Contributed by Bill
Publisher of: The
Fleet Street Letter
MONDAY, 23 JULY 2001
*** Amazon...further down the river...
*** A useful phrase for 2001-2002: "We did not fully
comprehend the risk..."
*** Wall Street on the defensive...wine futures...more
losses in Japan...$10.4 billion for Yahoo?... and so
|Oh Amazon...another quarter gone by and Amazon.com |
has gone nowhere but down the river! 17 consecutive
quarterly losses. More than 5 billion books sold...and
AMZN has 50 cents of debt to show for every one of them.
What a company!
But Jeff Bezos' monster is just a sideshow. The
real show is taking place in the credit markets...the
economy...and the Dow.
Mortgage lenders Freddie Mac and Fannie Mae - the
freaky Siamese twins of credit creation - are
practically holding the economy and the Dow up alone.
Fannie's portfolio of mortgages grew by 70% over the
last 3 years, while Freddie's holdings grew by 134%. And
Freddie, ever eager to help out a central banker in
distress, has bought 180% more debt in the 2nd quarter
than the same period a year ago. (see: Has The Fed
Abdicated Its Authority?)
We "did not fully comprehend the risk" said the
CEO of AMEX recently, explaining how the company took a
$826 million hit on its junk bond investments. AMEX
expected the bonds to default at a 2% annual rate.
Instead, 8% of them are going bad each year.
Whether for use by homeowners with too much debt,
shareholders with stocks that are too expensive,
foreigners with too many dollars, or financial
institutions with elaborate derivative positions...the
phrase - 'we did not fully comprehend the risk' - may
come in handy.
But, Eric, what's shakin' on Wall Street?
Eric Fry reports from New York:
- Last week, Wall Street featured a lot of "sound and
fury, signifying [next to] nothing." The Dow gained a
meager 37 points over five trading days and the Nasdaq
fell a slightly more significant 55 points.
- The week's overall message seemed to be that the slow-
down is not over just yet. Although Nokia offered an
upbeat forecast, AOL, Intel and EMC each told a tale of
woe. When the dust settled, EMC's share price had been
sliced in two.
- "All of Wall Street is on the defensive," The NYTimes
reports. But not because the stock market is struggling.
Rather, because the legions of investors who are only
now coming to realize that "their decimated portfolios
may never come back" are looking for someone to blame.
Next step: sue your broker.
- Most of the unfortunate souls who lost a bundle in the
stock market should probably begin their blame game by
looking in the mirror. Greed loses far more money than
any wire-house broker ever could. Couple a client's
greed with a broker's greed and it's bye-bye savings.
- But then, following the timeworn American custom, it's
'hello lawyer'. To be sure, avarice is a dominant part
of Wall Street's DNA, but suing brokers for being self-
serving is like trying to blame a rattlesnake for being
- Nevertheless, Wall Street firms are the new Phillip
Morris of American courtrooms - purveyors of a known
toxic product, the victims of which claim ignorance when
they suffer the consequences of using it.
- Says the New York Times, "...investing is not as easy
as it looks." Now they tell us!
- Wine futures will begin trading on - where else - the
Paris bourse on September 14th. The Winefax futures
contracts will cover three different price levels for
French Bordeaux wine.
- Apparently, the hand of fate isn't finished slapping
the Japanese around. For more than a decade, asset
values from stock to real estate to golf club
memberships have been spiraling downward. At the same
time, the industrious nation's economy muddles
along...on its good days. And now this:
According to the Ministry of Health, Labor and Welfare,
Japan's Pension Welfare Service Public Corp. suffered a
loss of 2.31 trillion yen ($18.8 billion) in the year
ending March 2001 - the national pension fund's largest
one-year loss ever... and that's saying something, 12
years into a bear market.
- You gotta love Chris Byron. The inimitable financial
writer for the New York Observer offers a unique take on
Yahoo's latest earnings. "The fact is, the only
worthwhile business Yahoo now has going for it is
collecting the interest it has been earning on its $1.75
billion of cash and marketable securities," says Byron.
"As such, Yahoo Inc. isn't really a business at all;
it's just an enormous money-market fund that employs
3,000 people engaged in wasting shareholders' money...
- "Just how overvalued is Yahoo, really?" Byron asks.
"Yahoo is being valued at somewhere around $10.4
billion. So if someone came around and offered you the
following - $10.4 billion in cash, or all of Yahoo Inc.
- which would you take? Enough said..."
Bill back in Charm City:
*** "ENERGY IS DONE. Sell it all," writes Dan Ferris,
"Whenever people start talking about permanently high
oil prices, you know it's all over. Oil will continue
its century-long real descent. That's called progress,
and it happens mostly when times are bad. The beauty in
this is that human nature will never change, and this
opportunity will come around every several years like
clockwork. For now, it's definitely time to sell oil."
*** Meanwhile, my old friend, Scott Burns, urges
caution: "'The End of Cheap Oil' - a landmark article in
Scientific American in 1998 - asserted that global oil
production would start to decline around the year 2010.
Based on a global extension of techniques developed by
geophysicist M. King Hubbert, the article showed that we
were rapidly approaching the point where half of all oil
reserves had been pumped out of the ground. The article
also showed that most of the recent increases in oil
reserves were political fictions, that new finds were
smaller fields, and that global oil production would
turn down as certainly as U.S. oil production had peaked
in the late '60s."
*** "It should be noted that the authors [of the
Scientific American article] are not members of the
gloom-and-doom school," Scott continues. "They were
careful to acknowledge alternative sources of oil that
are, as yet, undeveloped. 'The world is not running out
of oil - at least not yet,' they declared: 'What our
society does face, and soon, is the end of the abundant
and cheap oil on which all industrial nations depend.'
*** "One implication: The energy jolts of the last year
could signal that we are about to experience the
economic boom of the '80s and '90s in reverse."
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VICTIMS OF GREENSPANISM
Hang the black crepe. Bring out the gladiolas...
I can almost see the caskets, laid out side by side.
If you have endured the last few days of the Daily
Reckoning, you know the stiffs to whom I refer. For on
Friday, I posed the question: upon whom will the
deadweight of Greenspanism fall? When?
Force and fraud, the two weapons of modern government
and managed currencies, are bound to cause some damage.
Jeffrey Rogers Hummel explains:
"The pirates who plagued colonial waters until the
middle of the 18th century enriched themselves with
captured cargoes. If they sank merchant ships in the
process, then the losses of merchants exceeded the gains
of the pirates. Economists call this excess burden
All government actions - whether making war, taxing
citizens, or forcing funny money and artificial rates of
interest upon them - leave a path of destruction. Today,
I take a peek into the open boxes of two of tomorrow's
There, on the one side, is the investor - the poor soggy
schmuck who was sunk by Wall Street and Fed 'liquidity.'
Urged to 'buy, buy, buy' by shills like James Cramer and
Abby Joseph Cohen, he went out and bought.
What chance did he have? Figures from May show more than
$17 billion of new money reaching equity funds. And
these are not cheap stocks he's been buying. The Dow
still trades at 25 times earnings. Despite the blow-up
in tech, companies such as e-Bay trade at 170 times
earnings. Loaded to the gunwales with these heavy
stocks, he was sure to go under when the waves picked
And there on the right, is the American consumer, the
poor schlep - he broke his back trying to carry the
entire world economy.
Urged to excess by Dallas Fed governor McTeer, and low
short-term interest rates, he did his best. Struggling
with a greater burden of credit card debt and mortgage
debt than the world has ever seen - he nevertheless
tried to "spend, spend, spend" as if it were his
His situation had been hopeless for a long time.
When Greenspan began cutting rates, unemployment was
below 4.5% - lower than it had been since the late 60s.
How could he ever expect that unemployment would not
rise? Previous downturns had sent unemployment soaring
as high as 10% - as recently as the early 80s. In the
slump of '89-'92, the jobless rate hit 7.8%.
What's the key to jobs? Easy - corporate profits. When
profit margins come under pressure, managers cut
"The signs of an investment collapse are everywhere,"
wrote Dr. Kurt Richebacher in early July, "particularly
in the steepest and most rapid slump of profits in the
whole postwar period."
"Corporate America is in a deep earnings recession,"
observed Stephen Roach of Morgan Stanley, "and needs to
cut costs. We went hog wild bringing in managers, and I
think they're going to get slashed..."
I examine the corpse in front of me for slash marks.
Sure enough, there they are. But it wasn't the sharp
pink slip that killed him. It was what happened next.
Mr. Consumer could have cut back and hunkered down; he
might have thrown away his credit cards while there was
still a chance to save himself. But why worry? Wall
Street and the news media assured him there would be a
'second half recovery.' Instead of cutting back, he
actually increased his indebtedness in the first half of
In 1980, the consumer had only about 60% as much debt,
relative to his earnings. And he had more savings, too.
But this guy, in the coffin before me, left no
savings...he had no margin of safety. When he lost his
job, he could no longer support the weight of
What a shame we have no suitable last rites...and no
appropriate dirges or funeral services for those who
have been blown-up by Wall Street, or drowned or broken
by the Fed. Nor are there any placques...nor
statues...not even a small white headstone erected to
their memory. What a pity. For these two both heeded the
call of duty just as any Johnny Reb, Doughboy or grunt.
They went 'over the top' when they heard the whistle -
buying stocks that were far too expensive...and
borrowing more money, even when they already carried
more debt than any trooper could bear. Surely, they
deserve at least a memorial service...a few candles and
But wait...this is still in the future.
The investor and the consumer are still alive. They
still breathe and walk among us. Perhaps there is still
time! Maybe they can avoid disaster...maybe it's not too
late! But how? If they sell their stocks, the market
will crash and everyone will lose. If they stop
borrowing and spending, the economy will come crashing
down...and they'll lose their jobs...
Oh well, at least we can prepare a decent wake and
funeral oration. And a tombstone with these words
chiseled out: "We did not fully comprehend the risk."
Your reporter in Baltimore...dusting off his black suit.
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.