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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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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
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Last modified: April 02, 2001
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