In Today's Daily Reckoning:
*** They did something...but what happened?...
*** Markets are jittery...anxious...worried about the 4
E's...
*** How the Romans invented the 'new economy'
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*** Friday was the big day. The world's governments 'did
something' about high oil prices and a low euro.
*** Hey, what's this? The euro is falling again...and oil
seems to be stabilizing at more than $31. Maybe the fix
was only temporary.
*** And poor Ms. Wu. She was the one demanding that
government take action to protect the prices of her tech
stocks. Alas, South Korean stocks fell another 1.12% this
morning.
*** Stocks throughout Asia fell this morning - led by the
techs. The Tokyo average is again below 16,000.
*** "Global Markets," which expected clear sailing this
week, after Friday's announcements, "on Alert" says one
Reuters headline. Another tells us that "Stocks Sink on
Earnings Jitters." The Autumn of Anxiety is underway.
*** The Dow fell 37 points and the Nasdaq dropped 62 as
the Big Techs got swamped in the rough seas. Intel lost
$2.50, to close a little above $45. Cisco lost $3,
bringing it well below $60. Micron lost $6.
*** Have they suffered enough? Has negativity already
taken the wind out of their sails? Not even close.
They're all burdened with the albatross of outrageous
stock prices. Cisco is still selling at 87 times next
year's earnings. Uniphase is priced at 167 times. Oracle
is at 86. Sun Micro at 92. These companies would have to
be growing at the speed of light to justify these prices.
*** Instead, they're stuck in the doldrums of declining
growth rates. The WSJ notes that tech spending is slowing
down. Not only is this undermining the growth and
earnings of tech companies, it also threatens the GDP in
a major way. The Journal points out that 30% of GDP
growth over the last several years has come from spending
on new technology - information technology, to be
specific.
*** Of course, you and I know that that GDP figure is a
fraud. People didn't really spend a third of new GDP
growth on computers and information technology. Instead,
the magicians at the Bureau of Labor Statistics magnified
a rather small sum, using 'hedonic' measures, and turned
it into a major component of the GDP. So, when tech
spending goes down, the GDP is going down too. Easy come,
easy go. (see: Lousy Economics, Statistical
Wizardry...
Who Gains?)
*** Oil fell yesterday by $1.11 - but seems to be
stabilizing in overnight trading. Oil has declined from
$37 to nearly $31. But the 4 E's still cloud the skies of
Wall Street - Earnings, Energy, the Economy and the Euro.
*** "The American Petroleum Institute has stated that
crude oil supply is NOT the problem," says Kevin Klombies
"so the release of 30 million barrels is simply an
attempt to manipulate prices for political gain. In fact,
it is refinery capacity that is serving as the
bottleneck, with refineries operating at 95% capacity at
present." According to Klombies, the trend towards higher
oil prices remains in tact. (see: The Market Reacts (Not)
To Mr. Gore)
*** 1269 stocks advanced on the NYSE yesterday, 1579
declined. 80 hit new highs; 97 hit new lows.
*** Is this really a new era? "In knowledge-based
production, in contrast to physical manufacture," wrote
Marc Faber recently, setting up one of the New Era
arguments for the purpose of knocking it down, "almost
all the costs are incurred at the beginning."
"According to them," he continues, summarizing an
argument of the New Era apostles, "the marginal costs of
production [after the original capital investment] are
far below the average."
Faber goes on to point out that Roman aqueducts, canals,
and even the conquest of new territories by the Romans
were front-loaded with costs. "In fact," he writes,
"practically every canal or railroad ever built incurred
almost all the costs during the initial construction
period, while the subsequent marginal costs were
minimal...[and] the Romans invented the 'new economy,'
since they invested heavily in the conquest of
territories and then forces those acquired 'colonies' to
pay for the initial costs of the military campaigns."
*** Another interesting item from Faber: a chart from
Morgan Stanley shows a widening gap between real personal
income and consumption. For nearly two years, the growth
rate for real personal income has been declining. But the
rate of consumption growth has been accelerating. The two
have to get in sync. Most likely, consumption - which
already shows signs of heading down - will decline to
match real income.
*** "The US economy in the 1990s missed one of its four-
year cyclical recessions; there had been two in the
eighties and two in the seventies; in the nineties there
was only one," writes William Rees-mogg. "...recessions
are needed to clear the excesses of a long boom, and a
postponed recession may well be a severe one... there
will be too much debt to liquidate easily." (see: How
Will The Next President Handle An Overdue Recession?)
*** The Danes are said to be 'neck and neck' on the new
euro vote. It could go either way. So, apparently, could
the contest between Bush and Gore.
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Collective thinking is not a good way to begin a romance.
Few women are swept off their feet by a man who
introduces himself:
"Hi, I'm John and I'm like everyone else you've ever
met."
Nope, the idea is to be different...to be unlike any man
she's ever met.
This is true in the business world too. The idea in
business is not to go along in step with other businesses
- but to establish a unique selling proposition. Not only
do you need to distinguish yourself with products and
services that are different from those of other companies
- you also hope to be able to keep other competitors out.
You do not want others at your side or at your back - but
plenty of open space to develop and distribute your own
products.
Artists and musicians rarely do exactly what everyone
else does. Each tries to find his own style, or his own
particular way of expressing himself. One paints
angles...another circles. One splatters paint on a
canvas, another oozes it on. One singer does sappy
country western songs. Another does violent rap and beats
up his girlfriend from time to time - just to keep his
name in the news. Everybody has to have his own shtick.
I have been trying to understand collective thinking
because it is what holds stocks at absurd levels. Imagine
that there were no stock market and no collective
thinking about stock investing. Who would pay $450
billion to buy Cisco? The average P/E for the Nasdaq back
in March was 260. Imagine that there were no Nasdaq...no
CNBC...no analysts...no Wall Street. Who - left to his
own analysis and own brain power - would pay 260 times
earning for ANY company?
Why would volume on the Nasdaq go up 10 times over the
last decade? And why would average p/es go up 7 or 8
times? Why would any compos mentis person think a dollar
of earnings in the year 2000 is worth 8 times as much as
a dollar of earnings in 1990?
"The Nasdaq used to be dismissed as a home for cats and
dogs - small companies engaged in unfathomable businesses
that earned them meager, if any profits," writes Conrad
de Aenlle in today's International Herald Tribune.
"In the last few years," he goes on, "the Nasdaq has
grown into the world's biggest market...home for enormous
companies, [that] still engage in unfathomable businesses
that earn them meager, if any, profits."
No logic can justify it. No individual, independent
experience or first-hand observation can explain it. And
yet, it is - proof of collective madness.
And to understand it, we have to go into another part of
the brain - where collective thinking takes place. There,
in the most primitive part of the cerebellum is a
pathetic little corner where people decide which
candidate for vote for, which team to support, and which
Big Tech stock to buy. It is the part of the brain that
is switched on when reading the editorial page of the
newspaper...or forming up for battle.
I described yesterday how the ancient Greeks fought in
tight formation - each soldier completely dependent on
his comrades to do his duty.
In this, they fortified themselves, according to "The
Western Way of War," - like voters used to - with strong
drink. But not too much - fighting took discipline. The
unit had to think as one person and act, as Plutarch put
it, "with no confusion in their hearts." The alcohol must
have cleared up some of the confusion.
Once in position, as a number of military historians have
pointed out, the sensible thing would have been to plant
their spears and their shields in the ground and await
the enemy charge. Especially, if they could get a
position on the high ground, enemy soldiers would exhaust
themselves in the charge against the fixed positions.
Better yet, they could fall back in good order as the
enemy charged...making it even more difficult for him to
find his mark. The famous leader of the Mongul invasion
of Europe, Subedei, perfected this tactic...deliberately
retreating on horseback in order to let the enemy follow.
Soon, the attacker's line would be in complete disorder
and the attackers themselves worn out. At that point, the
Monguls would wheel around and counter-attack.
But collective thinking has a logic of its own. Rarely,
could any group of Greek soldiers sit tight while the
enemy attacked. They had to act, to advance...to 'do
something."
Thucydides' describes the scene of the first battle of
Mantineia (418 B.C.):
"The Argives and their allies for their part went forward
eagerly and wildly, but the Spartans slowly and in time
to the many flute-players who were at their side - not
out of any religious custom, but rather so that they
might march evenly and their order might not disintegrate
- a thing which large armies are prone to do as they
march forward to battle."
Force meets force on the battlefield. The greater the
group cohesion, the more likely the victory. In the 4th
century B.C., the Greek city states battled each other.
In the 20th century A.D., the world's nation states duked
it out.
But victory in investing cannot be had by collective
action. When everyone rushes to buy a particular
investment - it is soon overpriced, like today's Big
Techs. Collective action turns into a disaster.
Your reporter,
Bill Bonner
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Last modified: April 01, 2001
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