In Today's Daily Reckoning:
*** Techs get hammered...Asia takes a beating... Poor Ms.
Wu...
*** Intel's chips are just not selling as fast as
expected...
*** Oil off...the dollar off...Abby Joseph Cohen off...
*** Poor Ms. Wu. She had already taken a big loss in tech
stocks in South Korea and had demanded that the
government 'do something' about it. But no sooner do
things begin to brighten up then - whammo - another
torpedo slams into the hull. Stocks in Seoul lost more
than 7% in trading early today.
*** It was the same story all over Asia as the Autumn of
Anxiety got off to a good start. Tokyo took a 3% hit.
Hong Kong got whacked for a 2.46% loss.
*** The trigger for these losses was an announcement last
night from the world's biggest chipmaker - Intel.
Apparently, the chips are not selling as well as
expected. In trading in the after market, Intel shares
fell 12 points.
*** Dell lost $4 in after-trading too. Dell was in the
news earlier in the day, announcing that it was on-track
for 30% earnings growth. I've been hammering the Big
Techs for weeks now - since they, like second marriages,
represent such an obvious triumph of hope over
experience.
*** Almost all the techs are trapped by their own good
fortune. Dell, trading at a p/e of 55 - is just too
expensive for a company whose sales are rising at 30%.
You'd have to sit on the stock for 5 years - with sales
rising 30% per year...and the stock price steady - before
earnings (to say nothing of actual dividends) would equal
what you could get from a T-bond.
*** Even if you were the sort of financial masochist who
might enjoy doing that - you'd most likely be
disappointed. The bigger these companies get - the harder
it is to continue growing. Dell was supposed to grow at
40% this year...which was revised down to 30%. Some
analysts think the actual number will come in closer to
25%.
*** The whole tech sector is doomed. The Nasdaq 100, home
of the Big Techs, is down 21% from its March 27 record
high of 4704.
*** But wait, Abby Joseph Cohen says investors' fears are
"overdone." Actually, investors are not yet fearful at
all. They're still extremely bullish. Money is still
flowing into mutual funds. People are still buying the
Big Techs - even at prices that are preposterous. They
still think there are New Economy stocks that are "must
own" investments. Fear hasn't even begun.
*** Investors are just getting edgy. The Dow is down 7%
for the year. Major stocks such as Intel and Microsoft
are off 30% to 50%. People are beginning to wonder what
is going on.
*** I'm wondering too - but I suspect that Mr. Bear, who
began his work last year when the Dow and Nasdaq both
peaked out, and then took a long summer vacation, is back
on the job. The U.S. economy carries $12 trillion more in
debt than was normal, relative to GDP, for the first 3
decades after WWII. My guess is that some people are
getting uncomfortable under that burden.
*** Oil eased off yesterday - falling $1.24. Al Gore
accused the big oil companies of price gouging and is
proposing to open up the strategic oil reserve to make it
easier for democratic voters to drive their SUVs and heat
their homes. OPEC says oil production is in excess of
demand.
*** And the dollar broke to the downside; the dollar
index fell to 115 and the euro rose to more than 86
cents.
*** The Danes are scheduled to vote on joining the euro
bloc next week. Chances are, they'll vote no. If so, we
could see another move down in the euro. But the bottom
for the euro can't be much further down.
*** The Dow, meanwhile, rose 77 points, but the gain was
not very satisfying. 17 stocks fell for every 11 that
went up. Almost 3 times as many hit new lows as hit new
highs.
*** "The trade deficit is now running around $30 billion
a month," writes Ray Devoe, "compared with $36 billion
for the entire year of 1992." When will this affect the
dollar? And what would the Federal Reserve do? Raise
interest rates to protect the dollar? And... if the
dollar weakened would foreign money stop flowing into
American securities? Or, conceivably, start returning
home?" (see: Autumn of Denial in A Less Safe World)
*** Yesterday, the Fed Beige Book was released. Bill
King: "It contained a most dire warning - wage increases
and higher material costs are widespread (inflation), and
the high labor costs are a problem. Oil, wage inflation,
and the euro spell earnings contraction. Bye-bye stocks."
*** Also from King, speculating on why the rich got
richer and the poor get poorer during the Clinton years:
"Dems typically raise taxes to cover social spending,
then paper over it with monetary promiscuity. The wealthy
capitalize on the easy money via asset leveraging,
whether its real estate, stocks, or whatever. The middle
and lower class don't have the same access to capital and
leverage, so their incomes sag."
*** What else? Well, in a bit of old news, Alec Baldwin
has pledged to leave the country if Bush is elected. So,
you see, a Bush victory wouldn't be all bad.
E-Toys.com is worth 7% of it's IPO high. Webvan down 75%,
1-800-FLOWERS.com down 75%, NetZero down 75%, Agency.com,
down... E-loan Inc. down... and on and on. I hate to say
we told you so, but "we told you so."
Meanwhile, you could have been making good money
from a different kind of "high-tech" investment. It's no
dot.com. It's a world-renowned company that's quadrupled
sales in 5 years... and increased profits 6 times. You
can buy it right now at a P/E that's 40% less than some
competitors. Click Here to learn who's really making
money in The Real Internet Economy: http://www.agora-inc.com/reports/FSUS/OrderNowhere
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"Hey," said my assistant Addison yesterday, "that's just
what we do."
He was referring to the movie "Pi," wherein the lead
character decides that he can best discover the mysteries
of the human heart in the movement of stock prices. He
believes our amalgamated hopes, ambitions, work, emotions
and fantasies can be tracked on a chart of stock price
movements.
But the trouble with collective thinking, a point I have
been making to the point of tiresomeness, no doubt - is
that it creates a phony, shallow, slogan-driven view of
the world, which ignores the complexity of real life.
Herd thinking can elect a president. It can launch a war.
It can make a movie popular. And it can lead entire
generations to abandon two millennia of experience and
take the world into a 'dark night' that lasts 7 decades.
But it is not a good way to invest.
The tragic hero of "Pi" believes he can find a
mathematical constant - like pi, or the Fibonacci
sequence, or the golden constant - that will unlock the
Deep Truth of the human heart.
But our goal here at the Daily Reckoning is much more
modest. Just show us an episode of madness so extreme
that even we can't miss it.
The two biggest sensations in the investment world today
are U.S. stocks (especially the Big Techs)... and the
U.S. dollar.
The Techs seem to have already peaked out... and are
working their way down. The dollar, though, is about 2
cents (against the euro) above where I thought it had
peaked out back in March. Unless the ultimate peak
happened yesterday - the great reckoning for the
greenback still lies ahead.
The madness of dollar strength reveals itself soberly,
even tediously, in macro-economic analysis and
statistical deconstruction. But the madness of the techs
is more entertaining..
Alan Abelson recently cited the case of a tech company
called SpeechWorks. It is a tiny company with total sales
of only $14 million last year. And yet, thanks to the
power of collective thinking its market cap has been
amplified to about $2 billion. What makes a small company
worth that kind of money?
Well, it's in the speech recognition business, which as
Abelson puts it, "has always been a hot button for the
racier element in the Street."
In order to justify the stock price, the company would
have to turn up the volume sales by approximately
14,200%. Maybe it will. But only if and when it does will
the stock be worth what it is selling for today. Until
then, it needs to be discounted for all the many things
that might go wrong - competition, technical failure,
management problems, a general breakdown in the stock
market, nuclear war, global warming...the list is quite
long.
Or, take the example of the 2nd biggest company in the
world. In terms of market cap, that title currently falls
heavily on the shoulders of the Cisco Kids. The current
issue of Grant's reveals, that when it comes to reporting
income and earnings, the Cisco Kids follow the beat of
their own drummer. While Cisco says its diluted earnings
per share for the last year, ending July 31, 2000, came
in at 53 cents, following the more traditional beat of
the GAAP rules yields only 36 cents. By Cisco's count,
earnings also grew by 47% in the 12-mo. period, but GAAP
gives a more modest figure of only about half that amount
- 24%.
Cisco is not some dodgy company in a Brooklyn loft. It
has a market cap of nearly half a trillion dollars. Yet
it is priced, by investors, as though it were a fast-
growing upstart with a patent on sugar. The current p/e,
Addison tells me, is 169.
But Cisco is a popular sensation. Apparently, few people
actually look at the numbers. If they did, they'd
discover what Grants found: ROE has declined from 33% in
1996 to 10% in 2000. Operating margins have been cut in
half.
And even if they do look at the numbers...and connect the
dots...they still might not be able to believe the
evidence of their own senses. They must wait for
confirmation from the collective unconscious.
Meanwhile, the Wall Street Journal told the story of a
very young man who made a more than a quarter of a
million dollars in the stock market. Jonathan Lebed of
Cedar Grove, NJ, learned how to pump and dump stocks at
the age of 14. Trading through his father's account, he
bought shares in a thinly-traded company...then placed
hypey notes on Internet bulletin boards. He sold the
shares within 24 hours - to the slouch brains who
believed his hype.
Confronted by the SEC, Jonathan copped a plea - saying
that he did nothing wrong, but would not do it any more.
Your correspondent...oozing thoughts...
Bill Bonner
P.S. The search for 'Pi' drives the hero of the movie
mad.
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Last modified: April 01, 2001
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