodic rallies convince people that 'all is 
well'." Ray Devoe reminds us. "...[they] keep people 
wondering, 'if we are really in a bear market.' CNBC and 
other stock market cheerleaders are doing their part, 
too. The bear's mission is... to destroy those with 
negative attitudes on the market and discredit or humble 
prudent professional investors." Richard Russell in 
Barron's: "...the bear will make himself obvious after he 
has lured the most people into the market in order to 
lose the maximum possible amount of money." 
(http://www.dailyreckoning.com/body_headline.cf?id=252)


*** Stocks fell along with bonds. The Dow lost 43 points. 
The Nasdaq ended the session down 121. 


*** Intel fell more than 4 points. MSFT was down more 
than 5. These two companies - even following recent 
declines - still represent nearly a trillion dollars of 
market cap (give or take a hundred billion or so). Intel 
sells at a p/e of 59. MSFT has a p/e of 43. These numbers 
signal fast growth - why else would investors be willing 
to pay such high prices? Yet, Intel's operating income 
has been flat for the last 12 months. MSFT actually had 
declining income from operations. These tech giants are 
going to fall.


*** As the dollar rose, gold fell. It lost $3.50. You can 
now buy an ounce for $279 - or nearly a third of the 
nominal price when Ronald Reagan was sworn in as 
president. Even platinum went down - $1.20.


*** There were 1125 declining stocks on the NYSE 
yesterday... 1674 rose.


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DARNED CHEAP STOCKS


Young men of the '50s and '60s typically had grease under 
their fingernails - an indication of what was both a 
pastime and a necessity, working on their cars. 


Today's car parts do not seem to wear out the way the old 
ones did. What's more, today's automotive machinery tends 
to be too sophisticated and difficult for the average 
backyard mechanic.


I could practically stand up under the hood of my '54 
Chevy. It was a relatively simple machine that invited 
tinkering. But I do not even open the hood on modern 
cars. Why bother? I have no idea what goes on in there.


Young men seem to have lost interest. Instead, they spend 
their time connecting hard drives to CD burners. It's 
cleaner work, and you don't scrape your knuckles.


This trend has not gone unnoticed by investors. Auto 
parts manufacturers have been pounded by Wall Street. In 
fact, so beaten down are their prices that they have 
begun to look attractive.


My source for the auto stocks is James Grant's Interest 
Rate Observer. (http://www.grantspub.com) What water 
pumps and differential gears have to do with interest 
rate observing, I don't know. But Grant's revealed a 
group of companies that have roughly the same effect on 
extreme contrarians as free Guinness has on Irish 
housepainters. They make me a little giddy. 


Tenneco, reports Grants, can be purchased for just 2.68 
times earnings and half of book value. Tenneco, by the 
way, is no micro-cap. It has sales of more than $3 
billion annually.


Another parts maker is Visteon - selling at 3 times 
earnings. While Delphi, formerly of GM, has nearly $30 
million in sales and a P/E of only 7.7.


Visteon, by the way, sells for less than one tenth of 
sales. This, I don't need to point out, stands in 
remarkable contrast to many tech and net stocks, which 
often sell for hundreds of times sales. The Nasdaq's P/E 
is about 30 times greater than that of these 'old 
economy' stocks, and Visteon's p/e is about 1/25th of 
Intel's.


The difference is that Intel represents the technology of 
the future, while Visteon, Lear, Dana, and Delphi carry 
the banner for the technology of the past. 


I do not argue that this distinction is entirely 
incorrect...just that it is exaggerated.


Automobiles have been around for a while, but they do not 
appear to be disappearing. Most of the world's people 
still do not have them. And even in America, I did not 
notice that the traffic had thinned noticeably since my 
last visit.


What's more, the future may hold a surprising boost for 
these 'old economy' companies.


"Over the next five years," Grant's quotes an industry 
analyst, "over 50% of the UAW workers are eligible for 
retirement... That is the best time that the automobile 
companies will have to shift to outsourcing..."


Whether that will happen or not, I do not know. I cannot 
say what the future will bring. But when billion-dollar 
(in sales) companies sell for less than 3 times 
earnings... there is less future to worry about. 


While the automotive parts stocks have the misfortune of 
time working against them (that is, the future) 
...another group of stocks has the misfortune of space. 
They are in the wrong place. I'll give you more Darned 
Cheap Stocks tomorrow...


Until then,


Your jet-lagged correspondent, wishing you well...


Bill Bonner
 
 
 
 
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"
(Timothy)

" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor"
(Makram)

"It is actually better than some of the newsletters that I pay to
get"
(Joe)

"Your statements and philosophy have kept me from storming into the market and in fact [I'm] making some money in put options" (Frank)

Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

 
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Last modified: April 02, 2001

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