Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 14 AUGUST 2001
Fool Me Twice
*** Americans and financial ignorance, maybe it ain't
just a theory... your home is your - "margin account";
your personal IPO?
*** Dow trades "sideways", again... SOX up 3%, must be
time to load up on "rocket chips"...
*** McAll-Natural sandwiches... wine getting spendy...
by mid-August holders of the US $ will be able to "paper
their toilet stalls" with them... and, of course,
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*** Americans are woefully ignorant of the "financial
facts of life." At least that's what a touchy-feely
article in the Detroit Free Press tells me, suggesting
that a non-profit organization get involved with
educating America's youngsters.
*** And with good reason, I suspect. "Personal debt in
the U.S. has reached an all-time high," the article
relates. "The amount of their incomes Americans are
dedicating to paying down that debt is at levels unseen
in 15 years." Moreover, "mortgage delinquencies and
writeoffs by credit-card companies are rising, and
personal bankruptcy filings could hit a record this
*** Many are still feverishly gripping the last great
savior of the American family balance sheet: the home.
"Today your home isn't your castle, it's your margin
account," says Scott Burns, of the Dallas Morning News.
*** For now, real estate markets around the country are
still rising...average homes in...
Boston: up 13.9% to $345,000
Denver: up 14.9% to $210,000
Fort Myers: up 14.4% to $111,100
Los Angeles: up 11.5% to $225,000
Sacramento: up 22.9% to $163,000
*** Will it be long before layoffs and the illusory
corporate profit mirage of the late '90s takes its toll
on the real estate bubble, too?
*** Greenspan before the Senate two weeks ago: "I think
one of the things that's occurring in this country is
the evolution of housing into a very sophisticated,
complex industry, in the fact that...as the market value
of homes continues to rise, even in a period when stock
prices are falling, we're observing a rather remarkable
employment of that so-called 'home equity wealth' in all
sorts of household decisions."
*** "The bothersome fact is that home mortgage borrowing
is becoming a handy finance tool," writes Burns, "the
equivalent of your own personal IPO."
*** Eric, what happened yesterday on the Street?
Eric Fry reporting from New York:
- Booorring! The Dow fell one point yesterday. The
Nasdaq offered only slightly more thrills by posting its
first positive close in seven days - up 25 points. The
Nasdaq owed much of its advance to the on-again, off-
again semiconductor index (SOX), which gained almost 2%
on the day.
- It seems Goldman Sachs analyst Terry Ragsdale woke up
Monday morning and decided semiconductor stocks aren't
so bad after all. He placed Intel on the firm's oh-so-
prestigious "Recommended List" and upgraded a slew of
chipmakers on the belief (read: hope) that fundamentals
will improve in the fourth quarter.
- "We think the stocks are headed up for now," Ragsdale
opined. "The recovery writing is on the wall, and we
don't see how investors will be able to resist." Yeah
Terry, we can see how it'll be pretty tough to resist
shares selling for 60 times collapsing earnings.
- What inspired Ragsdale's call, I wonder... A prophetic
vision during the night? An uncontrollable urge to be
bullish on something...anything? Perhaps a plump new
underwriting deal from Intel? Who knows. One thing's
for sure. It wasn't tangible evidence of recovering
semiconductor demand. There isn't any.
- "Don't be suckered by the Street's latest tech-stock
hype," warns Fred Hickey's High-Tech Strategist. The
semiconductor industry is still in the midst of the
worst downturn in its history and semiconductor stocks
remain grossly overvalued.
- "Virtually all its major end customers - Compaq, H-P,
Sun, EMC, Nokia, Ericsson, Cisco, Nortel, Lucent, etc. -
are in turmoil," says Hickey. "[And yet] the average P/E
ratio for the semiconductor stocks in the SOX index,
based on analysts' estimates of 2002 earnings...is 84.
The absolute lowest P/E ratio for any of the stocks is
- "Before you act on Merrill's - or Goldman's - latest
urging," Hickey cautions, "I ask you to think about this
Chinese proverb, 'Fool me once, shame on you; fool me
twice, shame on me.'" (More in a Daily Reckoning Guest
- Gold keeps on edging higher as it tries to muster
another of its infamous mini-rallies. One of these days,
the mini-rally will blossom into a full-fledged maxi-
rally. Given the dollar's recent weakness, we shouldn't
rule out the possibility. The AMEX Gold Bugs Index
climbed nearly 3% yesterday - not too shabby for a
- But the relics that really "rocked" yesterday were the
coal stocks. Peabody Energy soared an eye-popping 13%
after announcing that its earnings could rise briskly on
the back of surging Appalachian coal prices. Shares in
Massey Energy, another leading U.S. coal company, also
jumped about 13% on the day.
- "Coal prices for Appalachian coal on the spot market,
where 20 percent of coal is sold, doubled this spring
and have held onto those gains through the summer,"
- John Myers of Outstanding Investments suggests coal is
still at historical lows. Myers: "Coal has been a
crucial source of energy since the time of the
Pharaohs... and used extensively for fuel since the
Industrial Revolution. But since 1975 or so, the greens
have beaten the coal industry silly.
- "At the height of the energy crisis, the price of coal
hit $100 a ton," Myers continues. "In constant 2001
terms that would put the price of coal close to $300 a
ton. By 1999 the price of coal had fallen to just $20 a
ton. That was just one-tenth of its price during its
heyday. Even after a revival, the price of coal is
selling for only $40 a ton, a fraction of what it was
fetching 25 years ago." (See: Suffocation, War or Coal)
- Pr�t-A-Manger, the all-natural sandwich shop I
frequent down on Broad Street, did a cool $1 million in
sales last year. Maybe my eyes were bigger than my
- Emboldened by its initial success in the hyper-
competitive Manhattan restaurant market, the Britain-
based operation is "ready to blitz New York with 40
stores selling cheap gourmet eats to lunchtime crowds,"
- Ironically, the unnatural McDonald's owns one-third of
the company and an option to acquire all of Pr�t A
Manger over time. Maybe we should keep our eyes on
Ronald & Co... First McCafe coffee bars...then gourmet
sandwiches. The innovations seem to be working. What's
next, McHedge Funds?
Back to Addison Wiggin, in Paris...
*** Yesterday evening I went down to the Franprix, my
local grocery store here in Paris, and I noticed that
there's a disturbing trend afoot. The liter of wine I've
grown accustomed to sipping with my sup has grown
noticeably more expensive. Once less than $2... it's now
closer to $3. (okay, so it's not the finest issuance
from the vine...)
*** Still, "the market seems to be ignoring poor euro
data and focusing more on the not-so-good U.S. data," a
UBS Warburg currency strategist told the IHT. The euro
traded briefly over 90 cents yesterday. The franc,
pegged loosely to the euro, has been trending towards 7.
*** Uncle Harry Schultz, curiously following the Russian
press, points out: "Outspoken economist Tatyana
Koryagina said in testimony to Sergei Glazyev's State
Duma hearings on June 29 that 'holders of dollars will
soon be able to use them for wallpapering their toilet
stalls.' She also forecasts a world financial system
blow out in mid-Aug." Maybe so... more below.
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The Daily Reckoning Presents: A Guest Essay. Fred Hickey
warns: "Don't be suckered by the Street's latest high-
tech hype." The semiconductor industry is still in the
midst of the worst downturn in its history - and
semiconductor stocks are still grossly overvalued.
'FOOL ME TWICE'
by Fred Hickey
The sell-side - brokerage house - analysts are at it
again, urging investors to hop on board the tech stock
train before it leaves the station.
Merrill Lynch recently warned that the semiconductor
train was pulling out and raised ratings on a dozen
semiconductor chip stocks and another seven
semiconductor equipment companies. Shortly thereafter,
in monkey-see, monkey-do fashion, W.R. Hambrecht used
the same train-pulling-out phraseology as an excuse to
upgrade a different set of semiconductor names that
Merrill had somehow overlooked.
Last year, the trains brought the dupes to the
slaughterhouse instead of the promised land of plenty.
Trillions of dollars of wealth were destroyed and
trillions more will be destroyed later on this year,
once the train cars are packed full.
[As we mentioned in the Daily Reckoning yesterday], NBC
cheerleader extraordinaire, Maria Bartiromo, titled her
August 2000 column in her hubby's Individual Investor
magazine: "Ready for a Rebound." Column subheadings
were: "Nasdaq 6000?" and "Soaring Semis."
All Maria did was parrot what the "experts" of the time
were stating. Dan Niles, the hottest semiconductor
analyst in August 2000, provided most of the quotes for
Maria's "Soaring Semis" section.
This is what Maria wrote: "One sector showing no signs
of a slowdown is that of semiconductors, which has come
roaring back from its slump in 1997 and 1998, powered by
explosive demand for everything from cell phones to Palm
Pilots to the Internet itself. 'All those things require
semiconductors and none of them has seen a slowdown, so
it looks as if the gains will continue for at least a
year and a half,' says Lehman Brothers analyst Daniel
Niles." Maria also quoted DLJ analyst Boris Petersik,
who predicted higher DRAM prices and a one-year 102
target price for Micron Technology.
Last year, Petersik was Wall Street's favorite analyst
covering DRAM and Micron. But how accurate were these
predictions from the leading analysts?
Standard 128-megabit DRAM prices were $18 in the July-
August 2000 time frame. They are now less than $1.80.
DRAM prices experienced their fastest decline in
history, which is saying a lot, because DRAM prices are
always falling. Research firm Dataquest predicts that
the DRAM market in 2001 will suffer its worst revenue
decline in history - down 55% year-over-year - from
$31.5 billion in 2000 to $14 billion in 2001.
Micron's stock never hit the $102 target price, though
it did break above 93 in late August before heading into
a death plunge that saw it lose 70% of its value (nearly
$40 billion) in just eight short weeks.
That's another example of why over the years I've called
Micron "The gift that keeps on giving" - for short
sellers and especially put and LEAP option buyers. Note
that at the peak stock price last year, Micron sold at
nearly two times the total worldwide estimate of DRAM
Historically, Micron has traded at two times its own
sales, not the total industry's. Micron has a little
more than 20% market share. Today, Micron is valued at
$26 billion - nearly two times the total worldwide
estimate of DRAM sales. I guess that's why Merrill Lynch
made Micron one of its dozen semiconductor stock
upgrades [recently]. Ha!
As for the overall semiconductor forecast, Maria, Dan
and Boris couldn't have been more wrong. Research houses
now admit that the semiconductor sales decline in 2001
will be the worst since 1985's debacle, and I believe
that when the final results are in, the collapse will
exceed 1985's. Cell phone sales in 2001 - approximately
400 million - are 200 million units short of the
forecasts from last year.
In 2000, cell phone vendors put about 100 million extra
units into inventory due to a sharp sales shortfall from
forecasts. Palm Pilot sales last quarter were one-fourth
of what Palm had originally forecast, leading to a
massive inventory bulge and brutal price war, which
As for the Internet as a driver of the semiconductor
industry in 2001, what can I say? Online spending in
June was 20% lower - $3.2 billion vs. $4 billion in June
2000, according to Forrester Online Research. According
to Nielsen/NetRatings, the number of U.S. users of the
Internet has stagnated at 100 million since January. The
average number of minutes spent online per month is down
from the beginning of the year.
According to Webmergers.com, through June of this year,
at least 555 dot.com companies shut down, with 60% of
all dot.com failures since January 2000 having come in
just the first six months of this year. More than nine
times as many dot.com companies have shut down this year
than in the first half of 2000. The failed companies are
spewing enormous amounts of computing, storage and
networking equipment into the used-equipment market.
Because some may argue that even 2002 earnings estimates
are temporarily depressed due to price wars and the like
- highly unlikely - I made some comparisons using
price/sales ratios using analysts' 'optimistic'
forecasts. Those comparisons show semiconductor stocks
as more than two times overvalued vs. historical
As always, I suggest that individual investors not sell
short. While most of my money is tied up in cash and
cash equivalents, I continue to play the downside
through a combination of longer-term put options, LEAPS
and shorts. With stock prices still egregiously too high
- total market valuation at 140%-plus of GDP vs. its 55%
historical long-term average - I remain in the bear
When we finally get capitulation from investors, we will
have cash at the ready to buy great tech stocks dirt-
I have short/put positions in Micron, IBM, Intel,
Applied Materials, KLA-Tencor, Altera, Linear Tech,
Maxim Integrated Products, Nvidia, Celestica and CDW
While it's been frustrating to watch stocks like this
rise for no good reason, Mark Twain provides some
solace: "Let us be thankful for the fools; but for them
the rest of us could not succeed."
for The Daily Reckoning
Fred Hickey is editor of The High-Tech Strategist. This
story is adapted from the August issue and a version of
it appeared on the grantsinvestor.com website.
Readers of the Daily Reckoning are cordially invited to
try grantsinvestor.com for 30 days. Simply, follow this
http://www.grantsinvestor.com/agora.html and follow the
menu provided for you there. Thank you.
The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand sends it off by e-mail before most Americans
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get upnot only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early 90sopening offices in Florida, London, Paris, Ireland, and
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.