In Today's Daily Reckoning:
*** Is the dollar in a new bull market...or a bear market
rally?
*** Cheap high-flyers? Not nearly cheap enough...
*** Capitalism drifts down the river of no returns
*** The excitement yesterday was in the Big Techs -
especially Cisco. CSCO was $81 in March - but fell as low
as 58 � in early trading. The whole Nasdaq was down 137
points.
*** But both CSCO and the Nasdaq bounced. CSCO ended the
day at 64 3/8 and the Nasdaq ended up 101 point.
*** "There are a whole lot of people out there who want
to use this sell-off as an opportunity to pick up these
high-flyers on the cheap," said Charles Payne, head
analyst at Wall Street Strategies. On the cheap? Cheap,
of course, is relative. Cisco is cheap at $58 compared to
what it was in March. Amazon is very cheap at $40
compared to what it was in December. But by more
fundamental measures - say, price compared to earnings,
sales, or book value - both companies are very expensive.
Cheap lies ahead.
*** The Dow rose 19 points. This brings the Dow to a loss
of about 7% for the year. The Nasdaq's loss is 7.6%.
*** But the big news - which no one seemed to notice -
was that the dollar also rose. You can buy a euro for
just a little more than 90 cents. And if the dollar keeps
going up - it will soon break its record high against the
euro and call into question my whole outlook.
*** Every major index has topped out. The dollar is not
only the most recent but also the most important. A high
dollar is what supports the whole bubble. Imagine the US
economy as a dot.com stock. It loses money every day -
about a billion dollars of net current account losses.
But foreign investors keep buying its stocks and bonds.
So, the money is still coming in. A rising dollar means
that more money is coming in than is needed to cover the
losses.
*** But someday soon - as I have been saying for long
enough to prove that my timing is bad - investors will
tire buying U.S. paper...the dollar will fall...and the
bubble will be over. It looked as though the end had come
on May 17 - when the dollar hit a peak against the euro
and began to slide. Now, the dollar is either in a bear
market rally...or in a new bull market move. We shall
see.
*** Bank Credit Analyst reports that money supply growth
is slowing. MZM, M2 and M3 - for those who like such
things - are all in declining growth patterns. New home
sales were also in a decline in June.
*** And Japan's Nikkei Dow swooned again. It fell 2 1/2
percent last night.
*** Another minor point I have made is that capitalism,
as we have known it, is doomed. It is drifting down a
river of no returns. Stock options are supposed to be a
way of rewarding key employees for superior performance.
When the employees' efforts increase profits and build
shareholder value, the owners share a little of the
upside with them. But Amazon's employees have not made a
penny in profit. And thanks to their exertions,
shareholders have watched their stocks fall 72% since the
beginning of the year.
*** Since the stock price had fallen so much, the options
held by Amazon's employees were worthless - as they
should have been. So Jeff Bezos simply issued a new batch
of options to senior employees - priced at $30. Amazon,
lest you had any doubt, is not run for the benefit of
capitalists - but for the benefit of customers [Bezos
calls it a 'customer-centered' company] and, more
importantly, employees. The workers are exploiting the
capitalists.
*** Gold fell yesterday - it is back to $279/oz. And
platinum melted down - losing $40.70. Is it true that
gold is merely a relic of the past? Is it no longer
needed as a store of value? Maybe - more about this next
week.
*** The wind was strong across the British Isles last
night. Minutes after the Normandy left Rosslare, Ireland,
she began to pitch and moan. Jules turned a little green
at dinner and suddenly started to throw up. I rushed him
back to the cabin and then felt a little queasy myself.
Soon, the whole family was racked out - except for the
two youngest, Henry and Edward, who enjoyed a Pokemon
movie before retiring for the night.
*** Overnight, the seas calmed a bit. Still, we were all
happy to back on dry land. We drove off the ferry at
Rosscoff, Britany - and headed south. I have come to
appreciate the sturdy diesel engine in our Renault van.
But after a while, I noticed it was losing power. Then, I
saw what appeared to be diesel fuel on the rear window.
Closer inspection revealed that the whole undercarriage
was soaked in fuel. Hmmm... A Frenchman, smoking a
cigarette, came over to offer advice. Maybe that is not
such a good idea, I explained.
*** But we were able to limp to a garage and get the
broken fuel line fixed for about $20. Finally, we arrived
back in Ouzilly about 8 PM, wondering why we ever left.
*** Back to work - I notice that the papers are full of
commentary on the Republican Convention, the upcoming
election, and the two major candidates. I pity the poor
writers, who have nothing to say...and the readers, who
have nothing better to do. Maureen Dowd worries that
George W. is an elitist. The NY Times quibbles with the
Republican commitment to "inclusion." The Washington Post
frets that Bush and Cheney are oil men. I feel I need to
read this stuff to keep up with what people are thinking.
Then I realize - they are not thinking at all.
When the Fed raised the discount rate from 5% to 6% on
Aug. 9, 1929, it launched the worst economic contraction
in history. Did today's Fed do the same thing? Dr. Kurt
Richebacher thinks so. Find out where the world's
pre-eminent Austrian economist thinks the stock market
and the economy are headed and what you can do to protect
your assets. Read Dr. Richebacher's latest report
http://www.agora-inc.com/reports/RCLF/corprofits7 on the
fate of the New Era.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
I will arise and go now,
And go to Innisfree,
And a small cabin build there,
Of clay and wattles made;
Nine bean-rows will I have there,
A hive for the honey-bee,
And live alone in the bee-loud glade."
The Lake Isle of Innisfree
W.B. Yeats
I saw no house in the Innisfree area built of wattles and
clay. People do not build of clay and wattles anymore.
Nor even of stone. They build with cement blocks. These
are stuccoed in various ways - often so as to leave an
exposed surface of pebbles. Sometimes the stuccoed
surface is white. Often - especially on the older houses
- it is the color of gray cement.
There are many houses under construction in Ireland.
A typical house is a rectangle of cement blocks with a
slate roof. The more up-market houses include dormer
windows, skylights, and sun-rooms. They are solidly-
built, comfortable and unattractive.
Man doesn't need much to live. A few bits of food and
shelter are all it takes to sustain life. Beyond that,
the only things that really matter are work, love, and
beauty. With the advent of the Internet, knowledge
workers can ply their trade almost anywhere. So, they
will go - ceteris paribus - where love or beauty take
them.
Some will choose to relocate from the suburbs of London
or Newark to the rolling hills and small towns of
Donegal, Ireland's northernmost and most beautiful
county.
But all Ireland is a beautiful place. The fields and
pastures are separated with stone walls. There are green
forests, glens, cool rivers, shining loughs and lakes -
the whole place sparkles.
You don't think of Ireland as a beach destination - but
the beaches of Donegal are extraordinary. I told you
about one of the beaches we visited. We had to hike for
half an hour through sheep pastures to get to it...but
once there, we had it all to ourselves. The boys ran
along the beach as though in a painting by Winslow Homer.
But instead of breeches and straw hats, our boys were
naked. Their bathing suits were still wet from a swim in
the hotel pool. They played among the rocks and splashed
in the Atlantic waves while Elizabeth and I hiked up to
the top of the adjacent hill - from which we could see
for many miles out into the ocean...or back over Ireland.
Wherever we looked, the view was stunning.
From our perch, we could see four or five farmhouses.
They were simple rectangles, stuccoed in cement with
slate roofs. One was painted a light green. The others
were white. Also visible were the remains of another
cottage - with stone walls still standing, but little
else to show for the labors of generations.
Occasionally, you will see the traditional two-room Irish
cottage - with whitewashed stone and thatched roof. Or,
here and there, you will spot a Georgian house with an
elegant portico or an ivy-covered front. Take a long look
- because most of the domestic architecture of Ireland is
ugly.
You may wonder what qualifies me to criticize
architectural design. My answer is that I know at least
as little about it as I know about investing. And in a
curious way - the two intersect.
Everything happens at the margin. Including beauty. In
France, it is rare to see a really ugly house. In
Ireland, it is rare to see a really pretty one. And yet,
they are constructed in roughly the same way, at the same
cost per square foot, and following the same basic
pattern. But for his money, the Frenchman gets a
beautiful house - the Irishman gets one that is only
passable.
For the same investment, a Frenchman gets a better return
on his money. And, as a consequence, a Frenchman is
richer - whether he owns a house or not. Driving along on
the road from Niort to Limoges - you are repeatedly
delighted by the houses you pass along the way. Even run-
down farmhouses have a certain style and charm. I almost
run off the road at every turn - so intently do I study
the houses I pass.
I am speaking of the domestic, vernacular architecture -
not tract housing or commercial buildings, which are
abominable almost everywhere. Most regions of the world
evolve their own distinctive housing styles - which are
suited to the climate and flattering to the surrounding
countryside. The Swiss chalet, the white towns of the
Spanish mediterranean, the Pueblo style of the American
southwest - each style provides a distinctive
architectural dressing that is not only functional, but
decorative.
In Ireland, the house that evolved over the centuries -
the thatched cottage - was a pretty building. The white-
washed stones had pleasing shapes and textures...and the
thatched roof softened the chilly, white surface of the
stones. The overall effect was harmonious and inviting.
But when the thatch was replaced with slate or tile, the
house looked small, boring and harsh.
Owners have tried to overcome these problems in a number
of ways. Some have put up decorative stone here and there
- including some phony stone, like the form stone you
still find on Baltimore row houses. Others tried bright
colors - either on the trim...or on the house itself.
Still others added doodads and geegaws - vestibules,
columns, picture windows...whatever they could think of
to tart up the front of the house.
None of these solutions work. Instead, they make the
houses look like freaks - like so many of the houses in
North America - with strange and unnatural collections of
shapes and colors.
The French, meanwhile, took the same basic structure but
instead of the gray-cement stucco, they use an earth-
colored material called "chaud." Or, they leave the stone
exposed. In either case, windows and doors are framed
with stone or stucco - to set them off from the
surrounding walls. Also, they add shutters. Houses in
Ireland do not have shutters. The cement walls are blank
and cold. These marginal differences make a big
difference in the way the houses look.
The solution for Irish domestic architecture is simple:
put back the thatch...or expose the stone. Or cover the
whole thing in ivy.
Your correspondent back in France, where every house is
above average.
Bill Bonner
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