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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
TUESDAY, 18 SEPTEMBER 2001 |
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Today:
Leaving
Gracefully
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*** Where were the patriots?
*** Strong selling, but no panic...yet...
*** Was bin Laden selling short? Cramer down, Cisco
down, GE down...what's up?
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"Viewing Disaster Can Trigger Temporary Mental
Disorder in Some" reveals a headline in today's
International Herald Tribune.
Ah, maybe that explains it. I refer to the
"Patriot Rally" that was supposed to happen yesterday.
Greenspan did his part - overnight bank rates were
cut to 3%, the 8th cut in 9 months. And central bankers
all over the world opened up the money throttles; $208
billion was injected into the financial system between
Wednesday and Sunday night.
And, of course, business and financial leaders
were everywhere proclaiming their faith in America, its
economy and its financial system...even Warren Buffett
was on television, choosing his words carefully,
declaring that he would not be a seller yesterday.
Still, the market functioned as it should -
transferring the money of people who believed it was
their patriotic duty to keep buying Krispy Kreme at 77
times earnings to people who took the time to read the
handwriting on the wall.
"We were already headed for a debacle of epic
proportions in the stock market with the economy
slipping into recession and rampant overvaluation in the
face of a post-bubble world," writes Lance Lewis of the
Prudent Bear.com. "None of that has changed. Last week's
events will likely only accelerate the decline."
But thank God for the patriots. Without them, to
whom would foreigners sell? Eric, what's your take on
yesterday's market?
*****
Eric Fry in Manhattan:
- I returned to my Wall Street office yesterday and it
was a very different place from the gleaming, self-
confident financial center I had left behind just a
couple weeks earlier.
- Wall Street and the surrounding area feel more like
Beirut than Manhattan. Thick dust covers everything.
National Guardsmen and police stand guard behind
barricades on every street corner. Some wear facemasks
and mini-respirators. Some do not. Tourists and
professional photographers of one sort or another press
up against the various barricades clicking off photos of
everything in sight. Many of these folks also wear
facemasks. I felt a little out of place not having a
facemask of my own.
- A weird kind of smoke still fills the air in lower
Manhattan. But it's not really smoke and not really dust
- more like "smust." And the odor is something quite
unnatural. "Acrid" is too tame a word to describe it.
Likewise, "sell-off" is too tame a word to describe what
happened in the stock market yesterday. Both the air and
trading action stunk - plain and simple.
- As most Daily Reckoning readers are aware by now, the
Dow suffered its worst point drop ever, losing 685
points, or more than 7%, to 8,921. The Nasdaq also
logged a miserable day, following 116 points, almost 7%.
The S&P 500 index managed a slightly better performance
by falling a little less than 5%.
- Where were the patriots?
- Whatever became of the millions of Americans who
pledged to buy stocks on Monday in a show of patriotic
support? Maybe they did, but were outnumbered by those
unpatriotic Americans and indifferent foreigners who did
not refrain from placing sell orders.
- Turncoats: 1, Patriots: 0. We'll see if the patriots
fare better tomorrow.
- Clearly, the stock exchange's week-long shut-down did
nothing to calm investors' nerves. Nor did interest rate
cuts by both Greenspan's Fed and by the European central
bank seem to make any difference whatsoever.
- Selling ensued from the opening bell and most stocks
got absolutely hammered. Oil and gold stocks put in a
strong day, but not as strong as one might have
expected.
- A 7% stock market decline would seem to reflect a
boatload of anxiety. Yet, the XAU Gold Stock Index
gained only 2.5%. Anglogold (NYSE: AU), a recent
recommendation from the Daily Reckoning Investment
Advisory, was one of the sector's better performers,
gaining more than 4% yesterday.
- "The markets went back into battle yesterday," writes
John Myers of Outstanding Investments, "The combatants?
Deflation v. Inflation. On one side of the equation,
money is being destroyed by falling stock prices, rising
unemployment and even insurance claims. On the other
hand, the Fed is slashing interest rates while the
Treasury is promising to inject billions of dollars into
the economy. The result of all this could be stagflation
- a situation where you have a stagnant economy and
stirring inflation."
- In the uncertain World that lies ahead it is not hard
to imagine that investments in oil and gold will produce
at least satisfactory returns. Maybe more than
satisfactory.
- Several "knee-jerk" trades punctuated yesterday's
trading action. For example, the shares of Kroll Inc.
soared 26%. Kroll "is a global risk consulting company
specializing in investigative intelligence and security
services."
- Elsewhere in the knee-jerk trade category, defense
stocks soared and airline stocks collapsed. The AMEX
Airline Index fell a stunning 40% on the day. Congress
is considering a $15 billion bailout of the airline
industry. And rumor has it that Osama bin Laden had sold
short airline stocks prior to last Tuesday's attack (I'm
not making this up). Now that would be a new kind of
terrorist indeed!
- Perhaps the most bizarre thing about yesterday's slide
on Wall Street was how little most people I talked to
seemed to care about it. A mini-crash on Wall Street
seems trivial alongside the tragedy that has recently
beset New York City and the rest of America.
- "On this day, even a sell-off qualified as a victory
of sorts," said Igor Greenwald of Smartmoney.com. "Wall
Street reopened for business with its thoughts and
prayers still focused on the smoldering mountain of
rubble blocks away."
- And what a mountain of rubble it is. The skeletal
remains of the World Trade Center rise from the ruins
like a massive gnarled hand. It is a very disturbing
sight. Healing will take a while longer.
******
Back to Bill Bonner in Paris:
*** So there you have it. Wall Street pulled comfortably
ahead of Tokyo in the race to the bottom. The Dow closed
yesterday at 8,921 while the Nikkei Dow lagged behind at
only 9,810. But the Japanese are very good at losing
money. One should think twice before betting against
them.
*** On the U.S. side, we note that while stocks sold off
yesterday, there was no panic. That means that a panic
probably still lies ahead. Perhaps next week. Perhaps 10
years from now. But there is usually at least one day of
panic selling in a major bear market. GE lost 11%
yesterday. Cisco closed at $14.
*** And poor James Cramer. A year ago, he put $2,500
into each of 50 different mutual funds. He reports the
results in New York magazine in an article entitled
"Mutual Fund Hara-Kiri."
*** "The results are in," he writes, "and I am staggered
by the losses. I gave it to magicians who made my money
disappear. My $125,000 has been reduced to $84,000.
Forty-seven of the mangers lost money, only three made
money, and of those, only one made me enough money to
offset the fees I paid to open the accounts and keep
them running. Some of the managers' performances were so
shameful that I can't believe these folks are still
running money."
*** Cramer's experience is probably little different
from that of other investors. How long will their faith
in the system remain? When will they panic?
Miscellany:
*** Last Thursday one of our publications, Taipan, began
an "Open for Business" disaster relief drive...readers,
including some from The Daily Reckoning, have donated
more than US$25,000.
Taipan will keep the drive alive until September 30th...
to find out more about how you can chip in, please click
here:
http://www.taipanonline.com/red_cross.html.
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LEAVING GRACEFULLY
by Bill Bonner
"Consumer confidence is shaken," according to Johan
Ruper, CEO of luxury watch maker Richemont. "It could
take six months before it is restored."
Mr. Ruper is an optimist. We may never again, in our
lifetimes, see consumers so confident.
Consumers have been feeling extraordinarily fat and
sassy for a very long time. How do we know? Because they
have been willing to spend more borrowed money than they
ever did before. And, so sure are they that the future
will be bright that they have been willing to mortgage
more of their homes than ever before to do it. In the
1990s alone, homeowners gave up an additional 10% of
their homes to mortgage lenders.
Investors, meanwhile, were so cocky they ran up stocks
to a level never before seen. The long-term trend for
stock market capitalization is a horizontal line at
about 50% of GDP. At one point in the late '90s, the
figure had soared to 183% of GDP. Even now, 18 months
later, stocks are valued at 135% of GDP.
And what kind of person buys a tech stock at 200 times
earnings? Neither "timid," "reflective," nor
"philosophical" seems to describe him. P/Es with three
digits suggest a different state of mind...beyond mere
faith "in the system." It presumes a confidence
bordering on lunacy...a belief that the world has
reached near-perfection - where there will be no nasty
surprises...no wars, no new technologies, no business
cycle turnabouts, no inflation, no bear markets...
nothing but good news.
This was the "Golden Age," that Treasury Secretary Paul
O'Neill and millions of other Americans thought they saw
coming.
It was madness, of course. But it is a kind of madness
that the mad men can now deny.
"The Twin Towers disaster has acted as a convenient
excuse for those economists, strategists and soothsayers
who've been dead wrong about what lies ahead," explains
Richard Russell in today's commentary. "'Oh,' they say,
'we were on the right track, but this attack on America
has changed everything. How could we have seen this
coming? Yes, the economy won't do nearly as well as we
thought it would. Instead of the rosy future we
predicted, the nation may now be heading for recession.
But please, the disaster in NYC has changed everything.
We're innocent.'"
"There is always some leveling circumstance," wrote
Ralph Waldo Emerson, 161 years ago, "that puts down the
overbearing, the strong, the rich, the fortunate,
substantially on the same ground with all others."
If it had not been for the terrorists, the process of
leveling American consumers' confidence might have been
slower, more gradual, more ambiguous. But, one way or
another, it had to happen.
Mind cannot be completely separated from matter. Sooner
or later, even the dullest consumer was bound to feel
the pinch of declining income and rising debt payments.
And what investor is such a fool as to not notice that
his portfolio has been in decline for the last two
years?
But now, consumers, investors and analysts all have a
way to take their leave gracefully. They can cut back on
spending without admitting that they ever spent too
much. And they can sell shares without recognizing that
they were damned fools for buying in the first place.
Now, suddenly, unexpectedly, the world has changed.
Consumers no longer have to cut back out of financial
necessity. Now they can downsize their lives simply
because it is the fashion. They can now leave work a
little earlier...and spend a few minutes more with their
families. They can assume a more thoughtful pose, gazing
out at the sunset or reading a book...and rediscover
frugality as though it were a fancy new restaurant or
the latest health craze.
The half-empty glass is suddenly half-full - financial
prudence is a la mode again. Getting and spending has
gone out of style.
Of course, there are fashion setters and fashion
laggards. Here at the Daily Reckoning, you can just look
at the cut of our coats and the styling of our hair and
know that we are way, way ahead of the curve...
But, poor James Glassman is hopelessly behind the trend.
He urges investors to ignore short-term fads. Instead,
they should focus on the very long term. "U.S. stocks
have provided the best protection against the vagaries
of world politics and economics," he argues.
"Imagine a baby girl born at the end of September 1929,"
he writes. If her parents had had the foresight to buy
$10,000 worth of S&P stocks on the day she was born,
she'd have $9,270,000 today."
Glassman is confident that the next 71 years will be
like the last 71. Even if that is so, it is a source of
little comfort. In real terms, the poor girl's capital
was worth little more in 1989 than it was in 1929.
Markets make opinions. In 1982 stocks were so
unfashionably inactive that Business Week thought they
were dead. "The Death of Equities," it reported in a
cover story. It was only in the last 10 years of the 20th
century that stocks came to life...and it was only at
the end of that period that their long-term performance
looked so good that investors' confidence knew no
bounds.
Had Mr. Glassman written his article in 1989, he might
have suggested that the girl's parents buy her a house.
She could have taken the money she would have paid out
in rent and used it to buy other houses. Depending upon
the neighborhood, she might have been far better off
than if she owned stocks.
It is only the magic of compounding dividends and the
bull market of the '90s that sent her wealth into the
big numbers. And the dividend yield today is only 1.42%,
itself a reminder of the momentum of bull market
fashions.
The inflation rate is running at approximately twice the
level of S&P dividends, so you could compound your
dividends until hell freezes over and still be poorer
than when you began.
Bill Bonner
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and sends it off by e-mail before most Americans’
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get up—not only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.
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