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*** Oh my... Wednesday's earnings warnings came home to
roost on Thursday - and tech investors on Nasdaq flew the
coop. The index plummeted 3.6% - 145 pts. - to 3,842...
just a skosch above it's June 14th low of 3,797.
*** Worldcom was tech's biggest loser - down almost 6 to
close at 39. Nokia got beat up, too. "We saw an adjustment
of the 'P' in the 'P/E' ratio," an analysts observed in
Reuters, speaking of the index as a whole. Wednesday's
warnings "...forced a lot of people to reassess high-tech
valuations." No kidding.
*** AMZN, too, continued to get punished - second day
running - for naughty earnings per share behavior. The
'river of no returns' closed the day at 31 - its most
dismal showing since December of 1998.
*** The Nasdaq's troubles sent shivers down the spine of
the Asian markets, too. Investors "in Tokyo dumped high
tech shares on fears of a prolonged slump in 'new
economy'," this also according to Reuter's. The Nikkei was
down 2.12 percent to its lowest close since March 31, 1999.
Korean stocks were down almost 5%. European analysts are
expecting the tremors to make their way all around the
world. Raphael, who covers La Bourse - the French stock
market - here in Gay Paris, appears unusually chipper this
morning... and since he's a bargain hunter, my guess is,
he's expecting the same.
*** By contrast, however, the Dow - despite a late-day
selling spree - finished up 69 points to 10,586. Oil and
energy were among the strong sectors showing tech who's
boss.
*** Still the bear appeared to be lingering close by. Only
1392 advanced whiled 1448 declined on the NYSE.
*** The S&P slipped a mite.
*** Could slumping earnings be evidence that that Fed's
attempt to hit the brakes is working? Who knows. But, "if
Greenspan achieves a soft landing," reports USA today "the
economy will grow only about 5.5% in coming quarters, down
about 2 percentage points from the growth that contributed
to this strong earnings season... [in which case] it would
be enormously difficult for profits to continue to grow
about 20% a year." Marc Faber sees the situation in
significantly more dire terms. Faber: "The recent spate of
corporate profit disappointments and the poor performance
of so many equities belies a period of very disappointing
profits - dead ahead." (see: The Coming Corporate Profit
Squeeze)
*** But there are alternatives... Steve Sjuggerud,
investment director at the Oxford Club: "Because 7-year
Argentine government bonds are currently paying 16%... if
interest rates come down to 10% over the next two years,
your total return on this plain-old government bond will be
over 70%." In fact, he's figured out a way you can make
even more from the Argentinean fixed rate system and the
movement towards dollarization there. Might be worth a
look. (see: A Safe, Simple Way to Make 183% in Argentina)
*** Nothing happened in history today... at least nothing
interesting. But you'll be happy to here this: I spoke to
Bill on the phone this morning. He's reached Donegal,
family in tact. He says the weather is beautiful... alas,
Compuserve - our erstwhile ISP - not so much.
*** And so... the hit parade continues: "An Air of Fin de
Bubble" was first run on August 23, 1999. But it remains
fresh as an Irish breeze... I've attached the Contrarian
Glossary too. Mostly because I think it's cool.
You can measure centuries literally...by the pages of the
Gregorian calendar. If that is your yardstick, the 20th
century will end on the last day of December in the year
2000.
Of course, almost everyone is prepared to celebrate the end
of this century on the last day of December of in 1999. By
the following December, the new millennium will seem old
hat. (...already does... Addison)
But you can also look at centuries in terms of the "spirit
of the age," or zeitgeist.
In that sense, the 19th century really ended, and the 20th
century began, one day in August, 85 years ago. On that
day, The Archduke Ferdinand of Austria, on an imperial
visit to Sarajevo, was shot by an anarchist. This set in
motion a whole series of events and mistakes that ended the
"fin de siecle" spirit of the Edwardian age. No one really
intended for the war to begin as it did. Nor could anyone
scarcely imagine the horrors that it would unveil. But bad
things happen, without anyone, good or bad, intending them.
Now we are coming to another end...and another beginning.
The 20th century is coming to a close. But it will really
end when the Fin de Bubble zeitgeist gives way to something
new.
People at the end of the 19th century were very optimistic.
Apart from brief "panics" on Wall Street, which affected
few people, the economy had been growing rapidly since the
close of the war between the states. There were only two
back-to-back recession years since 1869. Plus, people had
seen the awesome power and payoff of the industrial era.
Printing technology had become so cheap that even the lower
classes had learned to read and were reading newspapers.
Trains and telegraph lines had connected the East and West
coasts. Subways were constructed. The Eiffel Tower in Paris
proclaimed the almost infinite possibilities of engineering
and the machine process. It looked as though it would be
onward and upward forever.
This fin de siecle attitude lasted for many years...
throughout the "Gay `90s" and into the next century...until
that August day 85 years ago. Then, it was all over. The
can-do spirit of progress, based on faith in bourgeois
ideals and machine-age engineering disappeared, perhaps
forever.
On our recent visit to Le Dorat, we discovered a little of
the town's history. During the long warfare between England
and France that dominated this part of Aquitaine in the
middle ages, Le Dorat was often on the front lines. In one
instance, the town was betrayed by an English sympathizer,
whom raised the gates so the enemy could invade. Later, the
traitor was drawn and quartered, with a quarter stuck on a
pike at each of the town's four entrances. Whether this was
done as a warning, or as revenge, we don't know.
"Fortunately," said my mother, "things like that don't
happen any more."
This, too, must be a sign of Fin de Bubble thinking, in
which the historical tableau of my mother's own time has
been airbrushed to remove the unpleasant episodes.
My mother served in the army during WWII. While she looked
after German prisoners of war in Texas, other German
prisoners were sent to labor camps in Russia, where they
invariably died of starvation and over-work. Of the 700,000
German soldiers taken prisoner at Stalingrad, only a few
hundred lived to return to their homeland after the war.
While my mother and her Jewish friends in the WACs showed
propaganda films to GIs on their way to Europe - Kill or Be
Killed was a popular show - the Nazis rounded up Jews
wherever they went. The population of Eastern Europe's
Jewish Pale was almost completely wiped out, a victim of
machine-era efficiency.
Fin de Bubble thinking ignores unpleasant history. Just as
barbarism is thought to be a thing of the past, so are
economic cycles, panics, inflation, real war with real
casualties, recession, gold and unemployment thought to be
barbaric relics. Fin de Bubble is a period in which the
nastiness of markets and life itself are airbrushed out. We
see only the good side...the possibility that Amazon.com
may become a huge, profitable business that grows at 70%
per year indefinitely and produces a 10% profit margin -
rather than the more likely reality...that the company
never produces a profit, its shares decline by 95% and it
is eventually abandoned by investors and taken over by
creditors.
Fin de Bubble thinkers believe that people can borrow more
and more and thereby increase economic activity and wealth.
They think a huge Internet revolution can sweep the
globe... and produce only favorable effects on existing
institutions. They think savings are unnecessary and
leaving money in the bank is almost criminal negligence.
They think corporate profits can go down...and still
corporate share prices should go up. They forget the fact
that the dollar has lost 94% of its value during my
mother's lifetime and now believe it will remain stable
forever.
The Fin de Bubble world is one in which paper assets of
almost all sorts are priced for perfection. Trouble is, we
live in an imperfect world.
Your correspondent,
Bill Bonner
(A work in progress, the Contrarian Glossary was begun on
August 26th, 1999)
FIN DE BUBBLE - This is the term I use to describe the
spirit of our age. We live in a world, which is waiting for
something to happen. In the meantime, people are all very
optimistic about the future - especially the financial
future. Like people during the "fin de siecle" period of
the Gay '90s and pre-WWI, they are impressed by
technological progress and see few clouds on the horizon.
WWI ended the "fin de siecle" sentiment. What Archduke
waits to be assassinated so our fin de Bubble can be
entered in the history books?
BED & BREAKFAST STAGE - This is a new phase in the life
cycle of humans...wedged in between the career phase and
traditional retirement. It usually kicks in when children
have left home, careers have run their courses and a man's
balance sheet begins to look better than he does.
BONNER'S LAW - This one is eponymous. It describes the
interaction of Moore, Metcalfe and the process of creative
destruction. Moore and Metcalfe are used by Internet
investors to justify high prices. Why not pay a lot, they
say, when the whole industry is evolving at an exponential
rate? Bonner's Law predicts that the revved up speeds of
creative evolution in the Internet marketplace will produce
revved up rates of destruction too. Moore + Metcalfe =
Creative Destruction squared. Investors may want to gamble
on Internet companies. But they should pay very low prices,
not high ones. Low prices recognize the truth - that the
company is most likely to fail.
BUFFETT VS. GATES - This is shorthand for the conflict
between the older, Graham and Dodd investment
approach...and the younger, Bill Gates/Jeff Bezos wealth
creation formula. The eminent Graham and Dodd investor,
Warren Buffett, for example, won't buy Internet stocks or
even Microsoft...though he knows the company and plays
bridge with Bill Gates. Internet investors, on the other
hand, who tend to be younger, believe that Moore and
Metcalfe trump Graham and Dodd. This technology is
exploding so fast, they say, the old standards no longer
apply. The old guys just don't get it. Who will "get it" in
the end remains to be seen.
America's Last Great CAPITALIST - New Era advocates
maintain that the end of communism and the rise of the
Internet have ushered in a golden age of capitalism. Not
so. Instead, capitalism is dying. Marx defined capitalism
as the system in which investors put up the money to build
factories...and workers were then exploited by them. This
is no longer the case. The new workers don't need
capitalists to provide the machinery of wealth building.
They own their own laptop computers. They've seized the
factories. This is bad news for capitalists. Money no
longer counts. It's human capital that is important. This
is the capital that workers carry around in their capitas.
Microsoft's main competitor, the Linux operating system,
was built as freeware...an "open source" product that
relied on voluntary efforts from programmers all over the
world, cooperating without the benefit of payrolls or
health insurance. No capitalists were involved. And no
investors could profit from it. Linux is also made
available free over the Internet to anyone who wants it.
The pros say it is better than MS-DOS.
CHATEAU - This French word might be translated as "money
pit" or "place for people who don't like Internet stocks to
lose their money." By way of introduction, I am the
publisher of a group of investment services, called Agora
Financial Publishing. We have offices in Paris, London and
Baltimore. I had a choice. I shuttle back and forth between
these offices. But I chose to live in France and bought a
chateau not far from the late David Ogilvie's much larger
pile. Chateaux are the only investments that have lasted -
in a single family - for the very long run...a period of
1,000 years or more.
CREATIVE DESTRUCTION - The economist Josef Schumpeter came
up with this expression. It describes the natural process
of open markets: old companies and old technologies are
destroyed by new ones. Dirigisme tries to block the forces
of creative destruction. By contrast, laissez-faire,
another French term, lets the chips fall where they may.
Bill Gates, America's Last Great Capitalist, built his
company on the dirigiste model. Linux is an example of the
laissez-faire approach. Gates created vast wealth. Linux,
and/or the process of Creative Destruction, will destroy
it. (...if not, the government will... Addison)
DIRIGISME - This is also a French term. It is the modern
French version of Plato's ideal form of government - where
you get smart people together and they tell everyone else
what to do.
DOLLAR - more valuable than gold...the dollar has
nevertheless been going down in value since the Federal
Reserve system was set up more than eight decades ago to
protect it.
ESPERANTO MONEY - this is the term I apply to the euro.
Esperanto was a made-up language designed to make it easier
for people to communicate. It flopped. The euro will flop
too. Gold - Gold is a heavy, yellow metal, rarely seen or
spoken of. It is a barbaric relic that has been going down
in dollar terms for the last 20 years. It is about the only
thing you can leave on the seat of your car in Baltimore
without worrying about the windows being smashed.
GAMBLING - what you do with your excess money when you are
too lazy to invest the way Buffett does.
GRAHAM AND DODD - These are the guys who wrote the book on
investing. Warren Buffett - their most brilliant student.
HEAD AND SHOULDERS PATTERN - Not to be confused with the
dandruff shampoo, a head and shoulders pattern on a chart
vaguely resembles the head and shoulders of a man. A very
strangely shaped man. It is thought to be a precursor of a
decline. But if the market doesn't go down...the
technicians take another look and tell you that it didn't
look like a head and shoulders after all. It was really a
horse's rear end.
HEART OF DARKNESS - where Internet investors go...the
horrors.
THE INFORMATION AGE - the handle given to today's post-
industrial, post-modern economy. The successor to the Age
of Ignorance, the Age of Information is characterized by
such an abundance of useless facts and senseless data that,
now, everyone knows everything...and almost no one knows
anything.
INTERNET INVESTING - This oxymoronic term describes what
people who don't speak French do with their unwanted money.
For example, they buy Microsoft, or our "River of No
Return" stock, Amazon. The convention among Internet stock
buyers is that the company is worth a p/e equal to it's
rate of growth. Thus, MSFT, growing at 25% per year, should
sell for 25 times earnings. It sells for twice that much
now...50 times earnings. That's a lot of money for a mature
company that is bound to be the victim of creative
destruction. AMZN is growing at 70% per year. But the
trouble is, it has no earnings. So you can't apply the
formula. Most likely, AMZN will never make money. Most
likely, it will disappear...just as the 400 radio publicly-
traded radio companies of the `20s disappeared...and the
497 auto companies.
INVESTING - This the activity that many people say they do
but few understand. It involves studying the likely stream
of income from an investment, anticipating its growth or
decline and adjusting for risk. Most of today's "investors"
wouldn't know a balance sheet if it bit them on the
derriere - which, I predict, it will.
METCALFE'S LAW - Metcalfe noticed that a system like the
Internet becomes more valuable the more people use it. Like
the telephone, the first phone is virtually useless. The
millionth, by contrast, is exceptionally useful. Thus, the
value of the system itself increases exponentially as its
use becomes more widespread. Another curiosity, Metcalfe's
Law helps explain why the dollar has been such a hit all
over the world. Investment Biker, Jim Rogers, driving
around the world with his girlfriend, Paige Parker, reports
that he can use dollars almost everywhere - and in many
places where even the government won't accept its own
currency. Dollars have become a worldwide medium of
exchange - made more valuable simply because they are so
ubiquitous.
MOORE'S LAW - a key to understanding new tech investing.
Moore said that computer power would double every 18
months. Interestingly, statisticians use this device to
ramp up the GDP figures...arguing that a computer purchase
today is worth more than the actual dollars exchanged. They
never applied this logic to autos or any other sector, but
some $300 billion of these fictitious "chained dollars"
have been added to the nation's GDP.
SPECULATING - This is what you call gambling when your wife
asks what you doing.
SAND, SMALL TOWNS AND OLD TOWNS - Where people go to have
their mid-life crises.
SIGNIFICANT BASE FORMATION - This is what you get when you
sit around and eat too many donuts while reading the
financial news.
TRIFFIN PARADOX - The trouble with making a currency the
world's leading brand is that do to so, you have to print a
lot of them.... and export them vigorously. Each dollar is
an IOU from the government. The more outstanding... the
weaker the issuer's balance sheet, and the less each one is
worth. Eventually, Triffin and Metcalfe will have to come
to terms.
UNIFIED THEORY OF GREED (UTG) - The insight that we're all
greedy SOBs, but the real SOB is the guy whose greed -
whether for power, money or love - is not held in check by
his wife, the market or the law.
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