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
*** 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
*** 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
*** The same madness has brought prices of put options to
near record lows. No one is betting on a bear market, it
*** 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 nave 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.
*** And lest we forget where the juice is coming from,
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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
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
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
"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
"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
"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
"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
Your correspondent, reporting what I hear... on the by-
ways of life,
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Last modified: April 01, 2001
Published By Tulips and Bears