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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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OUZILLY, FRANCE
THURSDAY, 23 AUGUST 2001 |
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Today:
Backwards
Walking ll
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*** Epithet for the boom years: "Kind of a bubble
situation..." is now "spread to every geography..."
*** "Where's the recovery?" What happened to the
surplus? And other amusing questions.
*** But stocks up...even as the "situation...remains
very grave..." Best performer so far this year -
gold!... The end of the cold war...and more!
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"We got in kind of a bubble situation..."
explained Tom Seibel, describing the progress of the
technology sector over the last 5 years.
And now, "the economic downturn has spread to
every geography," said Carly Fiorina, with "no signs of
improvement in the market before 2002." Fiorina is
living proof that an illiterate woman can make it to the
top of a major tech company...and drive it into the
ground as well as any man.
Abby Cohen, another woman at the top of her
profession, lowered her targets for stocks. But she
still expects the S&P to end the year at 1500 - about
30% higher than it is today!
It is the 2nd half...we've just had the 7th rate
cut... "So where's the recovery?" asks a USA Today
headline...And what happened to the federal surplus?
"White House concedes near wipe out of surplus," reports
the Financial Times, as the nation's mortgages - public
and private - walk backwards again...more below.
But first, let's check in with Eric:
*****
Eric Fry in New York:
- If you were squinting real hard, you might have
spotted a little good news in yesterday's headlines -
very little.
- For one: Semiconductor equipment sales improved in
July for the third month in a row. The numbers, although
improving, still look more bust-like than boom-like. The
July book-to-bill ratio was .67 - meaning that chip-
equipment makers picked up $67 in new orders for every
$100 in deliveries. By comparison, the ratio in July of
last year was nearly twice as strong, at 1.22.
- The news really didn't seem like much, but it was
enough to attract investors back to their favorite
semiconductor stocks. The Philadelphia Semiconductor
Index (SOX) gained about 5%. The rest of the stock
market followed suit.
- The Dow climbed 103 points to 10,277, while the Nasdaq
rose 29 points to 1,860.
- "Good News" item No. 2: General Motors weighed in with
an announcement that it would meet its previous forecast
of 83 cents a share in earnings for the quarter ending
in September. GM's stock rose 3%.
- But while GM put on a brave face, Volvo laid bare the
grim truth. The Swedish industrial group warned that its
truck division will reduce production to combat a severe
drop in orders from the United States.
- Said Tryggve Sthen, president of Volvo Global Trucks,
"The situation in North America remains very grave."
Also making headlines was news that the American Gas
Association miscalculated the nation's gas storage
levels by about 50 billion cubic feet last week. If that
sounds like a big number, that's because it is. To say
the error was "significant" would be an understatement.
- AGA's initial estimate implied that the nation had
consumed a mountain of natural gas during the prior
week, and gas prices soared 12% on the news. But this
week, the AGA "corrected" its earlier estimate and,
predictably, the natural gas price collapsed to a 16-
month low of $2.80.
- It's a wonder traders believed either number. The
announced totals are so vastly different from one
another that they undermine the "counter's" credibility.
- It is noteworthy that on the very same day that the
AGA reversed itself by announcing that natural gas
supplies are abundant, the American Petroleum Institute
(API) reported "smaller-than-expected" inventories of
crude oil and gasoline.
- Gasoline supplies fell for the sixth week in a row and
crude oil supplies posted their largest decline in two
months. Obviously, somebody is using this stuff. If
demand for crude oil and gasoline is not evaporating,
it's a fair bet that demand for natural gas will not go
away either.
- "Today's sell-off in the natural gas stocks just might
be a buying opportunity," says John Myers of Outstanding
Investments. We'll see.
- One Daily Reckoning reader offered an insightful
modification to my suggestion yesterday that billions in
VC capital simply went "poof": "The imaginary market
wealth that investors thought they had all went away to
money heaven as market caps came down. The VC money, on
the other hand, didn't go poof. The VC money was spent -
every dime of it. It was spent on everything from
Ferraris to Faberge eggs. All that money changed hands,
and that has contributed greatly to the mess we are now
in. Great chunks of those billions were spent on
routers, servers, high-end office furniture, and
hundreds of other types of goods. Sales of everything
boomed. For the suppliers, this was the equivalent of
giving a condemned man his last meal."
[What's Your Opinion?]
*****
Back to Bill in Ouzilly - with a couple additional
notes...
*** Who's making money in this market? Investors
Business Daily reports that the leading mutual funds are
down an average of 21% so far this year. But investors
in gold are doing well. Ed Bugos of the Goldendar
letter:
"Outside of the REIT index, there is not a better
looking stock chart than that of the average gold chart
today. And any analyst that can disentangle from their
anti-gold bias should be able to spot that. Another fact
is that gold has outperformed every single paper
currency this year - including the dollar." The DR Blue
Team's Gold pick is up 12%+...
*** "The Cold War ended 10 years ago this week, with a
whimper," writes Bob Bauman. "That was when the 'red
barons' of the Soviet Communist party, the KGB, and the
Red Army tried to oust Mikhail GORBACHEV. The effort
died in drunken disarray after 3 days, only to be
replaced by the alcoholic Boris YELTSIN atop his
signature tank in Red Square."(For more, check out the
Sovereign Society: http://www.sovereignsociety.com)
*** I've returned to the country to spend the last few
days of summer. Earlier this week, we drove to Paris to
check out a new school for Maria, 15. Maria has not been
doing well in the French school system, so we're going
to try the international system...schools that teach in
English and award the equivalent of U.K. or U.S. high
school diplomas.
*** Does it make any difference what school Maria
attends? Or if she attends any school at all? Carly
Fiorina, Abbey Cohen, and Paul O'Neill all graduated
from high school. I wouldn't want Maria to turn out like
them.
*** The school we visited proudly announced that it
emphasized environmental studies: "Teaching children how
to protect planet Earth..." To that end, students are
indoctrinated with the latest green fads - whether it is
sorting trash or using cloth diapers. The gods must be
laughing...
* * * * * * * * Advertisement * * * * * * * *
After The "Tech Wreck": Waiting For The Other Shoe To
Drop
In the first wave, big, big companies - among the
largest in the world - dropped like cement blocks in the
Hudson. Hard-working investors were forced to foot the
bill. $4 trillion lost...on paper. The real cost?
Private retirement "dreams" on hold...indefinitely.
How could it happen so fast? Worse, if Intel or Cisco
can be on the ropes in a matter of months - which Dow
titans will follow? Most investors don't have a clue...
Do you?
Before you invest another dime - read this free report.
It will make you think twice about "safe" investing in
the Dow:
http://www.agora-inc.com/reports/STRT/TheFastTrack
* * * * * * * * * * * * * * * * * * * * * * *
BACKWARDS WALKING - II
By Bill Bonner
"You must admit it's getting better, it's getting better
all the time..."
The Beatles
"The official Gross Public Debt is back up to $5,740
billion," reports the Mogambo Guru. "The lie known as,
'The Great Debt Buyback Hoax' is now exposed. True, the
debt level stopped getting bigger for a couple of years,
but it never declined. This indicates that we didn't go
farther into debt. But that is a long, long way from
actually reducing it.
"And government debt will accelerate from here.
Consider that during the peak of economic boom when tax
revenues were flooding into Washington, the best they
could do was meet expenses. Now, Congress has stepped up
its spending even as the Treasury reports that tax
revenue is shrinking. The shortfall has to be made up
from, as always, debt."
Thus does the greatest nation in the world, the world's
only superpower, blessed with the greatest central
banker who ever lived and more communications technology
per square mile than any civilization in history, begin
walking backwards.
Who would have imagined it, a few years ago? That was
when the stocks were still rising at 18% per year and
Alan Greenspan was still alive. But, the prosperity that
stocks brought proved to be as foamy as the head on a
draft beer or the Federal surplus. A few months later -
it was gone. As the Federal Reserve itself calculates
it, stockholders have backed down from a asset value of
$12.3 billion to just $8.7 trillion since the end of
'99.
$4 billion of stock market losses rarely goes unnoticed.
Since the end of '99, more people have come to agree
with us - perhaps 2 out of a hundred - that it was all
an illusion. The rest remain convinced that this is
merely a pause in the inevitable forward march of
progress, perhaps with a little retrogression while we
wait.
Harry Dent, for example, believes the Dow may drop down
to the 7,000 level - before resuming its race to the
stars. James Glassman still expects the Dow to hit
36,000 - eventually. Abby Cohen expects extraordinary
growth in stock prices - even in the current year!
But many Americans have become skeptical of stock market
forecasts. They now know that share prices can back up
as well as go forward. So, they've turned their
attentions to another asset class, one presumed to have
no reverse gear. That is the subject of today's letter -
not the nation's public backwards walking mortgage, but
its private ones.
A "backwards walking mortgage" is what people in the
industry call a mortgage in which the mortgage payments
fail to keep up with the accumulated interest, so the
principal gets bigger. If the mortgage walks backwards
long enough, or if real estate prices fall, the
mortgagee could soon be "upside down"; he would owe more
on his house than the house is worth. At this point, a
man who measures his wealth by his real estate holdings
has a negative net worth. He no longer feels the burden
of wealth upon his shoulders...because he is bankrupt,
busted, broke.
Ever since 1945, homeowners have been trading more and
more of their homes for ready cash. At the end of WWII
homeowners had mortgaged only 15% of the value of their
houses. Forty years later, the percentage had risen to
twice that amount. But then, the desire to tap into the
purchasing power of one's own home seems to go the way
of all flesh in the boom years. By 1998, owners' equity
had fallen to its lowest level ever...Americans'
mortgages had walked backwards to the point where they
owned less than 55% of their own homes.
America could perfectly well get rich - even as a nation
of renters rather than homeowners. Your editor rents his
principal residence - an apartment in Paris - and feels
none the worse for it.
But Americans typically count their wealth in square
feet of housing space multiplied by the caliber of the
neighborhood. This is their main capital asset. When
real estate values go up, they feel richer. And unlike
stock prices, property prices never fall - or so it is
believed.
A chart from the Office of Federal Housing Enterprise
Oversight reveals no contrary evidence. For the last
quarter of a century, every quarter has produced a
positive movement in U.S. housing prices. While
Americans have lost $4 trillion on their stockholdings
since the end of '99, they have gained nearly a trillion
on their real estate. Property is, once again, the big
item on Americans' balance sheets and their main chance
of capital gains.
So sure must Americans be that home prices will continue
to levitate that they spend the equity almost as soon as
it appears. The rate of refinancing has skyrocketed to
50% of mortgage originations, up from just 15% a year
ago. Fannie Mae's "book of business" shot up at a 21%
rate in July. And Fannie, sibling Freddie, and half-wit
cousin the Federal Home Loan Bank system, have now
accumulated $3.2 trillion in debt - an amount equal to a
third of the nation's GDP.
"Living standards can only be increased in two
diametrically different ways," writes Dr. Kurt
Richebacher. "The normal one is for the long run and
occurs through capital accumulation, that is, through
saving and capital investment. The other one, the
abnormal one, is for the short run and occurs through
capital consumption, that is, through dissaving and
massive borrowing...for consumption. America is
practicing the second combination with abandon."
Reducing the facts to their essentials, homeowners are
borrowing against their main assets - and spending the
money. The cars, home theatre systems, and vacations
they buy lose their value quickly. But the debt remains.
As more and more houses are refinanced, the nation's
homeowners walk backwards - rather like Amazon.com or
TheStreet.com - using capital to finance current
operations. They stay in business, but they get poorer
by the day. How long will it be before they fall down?
We will see, dear reader, we will see.
Your ever-optimistic correspondent, enjoying the
spectacle...
Bill Bonner
* * * * * * * * Advertisement * * * * * * * *
ANOTHER CRASH...OR ANOTHER BOOM? Why the surprise of the
next 18 months might be NEITHER!
The tug of war between Wall Street's bulls and bears
shows no signs of ending. Neither side seems quite
capable of finishing off the other.
Are we in a stalled bull market...or are we in the midst
of a genuine bear market...or is the worst of the bear
market already behind us? It's quite likely that we
won't have clear answers to these questions for many
months. In the meantime, the clock ticks. And the
question remains:
How do we make money in this market?
In every market situation there are moneymaking
opportunities. And this year's Agora Wealth Symposium in
Las Vegas will reveal many investments that will yield
substantial profits - no matter where the market goes...
Click here...
http://www.agora-inc.com/reports/AWS/WinBigInVegas
* * * * * * * * * * * * * * * * * * * * * * *
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and 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 up—not 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 ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
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.
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