In Today's Daily Reckoning:
*** Bear returns to the office...
*** Big techs...big trouble
*** A surprise passenger on the ship...Donegal...and
*** The bear decided to go back into the office last
week. Not a big deal. Return a few phone calls. Catch up
on a little paperwork.
*** He's been enjoying a vacation at the beach...while
investors and consumers continue their 'summer of love.'
Margin accounts are still expanding. IPOs are still
coming out. People still think stocks will rise forever.
*** But, last week, it seemed like time for the bear to
go back to work and stir things up a bit.
*** The Dow fell 74 points - just enough to remind
serious investors of what lies ahead. The Nasdaq took a
loss of 179 points. The big techs - the worst place for
your money - took a big hit. Cisco, for example, dropped
more than $5 a share. JDSU fell more than $12.
*** Our old River of No Returns stock, Amazon, is now
struggling to stay above $30. It was over $100 when I
wrote about it last year. Amazon is not likely to
disappear. But the stock still has a long way to go -
down, of course.
*** Another Internet stock, iVillage, is featured in
today's Financial Times. Candace Carpenter, the 'digital
diva' who started the company, resigned as CEO. iVillage,
which provides 'content for women,' lost 94 cents a share
over the last 12 months. How much will investors pay for
a 94 cents loss? Well, iVillage buyers are paying $6. A
lot less than the $130 they paid a year ago...but still a
lot more than they are likely to pay in the future.
*** The whole market looked terrible on Friday - with
twice as many stocks declining as advancing. The Dow is
still trading at 20 times earnings. The S&P is nearly 30
times earnings. And the Nasdaq price is nearly 150 times
earnings. So, when the bear finally finishes his
vacation, he'll have plenty to work with. The Dow could
easily be cut in half...and the Nasdaq reduced by
80%...before this cycle is over.
*** The Nikkei Dow has been suffering too - it fell below
16,000 last week. Investors who believe stock prices
always go up over the long term might want to recall that
the Nikkei was over 39,000 in 1989.
*** Philip Morris announced an increase in the price of
smokes. Look for more price hikes as the tobacco
companies become regulated utilities run for the benefit
of lawyers and bureaucrats, rather than shareholders or
*** Meanwhile, in Zimbabwe, the government has announced
that it will confiscate, without compensation, half the
commercial farms in the country.
*** We passed a pleasant night aboard the Normandy making
the passage from Cherbourg to Rosslare, Ireland. The
gentle rocking of the ferry made for a good night's
*** Our dreams were interrupted in the middle of the
night when the intercom asked: "Would anyone with medical
training please make themselves known to the ship's
staff." Hmmm...some poor wretch must be sick, I thought
to myself before drifting back to sleep.
But in the morning we learned the cause: "During the
night," announced the ship's captain, "our passenger list
grew by one - a woman gave birth to a healthy boy. Many
thanks to all who helped out and congratulations to the
*** We almost needed medical attention ourselves when I
forgot that the Irish drive on the left side of the road.
It seemed like every truck in the republic was on the
same road we were - making our way from the southeast
corner of the Emerald Isle to the northwestern most
extremity. And since my steering wheel is on the left
side, as it is on an American car, I could see around the
trucks in front of me only by pulling out in the lane of
on-coming traffic. This made for some excitement in the
car...but I had the situation in hand until I forgot
which side of the road I was supposed to be on. For a
moment, I thought the truck facing us must be passing and
would have to yield. But then I realized, it was I who
was passing...I quickly gave way, to the sound of shrieks
coming from the back seat.
*** Ireland is a beautiful place, much favored by nature,
though as I reported on my last trip, man has been less
generous. In England, you will occasionally find a house
of weathered, mellow brick and a Tudor-style which is
fetching. Or maybe a mansion with Italian pretensions.
Sometimes, even a Georgian house is nice to look at.
*** But in Ireland, almost all the buildings I saw from
the N3 motorway - public and private - were dreary. There
were some exceptions - the entry to the King's School at
Ennisfree, where Oscar Wilde was a student, is
magnificent. And there were one or two Georgian manor
houses that didn't look bad. And we passed a couple
thatched cottages that were picturesque. But the general
look of Irish architecture is depressing, for reasons I
will explain later.
*** We stayed a few days at a St. Ernan's House Hotel, on
an island just outside of Donegal Town. The House was
built in 1826 for a nephew of Lord Wellington and has
been carefully updated and tastefully decorated, with
acres of ancient trees and gardens surrounding the house.
The house itself shares the charmless quality of most
domestic architecture in Ireland, on the outside. But the
interior is nicely done. We had a drink in front of the
fire (even in July, a small fire is welcome here). And
then took our places in the dining room for a very nice
dinner. I had the black pudding (blood sausage...which
goes by 'boudin' on French menus). It was very good.
There are only twelve rooms. The O'Dowds, who run the
place, would be happy to have you visit. Tel: 353 73
Down, Down, Down... eToys is worth 7% of it's IPO high.
Webvan Group Inc. down 75%, 1-800-FLOWERS.com Inc. down
75%, NetZero Inc. down 75%, Agency.com Inc., down... E-
loan Inc. down... and on and on. I hate to say we told
you so, but "we told you so."
Meanwhile, you could have been making good money from a
different kind of "high-tech" investment. It's no dot-
com. It's a world-renowned company that's quadrupled
sales in 5 years... and increased profits 6 times. You
can buy it right now at a P/E that's 40% less than some
competitors. Click here
to learn who's really making money in The Real Internet
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
You have to admire old Beelzebub. If human weakness is
his cake, irony is his icing. He lathers it on
Hardly a soul gets close without coming away with sticky
fingers...but what thanks does he get? Religious
modernists have been trying to run him out of the church
for years...and now academic writers are trying to ignore
his work in the financial markets.
I have promised to stick to useful market commentary in
today's message. But I cannot resist this observation
after reading Edward Chancellor's book, "Devil Take the
Hindmost": failing to give the devil his due is probably
the chief shortcoming of the eternal bulls.
Of course, in this post-modern age...with its Internet,
online trading, Geraldo and Howard Stern...we no longer
believe in the devil. We believe in psychologists and
chronic fatigue syndrome. We are logical beings. We are
alone in the universe with markets that are computer-
driven, efficient and nearly perfect. If the price of AOL
discounts earnings to the year 2200...it must be right.
The price is always right...there is no room for human
emotion...folly, wishful thinking, chicanery, tomfoolery
or a severe case of Seasonal Disaffection Disorder.
Chancellor recounts the stories of several market manias,
including the well-known Tulip-mania in Holland, and
other less well-known bubbles. In each case, investors
are gripped by the thrill of fast, easy money. This
leads, of course, to where all impossible dreams reach.
Judgement is impaired. Slightly at first. Then grossly.
The worst of the human sins and weaknesses rise to the
surface like the scum on a cold bath. Greed, gluttony,
hubris, envy, jealousy, treachery, stupidity - you name
it...a bubble makes people behave as badly as IRS agents
or English clergymen.
In 1720 the South Sea Company had a monopoly on trade
with the Spanish colonies of South America. But what
created the South Sea Bubble was a plan to privatize the
British national debt. The details are confusing. So was
the market's reaction to them. Isaac Newton commented, "I
can calculate the motions of the heavenly bodies, but not
the madness of the people."
But such is the nature of manias, that the more obscure the
vision...the more delightful we can imagine it to be. It is
a little like the difference between meeting a woman by
candlelight...and seeing her the next day at the beach. The
first meeting requires imagination. It is the bull market
phase. The second is the correction and usually requires
gin and tonic.
Freud tells us that when the devil visits his paramours
at night...he comes bearing gifts of gold. But by morning
light...the gold turns to excrement. Daylight destroys
One of the heavenly bodies to whom Newton wrote was Lady
Mary Herbert; he wisely advised her that the South Sea
stock could be kept up "for some time, perhaps some
years...but a melancholy prospect for those who shall
Seeing the money that was being made...and the demand for
shares...a number of other companies rushed to get out
IPOs. But the South Sea Bubble did not last long. By
midsummer of 1720 the price of the shares had risen
800%...and insiders were bailing out, even selling short.
By September the stock had fallen 75%...and not long
after became totally worthless.
"The progress of science is cumulative; the progress of
financial markets is cyclical." That's how Jim Grant puts
it. The devil is a product of human emotion, imagination
and experience - not science. He comes and goes,
cyclically...taking his opportunities for mischief where
he finds them. He lodges in the human heart, not in the
brain. (He prefers the grander accommodations.) But it is
in the heart where the serious decisions are made.
There have been some revisionist works on the South Sea
Bubble...as well as Tulip-mania. Professors of finance
have tried get rid of the devil altogether...by showing
that it was rational to pay such high prices for
investments. Their argument is simple. Since no one can
know when prices will rise or fall...or how much...all
prices are inherently logical. The investors who bought
the tulips or the South Sea shares, even at the height of
the mania, were acting sensibly.
The devil appreciates this kind of thinking. So do the
markets. They bring in the fools like a carney at a
circus. But even the supply of fools, though usually so
fulsome and copious, eventually runs thin. Selling
overwhelms buying...and the rational price gets a lot
lower. (see: The Hidden Logic of Market Manias
Even investors who understand how the devil operates are
tempted to ride along with him...just for the fun of it.
As prices rise, and friends and neighbors get rich, the
temptation is almost irresistible. James Cramer of
TheStreet.com said of Internet companies: "As company
after company went public and was successful, eventually
it hit these journalists that maybe it's for real. It
became too difficult to stay negative and have
credibility, because people are just making too much
It was too much of a temptation for London banker John
Martin in 1720. "When the rest of the world is mad," he
said, "we must imitate them in some measure." `Tis a
pity, though. When he looked for a fool to buy his
shares...none was available. He waited too long. He lost
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Last modified: April 02, 2001
Published By Tulips and Bears