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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
WEDNESDAY, 6 SEPTEMBER 2000 

 

Today:  The Black Grim

In Today's Daily Reckoning:
*** Back on the job...more or less: after escaping the 
Black Grim
*** Big Techs take a hit
*** Oil gets a boost...gold down, dollar up...

*** Wow...a very exciting past couple of days. The Daily 
Reckoning command center was struck by a nasty virus (I 
think)...appropriately, an old-fashioned, creepy crawly 
virus. More about that below.


*** Back on the job, more or less, I notice that Addison 
did a good job of filling in for me. "The graveyards are 
full of indispensable people," says my friend Michel. I 
am glad that I am, not yet, among them.


*** Oil hit 10-year highs yesterday, rising to $33.83. 
The Boston Globe reports that state utilities are asking 
for the "sharpest rate hikes since the 1970s." 


*** But oil seemed to bead up and run off Wall Street's 
back yesterday. Investors care only about Big Tech... So, 
Big Tech was where the action was.


*** Last week, the Wall Street Journal carried a negative 
piece on Yahoo that sent shares down $7. Yesterday, an 
analyst downgraded Intel, the world's number one 
semiconductor maker, from a "strong buy" to just an 
ordinary "buy." This dropped Intel by $4.69. Other 
rumors, reports, and gossip knocked $3.16 off Worldcom... 
and other of the Big Techs suffered too - including Dell, 
Gateway, Ciena and so on. Readers with a sense of humor 
might wonder what's the difference between a "strong buy" 
and a regular one. Either way, the buyer will be long the 
stock and suffer whatever happens. 


*** Barron's provides a helpful update on how over-priced 
these Big Tech stocks are. Price to SALES ratios:


Worldcom is at 2.5 times SALES
Amgen 20.2
Cisco 23.7
Sun Micro 12.2
JDS Uniphase 62.6
Siebel Systems 28.4
Sycamore Networks 141.4
Juniper Networks 213.9


*** These stocks have very low yields. Compared to yields 
on bonds, the S&P 500 yields are the lowest in history.


*** Last week provided evidence for the long-awaited 
'soft landing.' The jobless rate for August rose to 4.1%. 
The census takers were finally let go. Factory jobs fell. 
Factory orders dropped.


*** All of this was good news to Wall Street. The Dow 
barely budged, but the Nasdaq had one of its best weeks 
in a long time - up 4.74%, just like the good old days.


*** Now, summer is over. The kids are back in school. 
Volume is up on Wall Street and anything could happen.


*** Yesterday, the Dow ended up 21 points. But the Big 
Techs dragged the Nasdaq down 91. It was "a correction," 
said a 'strategist' asked by Reuters, "not the beginning 
of something significant." How could he know?


*** There were about as many stocks going up as down. But 
the number of issues hitting new highs outnumbered those 
hitting new lows, 4 to 1.


*** Gold lost $1.20. Platinum gained $6.


*** In the currency markets, the titanic, 3-way struggle 
continues. The euro is the weakest of the three 
combatants. It hit a new low against the yen yesterday - 
and barely held its own against the dollar. 


*** "Better fill up your gas tank," advised Pierre 
yesterday. A nationwide strike and blockade by truckers 
is now reaching into the heart of France. Stations are 
running out of gas.


*** But what do I care? I'm not going anywhere.


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THE BLACK GRIM


"Those were the days, my friend.
We thought they'd never end.
We'd sing and dance forever and a day."


Poitiers seems to be situated in natural bowl. From my 
hospital window, I can see about 120 degrees of the rim, 
running from East to South. The sun is clear and bright, 
as it often is in late summer. I see green trees 
everywhere - aspens, oaks, plantain trees (which look for 
all the world like sycamores)...and Lombardy poplars. 


When things have been going very well for a very long 
time it is hard to believe they could ever be any 
different. From this distance, all the leaves I can see 
seem to be completely green. There is no trace of the 
seasonal reversal that will kill them. I can scarcely 
imagine how they will look when they have turned brown. 
And yet, I know that that is what will happen. It always 
does. 


Predicting the future is a hit or miss game. Harry Potter 
learns to read tea leaves...and crystal balls. But he 
knows his instructor, Professor Trelawny, has only been 
right twice in 15 years. Still, he searches for the 
distinctive pattern of foreboding - the black dog, known 
as 'the Black Grim,' signifying death.


I thought the Black Grim had paid me a visit on Sunday 
night. In the events that followed, I suffered the 
symptoms of a miserable and humiliating death, but 
without the customary result. More about that later...


Economists, analysts, and Fed chairmen must occasionally 
have an honest moment. Perhaps looking into the mirror 
they say, quietly...to themselves alone... 'you have no 
idea what you're talking about, do you.'


Irving Fisher - the leading economist of the late 20s 
must have felt like a fool. He had done as much as any 
economist could have done: he had extrapolated current 
trends into the future.


On October 23, 1929, the highly esteemed Yale University 
economic professor spoke to the District of Columbia 
Bankers Association to explain the "truth regarding the 
level of prices on the stock market." He noted that had a 
wise person invested $100,000 in the most popular stocks 
just three years earlier in 1926...that "100,000 today 
would be over $1,000,000."


To refresh a memory that probably neither of us ever had, 
the 1920s were Big Tech years too. The tech stocks of the 
day...radio...automobiles...electrical appliances and 
utilities...airplanes...and motion pictures...were 
driving the market up wildly. If you had invested in 
$10,000 in General Motors in 1919, it would
have been worth $1.5 million in the summer of '29. Radio 
Corporation of America, RCA, or just "radio" as it was 
known in those days... was selling at an unheard of 73 
times earnings. 

But this was not a "house of cards," Fisher explained. 
Instead, it was the result of "the application of 
invention to industry." He touted the work of inventor, 
Thomas Edison. And the 4,000 scientists working at ATT... 
"and the laboratory of no university could equal that." 


"All the resources of modern scientific chemistry, 
metallurgy, electricity, are being utilized for what? To 
make big incomes for the people of the United States in 
the future, to add dividends to the corporations...to 
raise the share prices of the stocks that represent these 
new inventions," he boldly proclaimed. 


Fisher went on to say that scientific management, which 
he called 'Fordizing,' cooperation from labor, price 
stability and, believe it or not, prohibition were also 
helping to assure steady increases in stock prices.


Here are his final words to those D.C. bankers:


"Of course, I am not here to prophesy. I am not a 
prophet, nor the son of a prophet. I am not 
infallible..."


But, "unless there is a real panic tomorrow...a very
radical change in psychology or unless this lunatic 
fringe is much larger than I have ever dreamed it was. We 
shall not see very much further, if any, recession in the 
stock market. But rather a ragged stock market in the 
next few weeks, and then after the first of the year, a 
resumption of the bull market, not as rapidly as it has 
been in the past, but still a bull rather than a bear 
movement."


Fisher's crystal ball may have been a little foggy. But 
his timing was clearly perfect.


It happened that very next day, October 24, 1929, Winston 
Churchill was visiting New York City on a lecture tour. 
...walking down Wall Street and he stopped to see for 
himself the home of the "eighth wonder of the world" the
longest bull market in history - the trading floor of the 
New York Stock Exchange. As Winston watched in horror (he 
had earlier that week bought shares on margin) stocks 
crashed. It was the day the Black Grim visited Wall 
Street.


Extrapolating from recent experience, investors bought 
the dips. Stocks always bounced right back... Or at least 
that was what they thought. But stocks did not bounce 
back as expected. Stock prices did not recover until more 
than 20 years later.

And now, many seasons later, our own Harry Potter 
Greenspan, in his Jackson Hole speech about two weeks 
ago:


"...this extraordinary period of technological advance 
continues to exhibit great vitality, bringing with it the 
prospect of further globalization, greater competition, 
and the resulting improvements in the economic welfare of 
most of the world's citizens. It is almost surely the 
case that, the longer the process of globalization of 
economic activity continues, the more firmly entrenched 
will be the gains we are beginning to realize."


But Greenspan is no fool. He knows that the odds of 
successful forecasting are against him.


"But our past endeavors at long-term forecasting," he 
continued, "afford us little confidence in being able to 
anticipate seminal changes in global economics and 
finance."


Simple extrapolation only takes you so far. Tomorrow 
probably will be like today and yesterday, unless it is 
different. And the seminal changes are nearly impossible 
to see coming. 


Mr. Market doesn't like to do the predictable thing - 
unless it is unexpected.


In all of nature, of which markets are a part, there are 
built in seminal changes. Surprises. Reversals. Jerks. 
Cycles. Tides. Seasons. Some are more regular than 
others. But they all have a common feature - the Black 
Grim. The old must be buried to make room for the young. 
Old enterprises. Old technology. Old people. Old stocks 
too must pass away. 


Analysts extrapolate the growth patterns and stock price 
patterns of the Big Techs, apparently unaware that their 
very success carries with it, shall we say - the program 
code - of their destruction. Graham and Dodd described 
how this worked:


"There are several reasons why we cannot be sure that a 
trend of profits shown in the past will continue in the 
future. In the broad economic sense, there is the law of 
diminishing returns and of increasing competition which 
finally flatten out any sharply upward curve of growth."


The sharper the upward curve...the more quickly it 
flattens...or even curves downward. That is true of Big 
Techs stocks as it is of plants. The fast-growing weeds 
of springtime are already brown and dead. The oaks are 
still green.


More to come. As always,



Bill Bonner


P.S. Thom "Bomb" Hickling and I sat on the veranda Sunday 
night. We admired the green oaks and the fading light as 
we worked out the a few songs on our guitars. It had been 
a busy weekend. We performed to a small group on Saturday 
night. Jean Paul, a pleasant man in his 60s, got very 
drunk and sentimental. He kissed me three times before 
the evening was over. I felt like Sgt. York being awarded 
the Croix de Guerre...but without the customary medal.


Then, on Sunday, I stacked up firewood and tried to get 
things prepared for our return to Paris. By Sunday 
evening we were all worn out. Thom went out to work in 
the office. I cleared off the table. By then, it had 
gotten dark. Suddenly, from out in the darkness came an 
animal noise. But a strange one. It sounded like the 
beating of immense wings - hellish and scary. I didn't 
want to go out and investigate. Instead, I went closed 
the door, locked it and went to bed. 
 
 
 
 
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 01, 2001

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