*** The Big Techs are still alive - but trapped in a
Kursk of sinking prices. None will escape.
*** Friday, Oracle was torpedoed after announcing
earnings that beat its forecast, but still weren't good
enough. The stock fell 8%. But what could you expect?
Oracle is selling for 100 times earnings. This implies a
spectacular growth rate. The company should be doubling
revenues every year. But guess how much Oracle's revenues
went up? Just 14%.
*** Microsoft is struggling to stay above $60 (down from
$119). Cisco, too, is battling around the $60 mark (down
from $81.) Intel, Micron, Broadcom - you name it,
practically all the Big Techs are taking on water.
*** And these were the 'must own' stocks of the New
Economy? Don't believe it. There is no such thing as a
'must own' stock. And any company that gets a 'must own'
reputation is a sell candidate, not a buy.
*** The Nasdaq fell 78 points on Friday. That takes it
down to a 5.75% loss for the year.
*** Naturally, many of the companies that hoped to launch
themselves in the public markets this fall are having
second thoughts. Many are being withdrawn. These IPOs...
all ready to go...act as a ceiling on the techs. As soon
as demand increases and prospects improve, these new IPOs
will swamp the market again.
*** The Dow fell sharply on Friday too. I warned that Mr.
Bear may be getting ready to do some more serious damage.
Friday he was warming up. Still, we saw a little preview
of what he can do. The Dow fell 160 points, with
substantially more declining stocks on the NYSE than
advancing ones - 1748 to 1086.
*** This brings the Dow down to a nearly 5% loss for the
year too.
*** The money supply is still rising twice as fast as the
economy. This money has to go somewhere. But not
necessarily into the stock market.
*** Much of it is probably going to pay for oil. Oil rose
on Friday, hitting an intra-day high of nearly $37. It is
now trading at $35.59 (Oct. light crude). It was only $27
a barrel at the beginning of August.
*** Still, the Bureau of much-Labored Statistics reported
that energy costs DECLINED in August - by the largest
amount since Feb. of '91. Gasoline, for example, fell 6%,
according to the BLS number magicians. And yet, every
other measure of inflation is rising. Goldman's commodity
index rose 17.4%. CRB index rose 4.69%. The Journal of
Commerce price index went up 3.7%. And anyone who drives
a car knows that gasoline is more expensive than it was a
few months ago.
*** The dollar index rose to another record on Friday.
The euro fell to 85 cents. And gold, the dollar's rumored
competition, dropped another 20 cents to close at $275.
*** Asian markets do not like the sinking tech stocks on
Wall Street...or the price of oil. "South Korean stocks
caved in" this morning, reports Reuters. Stocks in South
Korean lost 7%. Taiwan fell below 7,000. The Japanese
index was down 204 points, or nearly below 16,000.
*** "Bad Times Ahead," concluded the Reuters reporter...
in a sentiment that might soon find its way to Wall
Street, perhaps smuggled to Manhattan in a container
shipment of running shoes. All of Asia's 8 major equity
markets are in the red for the year.
*** The Reuters piece covered a lot of ground. "Rising
energy costs globally are bad for earnings," remarked one
wide-awake analyst. "Everybody is freaking out about
oil," said another, perhaps a road manager for the Stevie
Wonder Band in a former career.
*** And then it gets interesting...speaking of oil: "This
is a classic case of how the market under-reacts to
emerging trends...And if they follow the usual course,
once they realize something's going on, they over-react."
Aha! Even the analysts are catching on. Analog Man...
driven by passion, emotion and near-absolute ignorance
rules the markets!
*** But what is true for the oil market might be even
more true for the Big Techs and the rest of the market.
Oil, like bread, has limited usefulness as a popular
sensation. It is too common...and too closely connected
with real economic activity...to be a subject of pure
fantasy. The Big Techs and the dollar, on the other hand,
like the dot.coms, offer plenty of elastic to the
imagination. They can be worth a fantastic fortune. Or
next to nothing at all. We have already been through the
top part of this cycle. The bottom part should be at
least as entertaining.
*** Readers of the international news may recall that the
Jakarta Stock market experienced a boom last week -
someone set off a bomb that killed 15 people. "Buy when
there's Blood in the Stock Exchange?" asks Steve
Sjuggerud of the Oxford Club. Steve recommends an
Indonesian telecommunications giant selling at a P/E of
4. Hey... pretty darned cheap. How can you go wrong?
(see: Buy When There's Blood in the Stock Exchange?)
*** Well, Lynn Carpenter explains how you can go wrong. I
mentioned Fleetwood - maker of prefab housing and mobile
homes - in these messages a few months ago. The stock was
'pretty darned cheap' I said. Well, if you liked it then
you'll like it even more now.
*** "It's down 40% since January," Lynn tells me. "But it
does pay a 6% dividend. It might go even lower yet, but
it isn't going to go away. Fleetwood just posted its
worst quarterly earnings loss in 50 years. Things can
start getting better now. Values are P/E 11.8, price-
sales 0.13 (Yes, I typed that correctly), price-book
0.76, and PEG 0.6.
*** "Fortunately," Lynn reminds me, she didn't recommend
Fleetwood. Her darned cheap builder, Centex, is up 28.8%
since she picked it.
*** Nothing much happened at Ouzilly this weekend. The
weather was spectacular - with crisp, cool mornings and a
bright blue sky. The light in late summer is especially
nice...I don't know why.
*** I decided to take advantage of the good weather to
paint some of the windows in the barn. The doctors
ordered me to stay off of scaffolds and ladders, but they
didn't mention anything about hanging out of second-story
windows. Thus was I engaged, painting one of the frames,
when Dr. Besseau drove up. I felt a little sheepish about
it...but he had a sense of humor.
"Well," he said, as he handed me a bill "please call me
again if you need me."
When the Lights Go Out Across America... Some People Are
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Because it's going to get worse before it gets better...
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"For of course, there's no such thing as the New Economy.
It's strictly a Wall Street conceit, enthusiastically
and, as always, thoughtlessly propagated by our fellow
wretches in the media."
Alan Abelson
"The Trouble With Europe Is..." begins the editorial in
the International Herald Tribune.
You can fill in your own predicate. For some reason, the
blessings of the New Economy have not been showered on
the Old World. Maybe it is because of the way the E.U. is
structured...bureaucratic inertia...institutional
rigidity, high taxes, labor restrictions, the welfare
state, the cheese, the aging population, vestiges of the
Holy Roman Empire, Cartesianism, socialism - you name it.
Once it is widely accepted that there is something wrong
with Europe, the next question - 'what? - arises without
begging. And answers present themselves like candidates
for federal election - usually shallow, self-serving and
stupid.
Mass thinking produces mass ideas - simple-minded slogans
which, when deconstructed, turn out to be accretions of
wobbly facts, empty abstractions, miscalculations,
misinterpretations, and balderdash.
And yet, on such mass thinking, huge financial bets are
placed. Currently, for example, people are betting that
the dollar will remain triumphant, for now...and perhaps
forever. Because, Japan is finished...and there is
something wrong with Europe...
Mr. DesHais, my gardener-philosopher agrees. "There is
something wrong in France," he told me, as I chauffered
him to the store to get more canning jars, "it is not the
way it used to be. People don't want to plant gardens...
they have forgotten how to do things."
What people have forgotten how to do are things like how
to can your own ratatouille...or make your own alcoholic
drinks. Or follow the phases of the moon to plant a
garden.
Mr. DesHais sees Europe from a different vantage point.
In America, we think of Europe as hopelessly
conservative. There is no credit card industry. And
people are reluctant to move, or take up new careers.
They are stuck in the past. Or, as Doug Casey puts it,
"Europe is a living museum."
But Mr. DesHais doesn't think so. "Things are changing so
fast," he laments. "I can hardly keep up with it."
Things are changing fast in Europe. Mr. DesHais's own
son, Benoit, reads books on the Internet and has his own
dot.com business idea he's trying to get started. More
and more, people in France are becoming entrepreneurial.
There is even an area of Paris where cyber start-ups are
concentrated.
London is booming too. And Berlin. And dozens of other
European cities.
But Europe is profoundly conservative too. People still
save money. And they're less eager to take up popular
sensations - whether it is running shoes or Big
Tech stocks. Europe suffered much more than America from
the popular sensations of the 20th century. Perhaps it is
now less vulnerable to them.
Beyond the impressions of a casual observer, the case for
the dollar over, say, the euro is largely statistical.
Even digital. The digits representing productivity,
growth, and employment are higher in the U.S. than in
Europe.
But so are the digits representing debt, current account
deficits, and inflation.
The trouble with digits, if I may borrow from the IHT
headline, is that they are like all facts - that is,
nothing without their nuances.
And no numbers are quite as nuanced as the U.S. digits
for productivity, economic growth and inflation. The more
carefully you look - the more wobbly the facts become.
"The appalling divergence between America and Europe,"
writes Dr. Kurt Richebacher, "...derives overwhelmingly
from the existing gross difference in their statistical
measurement." (see: The Great Fudge)
Europe keeps its figures the way Mr. DesHais keeps the
garden - in the old fashioned way. American number
crunchers have found a more modern way.
The simplest of their innovations was merely to report
the numbers on an annualized basis. U.S. GDP growth is
thus reported to be 5.3% - taking the 2nd quarter and
multiplying by 4. In Euroland, the quarterly number is
reported without annualizing. Most recently, the number
was 0.9%, which sounded pathetic next to 5.3%. But the
difference is really not much. The actual quarterly
number in the U.S. was only 1.3% - and even that, was
mostly a statistical fiction and an accounting fluke.
As I have reported before, U.S. statisticians use
'hedonic' prices to measure GDP, productivity and
inflation measures. Hedonic measures take into account
the computational power of a computer, not just its
price. No other nation does so - and certainly not
Europe.
Between the last quarter of 1998 and the 2nd quarter of
2000, for example, Americans spent an additional $28
billion on information technology. The statisticians then
applied the 'hedonic' miracle grow...and presto, they
stretched the $28 billion to $127 billion...which was
then added to GDP. To make a long, complicated and
nauseatingly complex story short, this extra GDP was
achieved without people working any longer or harder (why
should they...they weren't really making more computers,
just more powerful ones). So, it looks as though the U.S.
economy was getting a lot more productivity per unit of
labor. And consumers were getting a lot more computing
power for their money - so inflation went down too.
The quants showed computer prices falling by 30-40%
annually...even though people were actually spending
about the same amount of money. (They were getting more
for their money, supposedly.) And it all depended - like
a Rumanian weightlifter - on the artificial stimulant of
'hedonic' price measures.
Meanwhile, on this side of the Atlantic - that is to say,
in Europe - the numbers are more reliable. While they do
not show economic growth at fantastical levels, they show
impressive improvement. Employment rose in 1998 by 1.4%.
In 1999, it moved up another 1.5%. Inflation of around 2%
compares favorably to inflation in the U.S., officially
3.5% - but probably more like 5%.
Instead of showing the prices of computers falling by 30
or 40% per year, as is the wobbly, hedonic measure in the
U.S., computer prices have fallen only by 20% over the
entire period from 1991 to 2000. (Based on German
statistics.) This divergence, not the many reasons given
why Europe is a laggard, is the real source of most of
the statistical difference between the two economies.
Europe counts actual dollars spent. In the U.S. they
count digits of computational power.
"The great digital divide between America and Europe,"
concludes Dr. Richebacher, "is not in the economies. It
is in vast differences in statistical measurement and in
the propaganda."
"U.S. economic growth, deprived of the hedonic deflator,"
he continues, "is anything but illustrious. Not only
that. It's obvious propellant was the consumer borrowing
and spending binge... Credit excesses have many parallels
in history, but those in the U.S. are of such extreme
magnitude that they suggest a form of collective, manic
euphoria." A popular sensation, in other words.
Your European correspondent,
Bill Bonner
PS: Another wobbly feature of the U.S. economic miracle
is the logic behind it. Europe is portrayed in the media
and the popular imagination as having much more rigid and
expensive labor. That is the reason commonly given for
the failure of Europe to benefit from the greater
productivity of the Internet age. And yet, the only real
attraction of information technology is that it reduces
labor costs. Europe, with its higher per-unit labor
costs, should be benefiting more from the new technology
than America.
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