In Today's Daily Reckoning:
*** Stocks fall...people aren't buying PCs
*** Beating the numbers - still not good enough
*** The U.S. is running out of electricity...false
optimism...and forgiving 3rd world loans
You could've made 91% in one day! On a mere $0.62 move in
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*** Up down...down...up - the Nasdaq fell yesterday and
is once again in negative territory for the year. It lost
112 points following a report that computer makers are
shipping fewer boxes than they did a year ago.
*** How could it be that people aren't buying more and
more PCs? Don't they know that the new machines are
cheaper and more powerful (as the BLS tells us)...and
that they increase productivity more than enough to pay
for themselves (as New Era pundits claim)?
*** I guess not. Instead, they think that last year's
computer is plenty fast...and that all this IT spending
may not be paying off after all.
*** So, Dell and Apple both fell about 10%. Gateway lost
about 8%. But component suppliers Intel and Micron held
steady. Go figure.
*** The Dow fell too - down 48 points. No reason given,
and none needed.
*** Priceline.com came out yesterday and announced that
it 'beat the numbers.' That is, it exceeded analysts'
expectations in the 2nd quarter. Apparently, it should
have roughed up the numbers a bit more. The stock fell $9
- or nearly 25%.
*** Beating the numbers isn't good enough. Not with an
average P/E of 145 for the Nasdaq. Small increases in the
"E" don't do much. E has to increase about 7-fold in
order for the numbers to make sense. And that, dear
reader, is not going to happen. It is not the E that will
adjust, I confidently predict, but the P.
*** Bonds now yield 8 times as much as the S&P. Investors
don't have to be geniuses to figure out that when stocks
are falling their money is better off in bonds.
*** All but one major newspaper has reported stronger
earnings in the 2nd quarter. Wall Street is "stunned" said
the Reuters report. The Internet was supposed to put old
economy newspapers out of business. Instead, it is the
dot.coms that are going out of business.
*** Which is bad news for the newspapers, too. Knight
Ridder, for example, took in $6 million in dot.com
advertising in the 2nd quarter...and another $16 million
from the tele-coms.
*** There were 1105 stocks advancing on the NYSE
yesterday against 1742 declining. The average stock is,
once again, going down.
*** Gold fell $1.30. Platinum fell $4.30. The gold shares
are getting down to what could turn out to be super-
bargain levels. NEM is at $17. HM is at 5 7/16ths.
*** "The U.S. is running out of electricity," says the
Electronic Telegraph. Electricity use has grown 35% the
past 10 years due to the increased use of computers and
various electronic gadgets. "The United States as a whole
is using 3% more electricity each year," writes Dan
Ferris. "To simply keep up with that demand, the entire
electric generating capacity of the island of Taiwan, a
country of over 22 million people, must be added to
the U.S. power grid-every two years... But in Silicon
Valley, electricity demand is rising 5% per year..." Dan
believes he has found more than one way to profit.
(see: Is the US Running Out of Electricity?
*** Currency traders are spotting the opportunity in the
euro. The dollar topped out against the euro on May 17,
though almost no one noticed it. Euro-land grew at 3.4%
for the last 12 months, above expectations. And the U.S.
trade deficit continues to grow. In addition, interest
rates between Europe and the US are converging - so the
advantage of U.S. dollar deposits is declining.
*** "[The U.S.] is running a trade deficit of almost a
billion dollars a day." says Gary North. "Foreign
investors are funding this nation's buying spree. They
bought $100 billion of U.S. shares in 1999; in 1996, they
bought only $12.5 billion... When the U.S. goes into
recession next year, the rest of the world will be coming
out of theirs... the dollar will fall and import prices
will rise... American consumers are not ready for this,
but it's going to come." (see: An Orgy of Consumption
*** Another thing...Germany's tax reform bill includes
cuts in both corporate and personal rates. And currency
traders tell me that that the dollar has a seasonal
tendency to decline against European currencies in the
second half of the year.
*** A major subject of discussion at the latest G-7
meeting was debt relief for poor countries. Poor
countries could have borrowed on the open market if their
projects had been able to clear the hurdle of prevailing
interest rates - that is, if they'd been economically
viable. They weren't. So, the rich countries robbed their
taxpayers in order to back loans made by rich bankers to
the rich mountebanks who run poor, third world nations.
The money was, of course, stolen and wasted - like the
ill-gotten loot it was. And now, in the name of
compassion, the do-gooders are asking that the loans be
forgiven. But the whole matter is make-believe from the
beginning to the end. It is like a huge, plush float in a
Macy's parade. The bankers, third world potentates...and
a few hectoring, clueless moralists...all sip champagne
or Perrier, pausing to wave to the crowds or talk to
reporters - while the whole trundling contraption is
tugged by poor taxpayers on one end and pushed along by
poor Bengladeshi hod carriers and Brazilian trash pickers
on the other.
*** A quote from Justin Mamis: "CNBC has become the
standard bearer of optimism - give them a choice about
how to interpret a statistic and the grins come out. If
something's down, it's its own fault; if something's up,
it's a sign of how marvelous the market still is. We'll
wager, grumpily, that it takes 5 to 1 ups in a typical
portfolio to make up for the loss in that 1 down. Nay, 10
to 1, if we include the false-start ups, the inadequate
ups, the irrational ups. It is, to be blunt about it, a
helluva lot easier to lose money nowadays than it is to
*** If the report in today's Financial Times is correct,
Dick Cheney - who headed Gov. Bush's search for a running
mate - found someone...himself.
*** "Give the readers a break," said Addison, encouraging
me to lay off for a few days. Tomorrow, I'm taking the
ferry from Cherbourg to Ireland - beginning a family
vacation. I will try to keep up with the Daily Reckoning
as I go...but I cannot promise anything. Addison,
however, will still be at work in Paris.
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The sun reaches its zenith in countries north of the
equator on the 21st of June. On midsummer's eve,
celebrated as the Fete de St. Jean in France, bonfires
are lit throughout Europe - following an old pagan
But the heat of the summer doesn't peak until a month
later. Heat has a momentum of its own and continues to
build up for weeks after the event that will mean its
decline - the summer solstice.
Likewise, the Roman Empire continued to thrive - even
expand - for at least 100 years after the events that
would eventually mean its demise.
And at this time of year, 187 years ago, Napoleon's army
continued its advance into Russia - despite the fact that
it was already doomed. Its momentum carried it all the
way to Moscow...but alas, for 97% of the soldiers...not
all the way home.
Markets, too, have a momentum. The most speculative and
exaggerated prices - like the fluff of a milkweed flower
- have been blown away. The Internets are in decline -
with many facing imminent extinction. Probably 97% of
them, too, will die before the winter is over.
But still, spirits are high. The momentum of nearly two
decades of rising stock prices...and an economy that
everyone says is booming keeps investors holding on and
hoping that the good times will last forever.
"[T]he 18-year bull market," writes Lord Rees Mogg in
Strategic Investment, "has made investors almost
unanimous as long-term bulls."
Rees-Mogg cites the survey done last year by Robert J.
Shiller, author of Irrational Exuberance. Seventy-six
percent of respondents agreed that "the stock market is
the best investment for long-term holders." Nearly half
agreed that even following a crash such as the one in
1987, "the market will surely be back up to its former
levels in a couple of years or so."
(see: Irrational Exuberance: Shiller's Chilling Tale
Maybe Americans have no history after all. Certainly,
investors have none. As Shiller points out, there have
been long periods where the returns from stocks greatly
underperformed the returns from bonds. The "average real
return on the S&P composite Index was 0.2% a year," he
writes, "from June 1901 to June 1921, 0.4% a year from
September 1929 to September 1949, and 1.9% a year from
January 1966 to January 1986."
For these three 20-year stretches, investors got almost
nothing from their stock market investments. At current
prices, it is likely that another long stretch of low
stock market returns lies ahead. Even if prices remain
stable, it will take many years for earnings to catch up.
Investors, like Napoleon's soldiers marching along in
good order in the summertime, are still hopeful. But they
are probably doomed.
Down in Galesville, Maryland, a nearly full moon lit up
the West River when I visited. Galesville used to be a
fishing village near the Chesapeake Bay. It is an unusual
place, where women of whatever age or marital status were
addressed as "Miss Elsie" or "Miss Alice." And men of
whatever profession were called "Cap'n Bob" or "Cap'n
Summer in Galesville used to be different. Cap'n Earl and
Cap'n Dick used to sit out on a derelict pier and drink
beer - tossing the empty cans into the river. Nearby,
down at "Molly and Dave's" customers would pick their way
over rotten planks to the bar, which tilted towards the
opposite shore, making it easy to roll drunks into the
river. Motorboats roared up and down the river, and the
smell of steamed crabs - with their distinctive Cayenne
pepper flavoring - seasoned the heavy night air.
But that was back during the Johnson Administration. The
Great Society changed Galesville. It brought a lot of
money to the Washington area...so much that it overflowed
the Potomac and trickled down into the Chesapeake. My
cousin now rents a little summer cottage - winterized and
upgraded - for $2,000 a month. The motorboats have
disappeared, replaced by sailboats. Molly & Dave's is now
a quichey restaurant with deckboards so solid you could
drop a Republican congressman from 20 feet and still not
develop enough momentum to break them. And the 4th of July
fireworks - which used to be lit and stuck down Larry
Hall's pants - are now set off from a barge in the middle
of the river with the approval of every federal, state
and county agency south of the 40th parallel.
Money is visible everywhere in Galesville. It washed
ashore in waves. The first wave was robbed from taxpayers
in Minnesota and Arizona. But the most recent wave is a
result of the l8-year bull market. The yachts are a
quarter of a million each - and packed so thick you can
almost walk across the river on them. The houses are so
expensive that the sons of oystermen can barely afford to
"It's hard to be a doom and gloomer in the summertime,"
said an old friend of mine, PG, as we dined in Baltimore.
PG has been a doom and gloomer for years - even though
his own fortunes have done quite well. He is a good
writer and earns a lot of money at it.
"I'm techno-challenged," he said, "but I try to look at
the big picture. And the big picture is that there is
good technology and bad technology. You can't get one
without the other."
PG is worried about the momentum of technology. "There
are always nuts among us," he told me. "Some people will
always go postal and start killing other people. They run
amok with a knife or a gun. Some people die."
"But now, a single nut-case can go on the Internet and
get the plans for building a nuclear bomb...or a deadly
new bug...or a computer bug that closes down the world's
hospitals..or the ATM machines...or who knows what?"
"The point is," he went on, "no technology has ever been
used just for good things. Human nature doesn't work that
way. And human nature hasn't changed."
The chemical industry - heralded as one of the great
innovations of the last 100 years - was begun in Germany
at the debut of the century. Within less than 20 years -
deadly mustard gas was used in the trenches of WWI.
Another of the century's great breakthroughs was heavier-
than-air transportation. Again, less than two decades
after the invention of flying machines, airplanes were
used to drop bombs.
Some innovations have less potential for harm than
others, of course. Refrigeration and air-conditioning
are, as far as I know, never been especially lethal.
Television, on the other hand, has probably deadened more
brains than opium.
What evil lurks within the Internet, or the human genome,
or any of the other breakthroughs Wall Street now
celebrates? When will the dollar crash and bring down the
whole structure of modern finance? Will the Nasdaq
collapse and bankrupt millions of American families? No
one knows. But the events that will determine our future
have already happened. Stocks have reached unsustainable
heights. The Internet is a fact of life. So are dozens of
other innovations we haven't even heard of yet.
But in this summer of love, under the hazy moon of
Galesville, or the bright moon of Ouzilly, the threats
from nuts and bears seem a long way off.
Your correspondent...enjoying the summer...
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Last modified: April 02, 2001
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