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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 28 AUGUST 2000 

 

Today:  Madame de Thiery

In Today's Daily Reckoning:
*** Lazy, Hazy...Crazy Days on Wall Street...
*** The public is still piling into stocks
*** Death threats...dot.com layoffs...and 'it's the 
metric system, stupid.'

*** Friday was just another lazy, hazy, crazy day on Wall 
Street. Nothing much happened. The Dow rose 9 points. The 
Nasdaq fell 10 points. New highs outnumbered new lows two 
to one, but there weren't many of either. Volume was very 
low.


*** Barron's reports that flow of money into stock mutual 
funds is still positive...but negative for bond funds. 
The public - amateur Soroses, mom and pop Buffetts - are 
moving out of bonds and into stocks. What madness is 
this? The total year to date yield on Dow stocks has been 
about a minus 1.5%. The Nasdaq is about flat. That's 
including dividends. 


*** Bonds meanwhile, are up about 10%, plus you would 
have gotten about 4% in interest, year to date. Hmmm... 
14% vs. - 1.5%... Let me think about this...which would I 
rather have?


*** The same madness has brought prices of put options to 
near record lows. No one is betting on a bear market, it 
seems.


*** Meanwhile, "Stocks Float Higher" is how Reuters 
reporters describe the situation. The Dow gained 1.33% 
last week. The Nasdaq rose 2.86%. 


*** The bear must be grinning. He has done his work well. 
He's managed to put together the biggest, fattest, most 
complacent herd of na‹ve investors in history. He's tan 
and fit - after spending the summer at the beach. We 
never know for sure what the wily creature will do, but 
he must be thinking about coming back to the office and 
getting down to some serious business.


*** If I were Mr. Bear, I'd have my eye on the Big Techs. 
They are priced for a perfect digital world - in which 
things get better forever. But human progress is marked 
by episodes of extreme difficulty - as I chronicle below.


*** One of the illusions cherished by investors is the 
idea that profits are increasing, thanks to productivity 
gains. Yet, a report in the Wall Street Journal cited a 
study by Bear Stearns showing that if S&P 500 companies 
included the cost of employee stock options in their 
operating accounts profits would have fallen 3% in 1997, 
4% in 1998, and 6% last year.


*** "Through the first six months of the year," writes 
Alan Newman in his Crosscurrents letter, "Dollar Trading 
Volume came in at 350.6% of GDP, a record for any six 
months as far back as our data go (1926)." In February, 
Newman reports, more shares were traded on the Nasdaq 
"Bulletin Board," typically 'penny shares,' than on the 
Nasdaq itself. "This has never occurred in stock market 
history," he says, "and probably never will happen 
again...Can anyone legitimately argue that we have NOT 
been in a mania?"


*** But an investor - standing in the middle of the great 
herd - faces a kind of "prisoners' dilemma." Stock prices 
will remain high as long as everyone thinks they will 
remain high. As long as no one 'defects' from this kind 
of crowd thinking - everyone's portfolio will be all 
right. And the more desperate the situation, the less are 
people willing to tolerate defection.


*** But a smart investor - or investment analyst - can 
see that the situation is hopeless. And he knows that he 
is better off abandoning the herd sooner rather than 
later. So...he sells his stocks and buys bonds. Or worse 
- he becomes a short-seller.


*** All over the world, in every culture, defecting from 
the crowd is badly viewed. It is considered not nice. Or 
immoral. In time of war - a soldier who deserts his post, 
even a position that is suicidal - faces a death 
sentence. When Mr. Jonathan Joseph, an analyst with 
Salomon Smith Barney, downgraded four semiconductor 
stocks he received a series of death threats. An email 
told him: "We know where you work and we have a bullet 
with [your] name on it."


*** David Futrell had a similar experience after he wrote 
a column critical of some expensive stocks in the August 
issue of Money Magazine. He was labeled a 'basher' and 
hounded off Internet message boards. Said Futrell of the 
democratizing influence of message boards: "This is a 
crock. They are democracies only if you share the same 
rosy opinions as everyone else..."


*** More than 4,000 dot.com employees were laid off in 
August - not a huge number, but up more than 50% from 
July. A Reuters story reported last month that e-
companies are dropping the dot.coms from their names so 
that people will take them seriously.


*** Friday's trading was enlivened by a report that 
Emulex would have to restate its earnings and its CEO was 
leaving. The news caused the stock to fall $63 - from 
$108. But the information - which came from the Internet 
- proved to be false. Can you believe that, bad 
information on the Internet? 


*** Oil rose 40 cents - it's back above $32 where it 
seems inclined to stay for awhile.


*** New house prices rose 2.2% last month. That's an 
annual rate of more than 14%. But existing house sales 
slowed to a 5-month low.


*** From "Pulp Fiction," on Amsterdam: "How come they 
call a Big Mac a Big Mac... but a Quarter Pounder is 
called a 'Royale'..."


"It's the metric system, stupid...."


Now the metric system comes to Wall Street. Beginning 
today, on a trial basis, a few stocks will be quoted in 
dollars and sense instead of fractions. Wall Street is 
going digital too. Can anything resist the trend?


*** The Dow is still below its record high. Utilities 
actually hit a new record last week, but fell back on 
Thursday and Friday. 


*** The Dow is still selling at 20 times earnings; the 
S&P at 29 times. 


*** Gold gained $1.10 on Friday. Platinum rose $6.80. And 
the dollar fell a bit against the euro.


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MADAME DE THEIRY


Madame de Thiery seemed to want to tell someone. She 
talked and talked, quickly, hardly pausing for air. It 
was as if she had waited a quarter of a century for some 
near-strangers to come along - people who were so 
completely ignorant of the situation...and so obviously 
foreign to it...that she could speak her mind without 
apologizing...and without hiding her thoughts.


It was Sunday evening. She had invited us over for an 
aperitif. So, we sat on the terrace overlooking a 
beautiful little valley, with a plantation of oaks and 
several pastures on the other side of the river. Late in 
the evening, the sun seemed to hang over an ancient oak 
tree as if fixed to a wall. Then, suddenly, it was gone.


Madame de Theiry is the sister of the woman whose house I 
visited a week or so ago - for the wine tasting. The 
sisters are both in their early 60s, I would guess, and 
both attractive - with delicate features, auburn hair and 
thin, smooth skin. 


The two sisters married two brothers, as happens more 
often in rural areas than in the city. Both had large 
houses and large families - one with 5 children, and 
Madame de Thiery, 6. And both had lives marked, and 
shaped, by tragedy. 


Madame de Thiery, wife of a prosperous farmer, daughter 
of another, had lived the "vie de chateau" all her life. 
She even had a 'de' in her last name - testifying to the 
gentrified milieu from which she hailed. 


But the house we visited on Sunday night was no chateau. 
It was a simple farmhouse - not much different from the 
one to which Francois retired. In fact, it was one of the 
houses that was once lived in by her father's tenant 
farmers...and then by refugees from Poland. 


Readers of these messages are familiar with the 
meandering little roads I sometimes take. I offer no 
apology for them. These little by-ways do not get us to 
our destination in the fastest way...but they often lead 
us to places we had not expected to visit...where we 
discover things we had not been looking for.


Digital Men always take the highways. They do not like 
surprises. Not only do they follow maps, they also have 
satellite positioning systems built into their 
dashboards. Racing from one place to the next, they know 
what they see, but not what they miss.


I was not especially keen to wander over to Madame de 
Thiery's last night either. I was in Digital Mode - 
racing to get ready for the next exciting installment of 
the Daily Reckoning. But there are always surprises in 
life - Elizabeth surprised me with a social obligation I 
could not refuse. 


The Big Techs, you will recall, are 'priced for 
perfection.' In the world of Digital Man's imagination, 
1's and 0's just pile up...like profits. There are no 
setbacks worth mentioning and no surprises. 


Intel trades at 51 times earnings - but its profits from 
operations are at single digit rates. (Most of big 
reported increase in net income came from portfolios 
investments.) 


Microsoft, meanwhile, most recently reported an increase 
in earnings of 9.5% - but of that, almost 50% came from 
investments, not operations.


Yet, investors crowd in - paying multiples that should be 
awarded only small, fast-growing companies. Have they 
invented a cure for cancer? Do they have a patent on sex? 
Are they immune from competition? You'd think so.


Intel and Cisco alone represent 12% of the entire Nasdaq. 
And the bigger they get, the bigger they get.


Despite the Internet, and because of it, investors have 
less and less real knowledge of anything. Knowledge, like 
labor, becomes more and more specialized...with each 
person having a smaller and smaller portion of the total. 
The average investor couldn't turn off one of Cisco's 
router switches if his life depended on it...and I doubt 
I could find the 'Intel Inside' even with a pair of 
pliers and a screwdriver. 


So, it is not knowledge that drives his investment 
decisions - it is ignorance. The typical investor knows 
that he has no hope of ever actually understanding 
Cisco's switches or Intel's chips - so he doesn't even 
try. He doesn't take his computer apart...to study the 
switches and Intels. He doesn't pick up the phone and ask 
the Cisco Kids 'what the heck do you do, anyway?" He 
knows it is as hopeless as asking the Pope what is meant 
by the Holy Trinity. 


Instead of seeking knowledge, he seeks safety, comfort, 
validation, and confirmation. He buys what everyone else 
is buying...or an index fund where he pays someone else 
to buy what everyone else is buying for him. Either way, 
the biggest stocks get even bigger.


"Simply put," promises Alan Newman, "the more expensive 
an S&P issue becomes, the more likely it is to become 
even more expensive. Since the mathematical allocations 
of share purchases have absolutely nothing to do with 
corporate fundamentals, larger issues have become 
inefficiently priced and have remained at inefficiently 
priced levels for several years now. This has afforded 
many observers and participants with a sense of 
permanence for higher prices, although there has been no 
economic justification for same."


In Toronto, Newman points out, one company - Nortel - has 
grown so big relative to the market that it makes up more 
than a third of the Toronto Stock Index.


What a shame that perfection never seems to last. 
Accidents happen. Things go wrong. People end up where 
never expected to be. "In life," wrote the philosopher 
Kierkegaard, "only sudden decisions, leaps, and jerks 
lead to progress. Something decisive occurs only by a 
jerk, by a sudden turn which neither can be predicted 
from its antecedents nor is determined by them."


Digital Men can plot a straight line on a map and add the 
up the miles. But they cannot imagine a detour. Nor can 
they understand the quirky, unexpected route of real 
life.


Against long odds, both Madame de Thiery and her sister 
were widowed before they were 40 years old. The two 
brothers whom they had married each had a heart attack at 
42 and each died.


Her sister, remarried. But Madame de Thiery struggled on 
alone. She had 6 children. One had severe problems at 
birth and died in her early teens. 


Sitting on her terrace with the evening light on her 
face, Madame de Thiery explained:


"I was completely on my own. Everything was changing. My 
husband had borrowed enormous sums of money. It was 
different back then. If you had a good reputation, you 
could borrow money. But the world was changing. 


"After the war, we needed to mechanize the farms. And we 
needed to consolidate them...and drain the fields. It was 
very costly.


"Everyone offered to help, but when push came to shove, 
there was no one. I was alone. With thousands of acres. 
Huge debts. Six children. And 11 farm workers I couldn't 
afford.


"What could I do? I had to fire seven of the farmhands. 
So, I found them other jobs. But they didn't like what I 
found for them. They revolted. They wanted things I 
couldn't give them. Salaries I couldn't afford. New 
equipment. They knew I was at their mercy and they took 
advantage.


"I know you can't believe what I am telling you, but it 
is true. A merchant came by one day when things seemed to 
have reached a crisis and, after talking to the farm 
workers, came to me. 'Madame,' he said, 'you have a very 
big problem. It is not safe for you.' 


"Oh, but you cannot believe this...things are so 
different now.


"But the merchant, who supplied our fertilizer, he was a 
good man. He stayed around for several hours on some 
pretext...and finally came back to me... 'I think they 
have settled down; it is safe to go to sleep tonight.'


"Finally, some of them left. People complained. They 
hated me. But I just did what I had to do to keep the 
place together. But in the end, I had to sell it 
anyway..."


Your correspondent, reporting what I hear... on the by-
ways of life,


Bill Bonner
 
 
 
 
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Last modified: April 01, 2001

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