In Today's Daily Reckoning:
*** Tech stocks get hammered...
*** More 'Fantastic' numbers from the BLS...
*** The euro hits another record low...and Mr. DesHais
gives the gendarmes 'the finger'
*** "Tech Stocks Slam Lower on Earnings Angst" - says
today's Reuters headline. I've been warning ad nauseum
(no...let's not use that phrase for a week or two) about
the Big Techs. Sooner or later, they're going to get
taken down. But when? How? See below...
*** They got taken down a bit yesterday. The Nasdaq lost
another 129 points. The Sox index - which measures
semiconductor stocks - fell 5.7%. Intel lost about $3.50.
And Micron fell 10%. An analyst had a target of $120 for
Micron...which he decided to revise to $50.
*** That's the way it goes. One day a stock is thought to
be worth $120...and the next day it is only worth $50.
And nothing really happened in the intervening 24 hours.
*** The most important news yesterday was that the
productivity increase for the 2nd quarter was revised
upwards from 5.3% to 5.7%. An analyst was quoted as
saying that this was a "spectacular" increase. Perhaps
"incredible," "unbelievable," or "fantastic" would have
been more appropriate modifiers. These numbers come from
the fantasy world of the BLS, which also reported a drop
in unit labor costs for the quarter.
*** But so what if it's nonsense? It gave a big boost to
the dollar. The dollar index hit a new high of 113.26 and
drove the euro down to a new record low - 87 cents. The
fundamentals in Europe are actually very good.
Unemployment is going down. Taxes are falling. People
have savings and are willing to spend.
*** But who cares about fundamentals any more? "Sentiment
[against the euro]" says the Financial Times, "remains
determinedly sour." Meanwhile, the dollar, the U.S.
economy, the big techs are all sensational. Eventually,
of course, they will lose their sensational glow. But not
yet, dear reader, not quite yet.
*** "How about that Euro, anyway?" asked Addison, up in
Paris this morning. Since the Franc is loosely tied to
the Euro, he says his Vin de Pays L'Aude just got "a
whole lot closer to a buck a bottle."
*** Oil was sensational yesterday too - rising $1.07 to a
new high of $34.90. Treauries lost ground - worried about
the oil price. Gold fell - as it does when the dollar
goes up. It lost $1.80. Platinum, though, gained a big
*** Compared to stocks, treasury bonds provide the
highest yields in history. Digital Man, Ed Yardeni,
comments: "I expect the 10-year Treasury yield to fall to
5% by the end of next year (if not sooner) and to 4.5% by
mid-decade (if not sooner). US debt is down $565 billion
since Mar '97. There are only $630 billion in long bonds.
This is equivalent to a mere 5% of the value of the S&P
*** "Walmart at a P/E of five?!... Yes!" says the Oxford
Club's Steve Sjuggerud writing from Ecuador. "I went to
the Supermercados La Favorita headquarters just outside
Quito, eager to see the company firsthand. Supermaxi (as
it's more commonly called) is the Microsoft of Ecuador's
stock exchange, the stock that everybody knows and can
easily trade." Steve believes he has figured out a way to
make 200% or more on this darn cheap stock... (see: The
Cheapest Country I've Ever Seen
*** Japan, which can't seem to find the light switch of
the New Economy, watched in darkness as the Nikkei fell
back below 17,000 this morning.
*** If labor is so much more productive, how come
laborers are not earning more money? A new report from
the Economic Policy Institute found that:
- "an average middle-class family's income rose by 9.2
percent, after inflation, from 1989 to 1998. But they
also spent 6.8 percent more time at work to reap it.
- "Without increased earnings from wives, the study's
authors concluded, the average middle-class family's
income would have risen only 3.6 percent over the decade.
*** The EPI study said middle-class black families work
an average of 9.4 hours more per week than their white
counterparts. Blacks work more hours than whites at every
income level, said economist Larry Michel, a co-author.
*** The study also found that middle-class Hispanic
families work five hours more per week than their white
counterparts. Upper-income Hispanic families work the
most of any group in any economic class, putting in 12.9
hours more per week than whites, the study said. Other
ethnic groups were not profiled in the study.
*** Mr. DesHais' driver's license was taken away. But he
went along with Celine into town to get gasoline,
preparing for the strike. Seeing the gendarmes in the
station, who recognized him...he explained that the gas
was not for himself, but for Monsieur Bonner. Then,
according to Elizabeth, "he gave them the French
equivalent of 'the finger.'"
The truth? America is experiencing the largest credit
expansion in world history. For every dollar added to the
GNP, $2.92 has been added to the debt. But it's NOT
government debt. In this special on-line report one of
the world's preeminent Austrian economist reveals the
truth behind the 'longest peacetime expansion' in US
History. Here's how you can prepare now to protect your
money when this house of cards begins to crumble:
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Dr. Bessau, who had made an emergency visit to my house,
at about midnight Sunday, did not like what he found.
It looked as though I was having a stroke. I did not know
what was going on. I could not take my eyes off the
bathroom faucet, or even close them, or I would become
violently ill. Was I going crazy? Stroke? Heart attack?
None of the possibilities were very promising.
Dr. Bessau summoned reinforcements. Within minutes an
entire team of doctors and nurses from nearby
Montmorillon were on the scene. I can barely recall any
of the details. I was only semi-conscious. One of the
doctors had an accent. Various injections were made. To
an uninterested observer, it must have been rather
exciting...even comic. True to my doom and gloom roots, I
was sure the Black Grim had gotten his grip on me. It was
a melodramatic moment that I didn't want to waste.
I searched for final words. I recalled Jefferson's final
exclamation: "Adams still lives!" I couldn't quite
remember what Stonewall Jackson had said - something
about 'crossing the river and resting in the shade.' And
Lee, still deep in the action of the Civil War, "Tell
A.P. Hill to bring his troops up." Something like that.
I could think of nothing appropriate. Maybe I should just
tell Thom to 'tell Elizabeth that I love her.' Oh
Then, after retching a few more times, a more practical
'last words' occurred to me: 'Thom,' I thought to myself,
'what did you put in the ratatouille?"
I hope you will forgive me, dear reader, for passing
along this memoire of my recent illness. I have written
so much about things about which I know so little - stock
prices, economics, politics. Maybe this recollection of
an actual personal experience will unlock some small
truth...some insight about the way our doomed species,
homo sapiens analogiens, really think and act. Maybe we
will even find a better understanding of how markets
A virus can lay dormant in a human body for a very long
time. AIDS can take a decade to make itself known. Mad
cow disease can take two decades or more.
Some viruses seem to do little damage...and then all of a
sudden, they flare up in a dramatic way. Scientists don't
understand why or how the change occurs.
Viruses, like markets, seem to reach a 'tipping point."
"Maybe you were under a lot of stress?" asked Dr.
Cremiere, a small woman who reminded me of Edith Piaf.
"Sometimes a lot of traveling will do it. Or, often,
after a death in the family or a divorce... We don't
'We don't really know' seems like an appropriate 'last
words' for our attempts to understand the stock market
too. Movements in stock prices are more a product of what
we don't know than what we do. New technology, interest
rates, productivity - these objective conditions seem to
excite human emotions...and provide rationalizations for
the positions we take. But the why, how and when of major
turning points seems to be buried as deeply in the human
spirit as a viral infection. It can lay dormant for many
years - then, suddenly, for no apparent reason...it can
flare up - either in a burst of sensational optimism or
an imploding depression of animal spirits.
Ultimately, as Warren Buffett reminds us, stocks are
nothing more than the streams of income they represent.
As the flow of cash increases, so should the price we are
willing to pay to own it.
But there is no rational explanation for the willingness
of investors to pay more for the same stream of income
one year than the next - or more for a stream of income
from one source than from the next.
A safe bond yielding $10 a year should be worth about as
much as another safe bond yielding $10 a year. And both
should be worth about as much as a safe stock with the
same yield. Stocks may sell for less money - when
investors fear that the stream of income is less sure in
the future...or more, if they think the flow of cash will
increase. But all things being equal, the capital values
of equal streams of income should be equal.
Thus, you'd expect that the yield you might get from a
Triple-A bond would be about the same as the yield you
would get from the S&P 500. Before 1950, it was common
for investors to want a bit more yield from stocks - to
offset the risk of owning them. Now it is common for
investors to want a bit more yield from bonds - to offset
the risk of depreciating currency.
In 1929 - when stocks were almost as big a sensation as
they are today - prices of stocks rose to the point where
dividend yields fell well below bond yields. Bonds
yielded about 1.7 times what you could get from stocks.
Today, according to Ned Davis Research, the ratio has
soared to its highest level in history - more than
6...that is, you can get 6 times the yield of the S&P 500
in Triple-A bonds.
Stocks have been cut off from their stream-of-income
roots. They've become popular sensations whose prices
depend completely on investors' willingness to buy them.
Like celebrities who are only famous for being famous,
these sensational stocks are only valuable as long as
people think they are valuable.
This phenomenon is a feature of crowd psychology. It is
why, for example, it was impossible for me to find a copy
of the latest Harry Potter book. The book is not
appreciably better than many other children's books. But
it is a sensation.
Likewise, Henry returned from his visit with a friend in
Brittany with even more Pokemon cards, which he promptly
added to his collection book. Pokemon is indecipherable
to adults, but it is a rage among 9-year-olds.
And why do people wear those goofy running shoes with
straps and laces, air pockets and miniature nuclear
reactors built into the soles? They look fashionable now.
In ten years, they will look ridiculous.
There have been a number of books and academic studies of
popular sensations. Gary Scott wrote me yesterday with
more thoughts on Malcolm Gladwell's "Tipping Point" book:
"The Tipping Point points out why most investors have
trouble estimating dramatic exponential change. We cannot
conceive the power of exponential growth. For example, a
piece of paper folded over just fifty times attains
a thickness that reaches from the earth to the sun. Yet
the normal human mind can only deal with about seven
cognitive categories at once so is denied a full
understanding of such powers.
"The book then explains the power of social epidemics
(such as the use of fax machines) and how Metcalf's Law
helps determine explosions of use of such instruments.
For example, Sharp introduced and sold 80,000 fax
machines in 1984, the first year of their use. For the
next three years steadily sold more faxes were sold. In
1987 enough people had faxes that it made sense for
everyone to have faxes. This year (1987) was the tipping
point for the fax. A million machines were sold that year
and by 1989 two million machines had been put into
operation. (see: The Tipping Point: A Strategic
"There are three types of people that are required to
make an epidemic grow, connectors, mavens and salesmen.
Gladwell goes into quite some detail about each
personality type and the part each plays in spreading
news. JFK, for example was a salesman of the bare head.
Until he became President it was fashionable for men to
wear hats. JFK did not and his unintentional salesmanship
all but ruined the haberdashery trade."
Robert Prechter's latest book examines the phenomenon
from an investor's standpoint. "The prime mover of
aggregate stock market prices," he writes in The Wave
Principle of Human Social Behavior and the New Science of
Socionomics, "is mass emotional change, which itself must
be, and demonstrably is, independent of outside
I suspect Prechter exaggerates when he says the change is
independent of outside influence. But he is probably
right on the money when he notes that it is the "limbic
part of the human brain that gives rise to emotional
responses kicks in quicker than the cerebral cortex that
generates rational thought."
"When a herd 'thinks,'" he continues, "the result is not
reason but an emotional interpersonal super-organic
dynamic that must be the source of waves."
My limbic system must have sounded like the alarm system
on the Kursk Sunday night. It was on red alert. But viral
infections, like popular sensations, come and go.
After some panicky consultation, the doctors on the scene
decided that I should be rushed to the hospital in
Poitiers. I didn't care much for the idea. Every movement
was torment. But at that point, it didn't seem to make
They slid me into what seemed like a body bag without the
zipper...and somehow carried me downstairs. I was fitted
with various tubes and sent off.
Once at the hospital, I was rushed into a brain scanner -
which detected nothing unusual. Nor were any other vital
signs cause for concern. From all appearances, I was the
healthiest dying man they had seen in a long time.
Some of the tests were diabolical. Hot water was shot
into my ears to see if I would get woozy. Electrodes were
fastened to my head...while loud noises that sounded like
one of Sophia's CD's, featuring a band called Korn, were
blared in one ear. This torture revealed only that Korn
makes me sick - which I already knew.
Finally, after a day and a half, when they ran out of
tortures, the medical staff gave up. "It's probably a
virus," said Dr. Cremiere. "You might as well go home."
Remarkably, as soon as I left the hospital, I felt much
better. The sensations that so disturbed me passed.
The sun was as bright as I had ever seen it. Elizabeth
had taken a cab down from Paris (fortunately, this was a
couple days before the taxis went on strike). We spent an
unexpected and delightful afternoon together...and then
things returned, more or less, to normal.
Your correspondent, a bit embarrassed...but happy to be
P.S. The Black Grim will eventually take the Big Techs
down...and destroy the popular sensation that is the U.S.
economy, the dollar and the equity markets. It will take
us all down...including me, sooner or later. But not yet,
dear reader, not yet.
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Last modified: April 01, 2001
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