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*** After a brief visit to the office last week, the bear
went back to the beach on the weekend. Stocks rose. The
Dow was up 10 points by the close of business. The Nasdaq
rose 104 points.
*** Stocks in Japan, beaten down for the last decade,
managed a 2% increase.
*** And the big techs in the US came back with the
Nasdaq. Cisco rose 2 5/8. Intel, Qualcomm...these big
techs are the great hope for many thousands of investors.
They allow the investor to feel as though he owns a piece
of the glorious future of technology, without knowing
anything about either the future or technology.
*** Reuters reports on a survey by Doremus showing that
investors have little idea what they are getting when
they buy stocks and bonds. They seemed to think
Caterpillar was in the pet business, for example, and
Halliburton, the giant oil-service business, was a fish
company. Many investors also apparently believe that they
are protected from trading losses by the FDIC when they
*** These investors are the people who bought Amazon at
$113 last December in the belief that they had to get in
on The Next Big Thing - the Internet. Amazon shares sold
for less than $28 yesterday. CMGI, another 'must own' of
1999, also hit a new low.
*** But now it's the big techs - Intel, Qualcomm, Cisco.
People think owning these shares gives them a way to
profit from the future. Unlike the Internets, these
companies have profits. And as I have mentioned several
times - there is almost no way earnings can grow enough
to justify current share prices. They, too, will soon
collapse...as the summer of love turns into the autumn of
anxiety and the winter of our discontent.
*** Remember, bonds now yield 8 times as much as stocks.
The Dow yield is only 1.6%. The S&P yield is lower - at
1.1%. And the Nasdaq yield is not even worth mentioning.
It only makes sense to stay in stocks if prices are
rising enough to surpass "risk free" bond yields. A
stagnant market isn't good enough.
*** Oil fell to its lowest point in 3 months - to $27.43.
*** Gold fell too...by 90 cents. Platinum rose $1.39.
*** "Investing is not a purely rational pursuit," writes
my old friend, Mark Hulbert, "If it were, those with
higher IQs would have better track records. They don't.
Successful investing also requires mastery of your
emotions, which otherwise can wreak havoc..." Mark makes
the point that the rational thing to do in a bull market
is to be fully invested in stocks, following a momentum-
based system, such as OTC Insight or MPT Review. But when
the market turns, these approaches lead the way down,
just as they led the way up during the bull phase. Over
the very long run, investors might do well just to stay
with the system (they certainly did well for the last 18
years). But investors often over-estimate their own
tolerance for risk and fail to control their own
emotions. When these high-flying approaches plummet,
investors panic and sell - often at the worst possible
*** The Irish Independent reports that foreigners are
being attacked in Dublin. No reason was given.
*** And the infamous prison, the Maze, is being closed
down. The Maze has been the holding tank for IRA and
protestant terrorists. The murderers are being released,
following the terms of the Good Friday peace agreement.
*** "I'm very glad to see that the Loyalists are coming
out," said one honest protestant woman quoted in the The
Mail, "but I'd be happy to see the Catholics rot in
*** "The meaning of life does not jump out at us from
desk-top computer screens," said the Archbishop of Tuam.
Ireland is booming. Almost everywhere we go, new houses
are going up. The roads are often jammed with traffic.
The bar in Donegal Town, where we stopped in for a drink
on Saturday night, was so full we could not get a seat.
Father John Cunningham, leading a group of pilgrims from
Arizona, took the mike and sang "Oh dear what can the
matter be, seven old maids locked in the lavatory." The
upsurge in material wealth seems to be upstaging
Ireland's traditional piety.
*** The Archbishop spoke on the summit of Croagh Patrick
in County Mayo, a 'Holy Mountain,' from which St. Patrick
is said to have banished snakes from Ireland. Twenty
people were injured making the trek up the mountain to
hear the Catholic bishop. "There is a danger," he said,
"that ruthless greed can become reality."
*** Meanwhile, on Sunday, I led my own small band of
pilgrims into the Presbyterian church in Rathmelton. The
Church of Ireland church, Anglican, was closed. And the
Catholic service had already commenced. So, what the
heck, let's see what Presbyterianism is all about.
"You all know how to ride a bicycle," said the minister
in his sermon, with a heavy accent that seemed almost
Scottish, "there are certain rules you have to follow. If
you dunna follow the rules, wha' will 'appen? You'll fall
down, won' you?"
"It's just the same with God's rules. You have to follow
them. Or you will fall down."
Hmmm...this seemed simple enough. But the service was
almost painfully plain. There were no chants. No
elaborate robes or vestments. No sculpted figures. Not
even an altar. There was no communion. No confession.
I wondered how Presbyterianism survives. It has no
mystery or magic. Nor does it have the vitality of the
*** After church, we went to the beach. There are a lot
of very nice beaches in Donegal. You drive over moor-like
hills and then down to very private coves, sometimes with
thatched cottages near the water's edge. The kids were
happy throwing rocks and playing in the sand. Elizabeth
and I went for the coldest swim we've ever had. I was
afraid to go far from the beach - fearing that my muscles
would go numb and I wouldn't be able to get back to the
*** The scenery in this part of Ireland is spectacular.
There are fields, moors, salt water marshes, mountains,
and craggy rocks marching out into the sea. We explored
one castle,which was in ruins...climbing up the derelict
tower for a dramatic view over Lough Swilly. The castle,
in the middle of the field, has been forgotten. Its
owner, a local farmer, did not seem to know when it was
built, or by whom.
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Blame it on the weather. After weeks of beautiful fin de
Bubble weather in the late summer...fall is here. It is
rainy, gray and cool.
Thus do one's thoughts turn gray, too, as I darkly look
through the glass at the financial news. I've been
talking about the bubble and the coming bear market for
quite a while...where did it come from...where does it
Stick with me for a moment. It is important because the
next phase of the market cannot begin until this one
It is a grim paradox of life that all that life dies. And
as the fire of life burns hotter, life's energy is used
up faster too. A tree, for example, uses little
energy...and can survive for hundreds of years. There are
trees in California that were alive at the time of
Christ. A chart of the life cycle of such a tree would
show long, slow, steady grow...then, a peak...and a long,
slow, steady death. You can't even tell whether a tree is
alive or dead sometimes...it's life energy lays so
quietly and deeply within it.
Markets, being natural things, follow the same rules.
They can grow quietly and steadily for many years, in
line with the underlying economies on which they are
based. Or they catch fire...explode upwards...and quickly
burn up whatever energy they had.
Back in 1900, you could buy a barrel of oil for just a
bit more than $1. An ounce of gold, meanwhile, was about
15 times as much. This relationship went up and
down...never too far out-of-whack for the entire century.
A few months ago, you could still get an ounce of gold
with 15 barrels of oil. (Today, an ounce of gold is only
worth 12 times as much as a barrel of oil. My guess is
that the ounce of gold is ready for an adjustment
upwards...but who knows?)
Also, back in 1900, the Dow was at 61. So, in other
words, it took three ounces of gold to buy the Dow. This
too was subject to a lot of bouncing up and down. In the
late `20s, for example, it took six ounces to buy the
Dow. But that soon went back to normal when the Dow fell.
Then in the late `60s, it took as many as 20 ounces of
gold to buy the Dow. But that, too, was soon history when
the price of gold soared...and the stock market fell.
As late as the early `80s, the basic relationships were
still intact. The Dow was worth about three ounces of
gold...which, in turn, was worth about, well, 10 to 20
barrels of oil.
But something happened in the late `80s. The juice
started flowing at a much faster pace. The chart shows
the Dow stopped looking like the growth pattern of a
redwood, and began looking like a morning glory. Today,
it takes 40 ounces of gold to buy the Dow. Oil,
meanwhile, has doubled in price in the last year. Still,
while you could buy the Dow with about 50 barrels of oil
in 1900...and still do so in the early `80s...today,
you'll have to bring 400 barrels of the black stuff to
Inflation over the period - 1900 to 1999 - reduced the
value of the dollar to about 5 cents. So, if an ounce of
gold sold for $20 in 1900, it ought to sell for $400 now.
Likewise, a barrel of oil that sold for $1.19 then should
sell for...what's this...$23.18.
That's almost exactly the price of oil today.
So, oil is where it was in 1900. Gold is a little low,
but not far from where it should be. And stocks? They've
gone "off the charts." If the market were only to keep up
with inflation, the Dow should be at 1,220. Instead, it's
nearly 10 times that high.
Back to the chart...it shows a ragged line bumping along
year after year. It took 82 years to go from 61 to over
1,000. And then, zoom...it took off. The chart looks like
a topography map, with the line going from the tidal
flats...to the piedmont...gently rising, with minor hills
and valleys...and suddenly starting to climb Mt. Everest.
Now, standing at the peak of Everest, investors look back
and think it was inevitable. This is the way markets
work, they think. You just buy and hold, and over the
long run you make money. But as I pointed out two days
ago, if an investor had turned to look in 1982 rather
than 1999, the view would have been completely different.
Then, the long term...from 1900 to 1982...would have
given him a net loss against inflation.
What happened in the late `80s? Where did the juice come
from? Where did the stock market get this sudden input of
energy, enough to carry it from 3,000 to 11,000...from
the late `80s until about 15 months ago? Why, after eight
decades of "reasonable" behavior, compared to oil, gold
and the dollar, should it suddenly go bubble? The bulls
have their explanations. They say it is because the baby
boomers are putting money in 401ks. Or the Internet is
creating a New Era of productivity. Or, it's the end of
the Cold War...there's a "peace dividend," and a golden
age of capitalism. Or, as professors Glassman and Hassett
claim, investors just woke up and realized how much
stocks are really worth.
Actually, the juice for this market blow-off came from an
entirely different source. I will give you the details
tomorrow...the never before told story of how a bull
market turned into a bubble...
(Note: 'One Hundred Years of Investing' is part one of a
two part series. Tomorrow: "How A Bull Turned Into A
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Last modified: April 01, 2001
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