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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
TUESDAY, 25 SEPTEMBER 2001 |
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Today:
Concrete and Oil
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*** Stocks soar on Wall Street...big rally? Or bear
trap?
*** "The biggest financial insanity in history..."
*** Serial bailouts...the FBI comes to call...and more!
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* * * * * * * * Advertisement * * * * * * * *
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SLMC, and 11% shorting AFCE.
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* * * * * * * * * * * * * * * * * * * * * * *
The Dow has lost 3100 points since its peak. The
S&P is down nearly 40%. The Nasdaq has given up 74% of
its gains.
All over the country, business executives gather
together to try to figure out how to cut costs and
survive the coming downturn. Consumers have slowed their
spending. Debtors are having a hard time making their
payments. And people are losing jobs. MSNBC reports the
economy "screeching to a halt."
So what does the market do? Without even waiting
for the sound of gunfire, they blasted stocks upward
yesterday. Could this be the beginning of a major bear
market rally? Yes, it could.
But could this be merely a feint by Mr. Bear, a
trap for unwary investors - to be snapped shut by an
even sharper fall in stock prices - or even the panic
selling we've been expecting - tomorrow? Yes, it could.
Could this be an opportunity to sell your stocks,
and get out of this crazy market until prices finally
hit bottom at decent prices (10 times earnings, or
lower)?
Yes, it could.
Eric, what happened yesterday? (By the way, Eric
is hosting CNNfn this week. Look for him from 9:30 -
11:30 a.m. e.s.t.)
*****
Eric Fry in New York:
- The big relief rally finally arrived, and what a
relief it was. There's nothing quite like a bear market
rally to get the speculative juices flowing. The Dow
soared 368 points, or 4.5%, to 8,604 - chalking up its
best one-day gain of the year. The Nasdaq bounced more
than 5% to 1,499.
- Some of the day's notable winners included some of
last week's biggest losers. Boeing, for example, gained
almost 9%.
- As greed reasserted itself on Wall Street, many of
last week's "fear" trades crumbled. Treasury bonds, oil,
and gold all gave ground. Oil suffered a particularly
dismal day. The price of crude fell almost $4, to $22
per barrel - the biggest one-day drop in more than 10
years.
- So let's take a quick tour of the financial markets.
Are we near a bottom? Near THE bottom? Or still just
tumbling down haphazardly from the top?
- Certainly, stocks are relatively cheap - relative,
that is, to where they were trading in March 2000. But,
as a hedge fund manager I spoke with yesterday told me,
"It would be hard to say that stocks are absolutely
cheap. They just aren't." Even now, the S&P 500 index
sells for about 25 times earnings. Valuations like this
used to occur only at market tops...
- Sir John Templeton, one of the world's most respected
investment advisers, says that the downfall in the stock
market over the past year is bigger than the crash of
1929, and he doesn't expect a recovery anytime soon.
- In an interview last weekend with NewsMax.com,
Templeton said the run-up in market was "the biggest
financial insanity ever in any nation in history."
Templeton said he is warning investors that the recent
"technology bubble...was far bigger than any previous
bubble of any nation ever...now is not the time to buy
common stocks."
- "Two weeks after the terrorist attack on the World
Trade Center, the economic costs total $40 billion and
are likely to climb," Crain's reports. "The disaster
will likely be the most expensive ever, surpassing
Hurricane Andrew, which cost $30 billion, and the
Northridge, Calif. earthquake, which affected more than
2,200 square miles."
- Worse, the aftershocks of the terrorist attack are
rippling far beyond the epicenter.
- Crain's cites a typical example: Tom Cat Bakery. "The
wholesaler, which sells bread to hotels and restaurants
in Manhattan, was forced to reduce its employees' hours
and thus their pay by 20% last week, because revenues
are down about 35%. Four of Tom Cat's biggest customers
are hotels that either don't exist anymore or are shut
down indefinitely. The bakery's other customers, in
midtown and upper Manhattan, have slashed their orders
because of the shortage of tourists in New York."
- There may well be fewer tourists in New York these
days, but those that are here are swarming to Lower
Manhattan to catch a glimpse of "ground zero". They seem
to easily outnumber the emergency workers. It's almost
impossible to walk down the sidewalk on Broadway.
- "Bits of fine dust and ash still coat the windows of
buildings 10 blocks away," writes the Blue Team's Dan
Denning, who visited New York this weekend to bear
witness. "Clean up crews are busy trying to get the city
back to normal. Their efforts are being hampered by
thousands of tourists looking for the best angle to take
pictures of the smoldering ruins. It seemed like poor
taste to me."
- "[A]ll over the metropolitan area," the New York Times
reports, "people are slowly returning to shops to buy
what they must: groceries, school supplies, new sneakers
for the children. But the big-ticket items - cars,
jewelry, huge-screen televisions - are moving slowly, if
at all."
- "In wartime, markets do not operate freely," cautions
Marshall Auerback. "There is a tendency toward increased
regulation and centralized, government-directed activity
- even those governments which, under normal
circumstances, would champion free markets. Profit
maximization, returns on capital and investment, all of
these otherwise laudable capitalist objectives are
temporarily subsumed in the pursuit of a broader
objective."
See: "It's A Wartime
Economy, Stupid!"
*****
Back in Paris...
*** I heard from the FBI yesterday. They've asked for a
copy of my message from September 11th with the prophetic
headline - "Something's Coming, Something Big." Of
course, I had no idea what was coming. But I knew there
must be something, which in the sightless eyes of the
FBI classifies me as clairvoyant.
*** And several Daily Reckoning readers wrote yesterday
to warn me: "Watch out," said one. "You are in danger of
losing your audience. You just can't imagine the
sentiment over here. Returning from Europe, I was
shocked. I've never seen anything like it."
*** "Something big has happened," Elizabeth explained,
demonstrating that geography is no barrier to collective
sentiments. "It is more terrible than you seem to
realize. We Americans have been attacked. Thousands have
died. We are no longer safe. This is no time for jokes
or ironic reflection. It would be like telling jokes at
a funeral."
*** "After the tragedy," today's International Herald
Tribune quotes sitcom producer Steve Levitan, "being
funny almost seems treasonous...and when you laugh, you
feel guilty."
*** "It's not that irony is dead," said John Aboud,
editor of Modern Humorist, "It's just that feelings and
honesty are in."
*** "This incident has made everyone a lot more
thoughtful," added producer David Ladd. A DR reader
summed up the situation: "You have no idea what it is
like here. Flags flying everywhere...everyone unified as
I have never seem them before. It is wonderful. And a
little scary, too."
* * * * * * * * Advertisement * * * * * * * *
Suddenly, it seems like the world is a more dangerous
place...but the truth is, throughout the 1990s, it was
getting more and more so - and no one seemed to notice.
* While the United States spent billions on high-tech
defense, fanatics armed with box cutters planned the
most audacious attack on the United States in history...
* While investors thought they were going to get rich
with long-term Buy and Hold strategies - they lost $5
trillion in wealth in an 18-month period.
* While consumers heeded the Fed's call to "buy...buy...
buy" - they scarcely noticed that their own financial
security was going bye-bye under a collapsing tower of
DEBT.
For help protecting yourself against the FINANCIAL
THREATS you're going to face in the months ahead, click
here:
Mean New World
http://www.agora-inc.com/reports/STRT/Time
* * * * * * * * * * * * * * * * * * * * * * *
CONCRETE AND OIL
by Bill Bonner
Today I write to you with an irony-free letter. No out-
of-step ideas. No irritating reflections.
Instead, I offer you two ways to take advantage of the
coming bear market rally - if there is to be one. Or,
merely a chance to buy stocks that are good enough and
cheap enough that you could hold them throughout the
long, dark teatime of an economic slump...without
worrying about them too much.
When Jeff Bezos was enjoying fame as the world's
smartest entrepreneur and Amazon.com was still selling
for $88, in March '99, someone asked if there was
anything the Internet retailer would not sell.
"Cement," came the jesting reply.
This made us immediately sympathetic to things concrete.
Anything so un-hip, so anti-New Era, we reasoned, must
be as cheap as Amazon was dear.
Since then, Amazon has drifted downstream...selling
today for only $7.46 a share. The companies that make
cement, meanwhile, remained where they were. Relatively
cheap in 1999...they are still cheap. One of them seems
not only relatively cheap, but absolutely so.
Might it get cheaper in an extended bear market? Yes.
Earthquakes shake up everyone. But that is the benefit
of sleeping on a low bunk...you don't have as far to
fall.
Cemex is the world's No.3 cement maker. It is based in
Mexico and operates in 30 different countries. Forty
percent of revenues come from two markets - the U.S. and
Spain, with the balance coming from emerging markets.
Selling cement in the late 90's was hardly a glamorous
business. Surely, the people at Cemex must have had a
yearning to put a ".com" after their name or to start up
a B2B Internet business. They must have felt a little
d�mod� in their dusty, industrial age trade. So, they
can be forgiven for trying to put at least one foot in
the New Era. "The construction industry is ripe for a
digital makeover," says the annual report, "and Cemex is
leading the way, transforming itself from a conventional
to a digital enterprise."
Fortunately, Cemex did not take this effort too
seriously. It remembered that customers wanted tangible
cement, not information, and it flourished. "Operating
margins of about 25% and returns on equity of more than
15% have been the norm since 1991," reports Grant's
Interest Rate Observer.
"On June 30, debt accounted for 42.3% of capital,"
continues Grant's, "...while EBITDA covered interest
expense by 4.88 to 1."
Here at the Daily Reckoning, we do not feel competent to
judge the business prospects of a multinational cement
company. But to the question, "Do you really want to own
a cement company on the eve of a war?", we answer:
"Well...yes."
And to the question, "Why Cemex and not another cement
company?", we reply: "Because Cemex is on the bottom
bunk."
At a P/E of 5.3 times 2001 estimated earnings, Cemex is
less than half as expensive as rivals Hanson, Holcim and
Lafarge. Its dividend yield, at 4.07%, is the highest of
the group, and its price to book value, less than 1, the
lowest.
Our second suggestion comes from Frederick Sheehan, of
John Hancock Asset Management.
"We...will face energy shortages and bottlenecks for a
long time," he wrote on September 6. "We are short of
refining capacity in the U.S. and not much is being done
about it. The U.S. needs more natural gas. The world
needs more power plants. The world will need more
gasoline. A lot of Asians who never rode in a car a
generation ago now own one."
Has anything happened since September 6 to change that
situation? Probably not.
Sheehan lists 10 companies that he regards as "Rich and
Neglected." I give them to you with their P/Es:
Amerada Hess 6.4
BP Prudhoe Bay Royal Tr. 4.7
Frontier Oil 7.9
Murphy Oil 9.8
Phillips Petroleum 7.1
Sunoco 6.8
Tosco 12.5
Ultramar Diamond Shamrock 7.8
Unocal 9.4
Valero Energy 5.1
Why are these companies so cheap?
"All it takes is an announcement that gasoline inventory
has risen over the past week, and these companies get
sold. The thinking seems to be: 'The energy problems are
solved, let's buy XO Communications.'"
"Maybe profits have peaked for some of these companies,"
writes Sheehan, "but they are filling a shortage that
won't evaporate overnight."
Energy and commodity prices have been falling, more or
less willy nilly, for the last 20 years. Prices reflect
the widespread view that the next 20 years will be like
the last 20.
Will they be?
And here, dear reader, I permit myself a moment of
reflection. We do not know what the future will bring.
But we share the feeling with other Americans that
something big has happened. Some realignment of the
stars...some volcanic rumbling and tectonic shift...we
don't know exactly what it means...but we wait to find
out.
In the meantime, we will sleep on the lower bunks.
Your correspondent...keeping close to the ground...and
trying to understand what is going on in the world
around him.
Bill Bonner
[Ed. Note: The Agora Wealth Symposium is still on! We're
gathering at the Las Vegas Regent from October 31-
November 3, 2001. Bill Bonner, Eric Fry and Dan Denning
will be there. Hope you will be too!
To make your reservations today, call Agora Travel at 1-
800-926-6575 or 1-561-266-6570. For more information on
the trip visit:
The Agora Wealth Symposium
http://www.agora-inc.com/reports/AWS/WinningProfits/
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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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