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.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"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.
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Last modified: April 01, 2001
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