Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 28 AUGUST 2001
Back to Trend
*** It's getting worse! Relax, bear markets take time...
*** Dow down slightly...has rally peaked out? Or it is just
*** Cramer's sad portfolio...McCall's lack of cash...timber
investors lumber along...home-schooling, and more!
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"It's Getting Worse," a NY POST headline tells us.
"Earnings are still spiraling down," the paper explains.
Already, 355 companies have pre-announced negative results for
the 3rd quarter � up 7% from the first quarter." Even
restaurants are losing revenue; sales are down for the first
time since 1990.
The Economist adds that it's getting worse WORLDWIDE. Estimates
of gross world product for the 2nd quarter have it going down �
for the first time in 2 decades. Yesterday, Toshiba announced
that it was firing 9% of its workforce, contributing to the
worst unemployment in Japan in 50 years.
But what can you expect?
"Great bear markets take their time," says Jeremy Grantham,
interviewed in Barron's. "In 1929, we started a 17-year bear
market, succeeded by a 20-year bull market, followed in 1965 by
a 17-year bear market, then an 18-year bull. Now we're going to
have a one-year bear market?"
I don't think so, dear reader. More on the coming 17-year bear
market...but first, this report from Eric:
* * * * * *
Eric writing from New York:
- The sell-off continued in the savings and loan sector Monday,
thanks to a weak existing home sales report. Sales in July fell
3% from the month before, with every region reporting a negative
showing except the Northeast (Yea for me!).
- Shares of the nation's largest thrift, Washington Mutual, fell
4.5%, while the Bloomberg U.S. Savings and Loan Index dropped
- Even though home-buying activity in the Northeast held steady
in July, the region will not likely be immune to slowing sales,
now that pink slips are raining down on Wall Street.
- Most of the job cuts announced earlier this year targeted
support staff. But now, Wall Street's priciest employees are at
risk as well.
- "Investment bankers returning from summer holidays this week
face the prospect of job losses and bonus cuts," the Financial
Times reports, "with JP Morgan Chase becoming the latest to
wield the axe."
- If you happen to be visiting Manhattan during the next couple
of weeks and you happen to spy a tanned investment banker just
back from the Hamptons, be sure to offer him a handkerchief.
- Oil service stocks fared well yesterday, with the S&P Oil and
Gas Drilling and Equipment Index gaining almost 4%. But the
broad market averages finished in the red. The Dow Jones
Industrial Average slid 41 points to 10,382, while the Nasdaq
Composite fell 4 points to 1,912.
- From the end-of-an-era department: two icons of the dot-com
bubble shut down in August: theglobe.com and the Industry
Standard. A moment of silence please...thank you.
- The Industry Standard chronicled the dot-com phenomena from
start to finish. Based in San Francisco, the magazine was 100%
pure dot-com. It was both about and for the Internet movers and
shakers and bubble-makers. At its peak, the magazine grew to be
about an inch thick, brimming with advertisements from
dot-com-this and e-that. One year later, it's kaput - a ghost
town of journalism.
- Likewise, theglobe.com shut down its web site earlier this
month, marking the end of an era - the ridiculous IPO era, that
is. Theglobe's November 1998 IPO held the record � temporarily -
for the biggest first-day IPO pop with a 606% gain. The stock
closed Monday at eight cents a share, down 99.8% from its $48
- Theglobe.com, according to the New York Observer's Chris
Byron, "captured the utter and complete waste of the entire
dot-com frenzy...The [stock] was also representative of another
phenomenon of the dot-com IPO era: the scruple-free underwriter
prepared to bring almost anything to market if enough
knuckleheads could be lined up to buy it."
- Byron continues: "When the full measure of excess...is finally
taken for the greatest and last bull market of the 20th century,
no misallocation of capital is likely even to come close to the
incredible and infantile waste embodied in the dot-com IPO
- But wasn't it fun while it lasted?
- From the look-on-the-bright-side department: the bursting of
the dot-com bubble is not without its pluses. Reuters reports:
"It took a dot-com bust, a stock market swoon and tens of
thousands of layoffs, but Silicon Valley drivers are � finally -
enjoying life in the fast lane." Literally. Commute times are
dropping faster than Cisco's share price.
- Why did TheStreet.com founder, James J. Cramer, begin
displaying his personal portfolio on the Internet for all the
world to see? He answers that question in a recent New York
Magazine column. Says Cramer, "I chose to run it publicly -
announcing every trade as I made it on TheStreet.com's
subscription section - for the benefit of my readers..."
- Stifle your altruistic urges, James. Your readers can lose
money just fine without your help.
- At last count, the Cramer's portfolio was down 6.1% since
becoming a public spectacle on April 1st of this year.
- Still, compared to portfolio manager James D. McCall's
performance, Cramer's single digit losses look pretty darn
- "Relentless Search for Growth Humbles a Mutual Fund Star,"
observes the NY Times. Most of the funds under Mr. McCall's
"stewardship" have collapsed more than 70% over the last 12
months. Says Mr. McCall defiantly, "Valuation is not one of the
factors that enters into our methodology." Pity, because the
incredibly shrinking valuation of his clients' investments is
about the only thing that enters into their methodology.
- Maybe he should have practiced first with his own money.
Back in Ouzilly...
*** My friend, Michel, assures me that "forest owners [in
France] didn't lose much in the big storm. They were insured or
indemnified by the government...or they were able to sell the
timber even after it was on the ground. Timber is the closest
thing to a risk-free investment there is. But you have to be
*** We let Maria choose her own school. She chose
home-schooling. She'll still be taking her dance and acting
classes. But reading, writing and 'rithmetic she'll be doing on
her own. I don't know if I like this idea. If she doesn't do
well, we won't be able to blame the school... We'll see how it
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BACK TO TREND
by Bill Bonner
"The Internet-telecom-tech bubble was the biggest by far in
American history," says Jeremy Grantham. "Bigger than the
railroads, bigger than anything."
Grantham decided to study bubbles to see what happens after they
finally pop. "We found 28 bubbles," he says, looking at "every
bubble for which we have data...stocks, bonds, commodities and
currencies...We define a bubble as a 40-year event in which
statistics went well beyond the norm..."
What happened? "Every one of the 28 went back to trend, no
exceptions, no new eras, not a single one that we can find in
Mr. Alan Greenspan, central banker nonpareil, has seen his own
stock soar in the bull market. As well it should. For Mr.
Greenspan, perhaps more than any other person, deserves the
credit for creating the bull market. He helped make money cheap
and readily available when the world wanted it most.
But both asset prices and reputations deflate in a bear market.
If we are not mistaken, Mr. Greenspan's reputation seems headed
"back to trend."
At no time did the return on borrowed money seem more promising
than in the last 5 years of the 20th century. An investor could
cadge a few bucks at 7%...buy a tech or dot.com stock...and make
a net gain in the double digits. The cheaper the interest rate
on the borrowed funds...the greater the net gain to the
For the last year and a half, however, the net gain on most
borrowings has been negative. This year alone, the S&P is down
10%; the Nasdaq has lost 22% - even while Greenspan cut rates at
the fastest pace ever. The fed funds rate has been cut 7 times,
for a total of 3%. But, instead of getting better...as reported
in the NY POST, "It's Getting Worse."
This comes as no surprise to the readers of the Daily Reckoning.
Mr. Greenspan had already given the world too much credit. Too
many miles of optic fiber had already been buried, too many
companies had been created, too many computers were already
connected to too many servers, serving up too much useless
information. The world was already swamped with debt and data,
we noticed...and we doubted it wanted more of either.
Chairman Greenspan, on the other hand, seems puzzled. He thought
he saw what Treasury Secretary O'Neill calls "a golden age"
"When historians look back at the latter half of the 1990s,"
began his "The Revolution in Information Technology" speech on
March 6, 2000, "I suspect they will conclude we are now living
through a pivotal period in American economic history. New
technologies that evolved from the cumulative innovations of the
past half-century have now begun to bring about dramatic changes
in the way goods and services are produced and in the way they
are distributed to final users...
"At a fundamental level, the essential contribution of
information technology is the expansion of knowledge and its
obverse, the reduction in uncertainty. Before this quantum jump
in information availability, most business decisions were
hampered by a fog of uncertainty. Businesses had limited and
lagging knowledge of customers' needs, of the location of
inventories, and of materials flowing through complex production
systems. In that environment, doubling up on the materials and
people was essential as a backup to the inevitable misjudgments
of the real-time state of play in a company. Decisions were made
from information that was hours, days, or even weeks old.
"The fact that the capital spending boom is still going strong
indicates that businesses continue to find a wide array of
potential high-rate-of-return, productivity-enhancing
investments. And I see nothing to suggest that these
opportunities will peter out anytime soon."
Not even two years have passed. But already, historians are
looking back. What they see is not a New Era of productivity and
permanently higher stock prices. What they see is a Fed Chairman
who lost his head in a fog of bubble claptrap.
Four days after Greenspan's speech, the Nasdaq peaked out.
Stocks began going down all over the world.
And which industries were hit hardest? The very ones which
Greenspan had named as major beneficiaries of the new
"Already, major efforts have been announced in the auto industry
to move purchasing operations to the Internet," Greenspan had
observed. "Similar developments are planned or in operation in
many other industries as well. It appears to be only a matter of
time before the Internet becomes the prime venue for the
millions of dollars of business-to-business commerce conducted
Bloomberg's index of dot.com stocks in the business-to-business
sector shows a complete collapse - from a high near 2000 on the
day of Greenspan's speech to a low of 107 at the end of July.
The entire industry returned to the obscure penny-ante cyber
swamp from which it crawled in 1998.
Even with 24-hour, high speed internet lines, and computers on
every desk and in every washroom, the most forward-looking, high
tech companies in the world seemed unable to escape the fog of
uncertainty. Cisco wrote off $2.25 billion of excess inventory
in its third fiscal quarter. $44.8 billion of acquisitions by
JDS Uniphase had to be written off. "Throughout Silicon Valley,"
comments Jim Grant, "makers of PCs, chips, servers, printers and
other digital products have admitted to monstrous
miscalculations of final demand. Lucent, Corning, Nortel, and
JDS Uniphase have been devastated by one of the greatest
misallocations of capital outside the chronicles of the Soviet
In the U.S. investors lost about $4 trillion. Worldwide, the
losses have been estimated as high as $10 trillion.
Is that the end of it? Or just the beginning?
More on Thursday, when the "fog of uncertainty" lifts...
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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.