In Today's Daily Reckoning:
*** See-Saw Syndrome Continues
*** Better than expected earnings aren't good enough
*** Henry's birthday
*** "Stocks Seen Stuck in See-Saw Pattern" says today's
Reuter's headline. The paper notes the action but seems
unaware of the fulcrum - which appears to be Richard
Russell's 50% retracement level - Dow 10,759.
*** This 50% retracement marks the level at which the Dow
recovered half its losses...from its January high of
11,722 to its subsequent low of 9,796. Dow theorists
believe it is an important predictor. If the Dow holds
above the 50% level...it's bullish. If it remains
below...well, you can guess.
*** Back and forth, up and down...the Dow hasn't been
able to make up its mind. But each time it looks as
though stocks are on their way up...as it did last
Thursday...they get beaten down.
*** Friday was no exception. The Dow fell 110 points on
Friday. The Nasdaq lost ground too.
*** Taking the week as a whole, the Dow was down 79
points, and the Nasdaq down 152 (or 3.6%).
*** The Advance/Decline action wasn't encouraging either.
1427 stocks rose over the course of the week; 1864 fell.
*** This is the season for companies to announce their
earnings for the last quarter. 82% of the companies
reporting so far have "beat the numbers." AOL, for
example, reported earnings of 1 penny greater than
expectations.
*** But AOL stock fell $3 on the news. "Of the top 10
largest companies in the S&P 500 Index," writes Steve
Sjuggerud of the Oxford Club, "every one that's announced
so far has beaten Wall Street's earnings expectations.
Yet, every one of these companies is down since it
announced better-than-expected results. (The one's who've
announced so far are GE, Intel, Microsoft, Citigroup and
Lucent). The latest announcement, from Lucent, is a prime
example. Lucent beat expectations yesterday.
"But the announcement of beating expectations let down
investors - the stock fell $10 a share, down to $54."
What gives?
*** "Stocks," says Steve, "are priced for perfection
right now. Wall Street analysts now expect S&P 500
earnings growth of 24% over the next year - the most
optimistic forecast since 1984."
*** Perfection is as hard to achieve in the stock market
as it is in figure skating. And with expectations this
high, the opportunity for disappointment is great.
"Lucent's 10-point fall cost investors $32 billion
yesterday," according to Steve's calculations. He cites a
study by Ned Davis Research to make his case: "Since
1980, when Wall Street analysts expected earnings to grow
by 18% or more (like now), stocks ONLY rose 4.3% a year.
However, when analysts expected earnings to grow by LESS
THAN 12.5%, stocks actually GAINED 27% a year."
*** When dreamy investors turn against a stock, the
results are shocking. Agilent fell 33% last week. Lexmark
fell 22%. Macromedia was down 27%.
*** But the real nightmare is still ahead. E-bay must be
one of the great success stories of the Internet. It is a
pure play...an immaculate conception of the information
age, free from almost all taint of the old economy. E-bay
sells information - provided by the users themselves. It
was a great idea, profitable from the very beginning. And
it now has 12.8 million users and generates $225 million
in sales. But it makes only 6% on each transaction -
which gives the company a profit of less than $11
million.
*** What's $11 million of profit worth - earned by a
company with no defensible niche in the market?
Investors, in their collective wisdom, put the value of
the company at more than $10 billion. But it would only
take about $200 million in T-bonds to earn $11 million in
annual interest. Implication: E-bay stock is about 50
times more expensive than it should be.
*** Bonds have been doing pretty well, by the way.
Including interest yield, they're up about 10% so far
this year.
*** Gold did nothing on Friday. Platinum fell $1.40. Gold
stocks hit a new low.
*** "I've been watching beverage stocks for over a year
now," says Lynn Carpenter. "And this is the first time
I've seen numbers I like... while Bud's a syrup-slow
grower, 3% revenue growth last year - too expensive at
three times its sales - Coors is racing along at 35% EPS
growth at just 1.1 times its sales."
(http://www.dailyreckoning.com/body_headline.cfm?id=263)
*** After a couple of days in Paris, I'm back in the
countryside where we will spend the summer. Of course,
the summer is already half over...but you can't have
everything the way you want it. Today, Henry joins those
of us who have made it into the double digits - he turns
10.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Baptists dine casually. Large dinners are most often
served buffet-style, with good, wholesome food laid out
in prodigious quantities.
Here in rural France, dining is usually a more formal
experience.
And, as I think I've told you, Elizabeth has an
inclination towards what is commonly known as "old money"
- that is, the segment of society where people once had
money, culture and taste...and now struggle to make ends
meet in some semblance of style. I don't know what it is
about old money that attracts her - the cracked plaster,
the antique plumbing, the frayed upholstery...the worn
silver...the family portraits - but I go along with a
curious mind and a sense of humor.
So, it was that we dined at with a group of 20 or so at
Mondesir on Friday night.
New readers of the Daily Reckoning may wonder what this
could possibly have to do with investing. I wonder
myself...but I will try to find a connection as my story
develops.
Madame Annick Delaplaine is a small woman whose taste in
clothing seemed bizarre to our friend, Beatrice.
"She wears the funniest combinations," Beatrice remarked
of her as we drove along. We were on our way to Mondesir,
driving over a tiny bridge and along single-lane roads
for at least a half-hour. That is one problem with the
old money set in France - they are thin on the ground.
But the drive was pretty. Big, swirled up bales of hay
sit out in the fields, as in a painting by van Gogh.
Fields of sunflowers are in bloom, which look like they
might have been painted by Manet. And the Delaplaine's
house - a large, stone edifice - looked as though it
needed a painter.
I had met Annick and her husband, Antoine, at Beatrice's
house a couple of months ago. I could not remember who
she was until Elizabeth reminded me that she was the one
who talked so fast I couldn't understand her.
Maybe if I encourage her to drink more, I thought to
myself, she will slow down. I was seated at her right
hand, an honor, at the table. Typical of the milieu, the
table was set exquisitely, with beautiful, starched
embroidered napkins carefully folded on each plate. So
much silver and so many glasses crowded the table that
you could scarcely find an empty spot to put your bread.
The rural gentry in Poitou were well off at the end of
the 19th century. Europe was booming. France enjoyed an
explosion of new wealth. Imposing houses were built all
over the country - with high ceilings, fine woodwork, and
plenty of room for servants.
Annick and Antoine's house was an example of a "maison de
maitre" of, say, 1850. It was imposing, solid,
substantial - and looked as though nothing much had been
done to it since the day it was built.
Today, the big problem is the high cost of labor. These
big farms need a lot of attention. Even with modern
machinery, it is a lot of work to keep them up. French
gentry and aristocrats did not typically work the land
themselves, nor tend the gardens, nor do the laundry.
They had personnel to do this work for them.
Even as late as the 1950s, the former owner of my house
was able to get farm laborers in exchange for food,
lodging and just a few francs a day.
But the economy changed dramatically after the war.
People left the farms and moved to the cities (a process
that was already underway). Labor legislation increased
the cost of employing someone. Birthrates fell. And by
the 70s, it was already too expensive for most people to
maintain more than part-time help.
So the "old money" families sold off the farmland and now
have to do the housework themselves. A dinner party for
20 people would have been attended by at least a couple
servants. But on Friday, Madame Delaplaine and her two
daughters did the considerable work themselves.
Some people would find it depressing - living in a house
that seems only a few years from becoming a ruin...a
house too big and too drafty to heat properly. But that
is the attraction of it - the romance of decadence...of
vines growing over the roof, peeling paint, faded
wallpaper, and an air of shabby elegance and by-gone
grandeur.
"The trouble with you Americans," said a man named
Olivier, sitting across from me, "is that you have no
sense of history. I visited Montana. I saw the Grand
Canyon. It was nice. But I could not live there. There is
no sense of the past."
It was hard to hear Olivier. Everyone was speaking at
once. And the voices echoed off the musty wallpaper and
the bronze statue at the end of the table. I could only
catch little bits and pieces of what he said. But I
discovered that if I nodded and smiled, Olivier seemed
content to keep on talking. There is no telling what
gibberish I agreed with.
Meanwhile, poor Amanda. On my right was a young blonde
woman who had just come over from England - well, six
months ago. She got tired of her mother-in-law coming
into her house and opening the windows. Isn't it amazing
how little details take on so much importance? Meanwhile,
her husband couldn't get along with his father either. So
they sold out and moved to France. Amanda is happy to
have the English Channel between her and her in-laws. But
she barely speaks a work of French and is beginning to
realize that starting a new life in a very foreign
country is not going to be easy.
Unaware that she was English, I had begun speaking to her
in French. She was greatly relieved when she discovered I
could speak her language.
"What do you call it in America," she asked.
"Call what?" I replied.
"You know, the language...I mean, do you speak English.
Well, I mean, of course you speak English...but do you
call it English?"
It was bad enough, not having any history. But now it
seemed that we had no language either.
I was going to explain to her that not only do we speak
English in America...we even get the grammar right,
unlike the English. But she seemed on edge.
"No," I said, "We call it Norwegian. We know it's really
English, but we like to be different."
Amanda was a little ill at ease. The French and English
never understand each other. Even the way the French
serve dinner is a little off-putting. The French are too
rigid and un-relaxed - in the English view. The English
always feel as though they are the objects of ridicule or
scorn. Often - they are right.
Meanwhile, I was filling Annick's glass at every
opportunity in order to try to slow her down. But the
more she drank the faster she spoke. She spoke clearly,
but too quickly for human hearing. She needed to be
recorded and then played back at a slower speed.
Nevertheless, I found that we had something in common.
She manages pension funds in Paris and does some work
with Goldman Sachs. What did she think of the New Era, I
asked.
"Well, it's not the first one," she replied in a single
syllable. Annick, it turns out, is a value investor,
which may explain her curious wardrobe as well as her
apparent sophisticated poverty.
She went on to explain, as near as I could tell, that
Europe is on an upswing...which, she believes, will be
devastating for the dollar.
An interesting study done by Goldman Sachs, reported in
Grants, suggests that Europe is on the move. In Germany,
specifically, Goldman estimates that productivity will
increase at an annual rate of 2.8% from 2000 to 2005 - up
from 1.8% in the '95 to 2000 period.
"What is interesting about these numbers," writes Grant,
"is the missing footnote." The footnote that is not there
is the one that tells readers that the numbers have been
adjusted by 'hedonic' measures. In other words, the
German productivity numbers are real - not made up.
We've gotten used to footnotes in the numbers from the
Bureau of Labor Statistics - indicating that the
calculations have been enhanced by various accounting
frauds. Even so, American productivity growth has
averaged only 2.2% per year for the last five years -
considerably less than the productivity of the 1960s in
America and the projected rates for Germany for the next
five years.
Europe is booming. And unlike the U.S. economy - no
footnote is needed. The growth is real. Only in the U.S.
are quality enhancements used to fluff up the numbers.
These numbers have led people to believe that Europe
would lag behind the U.S. perpetually, rather cyclically.
Yet, as Dr. Richebacher deconstructs the numbers: "two
thirds of the apparently superior U.S. economic growth
performance over the last four to five years has been
pure statistical fiction and one-third cyclical. Thus,
once again, we see that there is no new era - just normal
business cycles and abnormally distorted measurements.
And what this means is that the dollar is ready for
another cyclical drop. (http://www.dailyreckoning.com
/body_headline.cfm?id=258)
Europe did not always lag America in productivity. Nor
was the dollar always high. Grant's points out that
German productivity growth surpassed US productivity
growth from 1977 to 1995. And it was only a couple of
years ago - as I recall - that the dollar was worth fewer
than 5 francs, instead of more than 7.
"The historical record," writes Dr. Kurt Richebacher,
"shows that divergent economic growth between the U.S.
and Europe has exerted the single, strongest influence on
the dollar." When the US is growing, the dollar rises.
When Europe is growing, the dollar falls.
"To be right on the dollar," he continues, "you have to
be right on the U.S. business cycle."
Anick Delaplaine and Kurt Richebacher both believe Europe
is speeding up, while the U.S. is slowing down. They both
also believe that this will mean a big drop in the
greenback. Maybe even a dot.com-style drop.
The dollar index topped out on May 17th. This may turn out
to be a good time to sell the dollar. And buy euros.
Your correspondent, his eye on the dollar...
Bill Bonner
P.S. After dinner, and after midnight, Elizabeth spoke to
Amanda. Elizabeth chattered away in French until she
noticed that Amanda had tears in her eyes. It was all too
much, she explained...trying to listen and not having a
clue to what people were saying...trying to speak and
being unable to get out the simplest idea. Trying to fit
into an alien culture. "Please speak English," she
begged, "...if that is what you call it."
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Last modified: April 02, 2001
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