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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
THURSDAY, 7 SEPTEMBER 2000 

 

Today:  Stroke of Luck

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 
$9.80.


*** 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 
500."


*** "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 
http://www.dailyreckoning.com/body_headline.cfm?id=442)


*** 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.'"


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STROKE OF LUCK


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 
my...too maudlin. 


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 
work.


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 
really know."


'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 
Alternative History 
http://www.dailyreckoning.com/body_headline.cfm?id=403)


"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 
influence." 


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 
much difference. 


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 
alive...


Bill Bonner


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.
 
 
 
 
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..

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Last modified: April 01, 2001

Published By Tulips and Bears LLC