*** Sophisticated inventory management? How come the
know-it-all market, in the information age, missed the
most important and most obvious bit of information on the
world's most important and most carefully-followed
commodity?...
*** Consumers are upbeat...oil up...euro up...heating oil
inventories down...Japan down...Kodak down...
*** Do hedonics really distort the BLS figures?
*** Heating oil inventories are now 26 million barrels
below last year at this time. Analysts say U.S.
distillates need to rise 4 to 5 million barrels per week
to avoid a supply problem this winter.
*** "Inventory management is now very sophisticated,"
wrote new era groupie Paul Erdman on August 17th. "Our
capitalistic system has always been plagued by inventory
cycles. [But] with the information that computers
instantly provide managers today, and with just-in-time
systems in place, major upswings and downswings in
inventories leading to similar swings in our economy and
in unemployment rates are, for the first time,
preventable."
*** And yet, a huge inventory shortfall seems to have
developed in the world's most important and most
carefully-watched commodity. "Oil Creeps up as U.S.
Supplies Dwindle" the Reuters headline tells us.
*** Despite opening the Strategic reserve, oil prices
rose yesterday, to close just below $32. And OPEC
announced that if the price fell too much, it would shut
down some of its pumps. (see: The Market Reacts (Not) To
Mr. Gore)
*** The Information Age has produced a deluge of
information. Data. Entertainment. You name it. Want to
know how to spell 'compos mentis'? It's right there on
the Internet. But that does nothing to overcome the
tendency of people to over-react and under-react. Nobody
wants to invest in refineries when the price of gasoline
is cheap. And nobody wants to think about inventories
when supplies seem abundant.
*** "In this information age," wrote Erdman, "we live in
a new world in which decision makers are immeasurably
better informed than ever before..." They certainly have
access to more information. Too much information. So much
that they cannot hope to analyze it. Instead, they look
for validation and confirmation in collective thinking.
Yes, more below.
*** The latest focus of earnings disappointment was Kodak
- whose stock fell $14 yesterday. Earnings, Energy, the
Economy and the Euro - they're still worrying Mr. Market.
*** The Dow fell 176 points yesterday - led by Kodak. The
Nasdaq dropped 51.
*** Advancing stocks fell behind those declining for the
11th time in 13 sessions. There were 1250 issues making
forward progress on the NYSE yesterday, while 1599
dropped back.
*** Intel lost another couple of bucks. It closed at
$43.40...after losing 30% of its value since last week.
*** In Japan, stocks fell 286 points...led by the techs.
*** "There's a lot of fear around," said one analyst
quoted by Reuters. But just a few lines down we discover
that "Consumers [are] Upbeat." Fear has not yet broken
out on Wall Street. The consumer confidence index rose in
September to 141.9 from 140.8 in August. Researchers
studied 5000 households. 53% of those surveyed believe
jobs are plentiful, with only 10.7% responding that it is
"hard to get" a job.
*** The euro may be climbing a wall of worry. All the
press on Europe and the euro is negative. Yet, the
currency rose to 88.57 cents yesterday. The dollar index
fell to 113. Gold did not move.
*** Europe, by the way, has not been a bad place to
invest. According to Morgan Stanley Capital
International, European equities have compounded at 18.2%
annually since January of 1983, versus about 16% in the
U.S.
*** Olympic athletes sometimes use drugs to pump up their
performance. The Bureau of Labor Statistics, as I have
mentioned often, uses 'hedonics.' But Barron's columnist,
Gene Epstein, claims that hedonics don't give the
performance boost that Kurt Richebacher, Jim Grant, the
Bundesbank, two Harvard economists - Medoff and Harliss -
and I have reported. According to Epstein, a 'dumb
arithmetical error' leads to a gross misunderstanding of
hedonic measurements. Stay tuned.
*** Also in this week's Barrons, editor Alan Abelson
mentions one of Lynn Carpenter's recommendations -
Centex. The stock - one of our 'darned cheap' collection
- is expected to earn $5 per share next year...and is
selling for less than $30. That gives it a forward p/e of
only 6.
*** Lynn updates us: "Centex is still great. Do you
realize you can get this stock for a PEG of 0.5 and price
to sales of 0.24, P/E 7.4? [Based on this year's
earnings.] It's still a bargain, even though FSL is up
21.8% on this stock as of today. We bought it in April,
so that's a week shy of a six-month return."
"Centex is also a good example of our contention
that the hi-tech sector isn't the only place to
look for good technology. It's what you do with
technology that counts. InformationWeek magazine
named Centex one of the 500 best users of
information technology. Earlier, Salomon Smith
Barney noted Centex was one of the 'most innovative
and Internet-savvy companies in the market.' SSB
included Centex on its list of the five best Old
Economy stocks..."
*** The violence "...is not what I came for," a
Birmingham schoolteacher told a reporter from the
International Herald Tribune. She was speaking of
demonstrations that turned into a cobble-stone hurling,
fire-bomb tossing melee in Prague yesterday. A peaceful
schoolmarm traveled across Europe - 24 hours by train -
to reach Prague because "her son often woke up in the
middle of the night, frightened about global warming."
She continued: "I wanted to tell my son I was doing
something about it."
*** It's another beautiful day here in Paris: Blue skies,
warm temperatures...the smell of fresh baked croissants
and expresso coming up from Le Paradis caf‚...prostitutes
close to retirement age in the doorways of the rue des
Lombards...the bells of St. Merry's ringing the hour.
Wish you were here.
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I have been exploring the idea of collective thinking,
popular sensations and mob action. The purpose, of
course, was to understand how the Nasdaq got to more than
200 times earnings. Only a form of collective madness
makes sense out of it.
Collective madness is useful, of course, in some
circumstances. In a charge of heavy cavalry, the more the
men act in unison...the fewer second thoughts and divided
hearts they have...the wilder and more reckless their
charge - the more likely they are to succeed.
The momentum of the charge - captured so vividly in the
paintings at the Musee d'Orsay - was intended to break-up
the enemy formations and cause havoc, and perhaps panic,
in the ranks. The cavalryman had to plunge himself and
his horse directly into the enemy line...forgetting his
personal safety, surrendering himself to the collective
will.
The word 'berserk' comes from ancient Norse. The Vikings
would go 'berserking' - attacking an enemy with such wild
fury that no reasonable man would want to be in their
way.
Collective thinking dominated the politics of the 20th
century. Now, the mob has turned to economics. "Today,
with the world at peace," wrote David Ignatius, executive
editor of the Washington Post, "the Armageddons that
people worry about are financial ones." Today, people go
berserk over stocks.
There is a deep point there, waiting to be grasped. We
are on the verge of a breakthrough in our understanding
of the way the human brain works...and the way human
society progresses. And you, dear reader, will be among
the first to have it.
The idea came to me while reading an article about Carl
Icahn, the corporate raider of 1980s fame. Icahn was in
the news last week because he attempted to force GM to
sell its stake in Hughes Electronics - in order to
'unlock shareholder value.'
The basic facts of the GM situation are worth recalling.
I reported them in an earlier Daily Reckoning as an
example of a 'darned cheap stock.' It is also an example
of how collective thinking in the stock market rallies
round some preposterously overpriced stocks - such as
Cisco or Amazon - and completely deserts other
investments, making them conspicuous bargains. GM, I
guess I don't need to tell you, is an example of the
latter.
GM had more sales, in dollar terms, than any other
company in the world - $177 billion worth. It earned a
profit of $6 billion. Not only are the earnings low - 3%
of sales - the other news is not good. GM is losing
market share and its unionized workers seem ready to
revolt.
But GM also has a few things going for it. Even in
today's world, $6 billion is a lot of money. Plus, GM has
$10 billion in cash. Its pension plan is over-funded by
$9 billion. And it owns a stake in Hughes that is worth
$15 billion.
Icahn's idea was obvious - so obvious that I think I may
have even suggested it in last year's note on GM. He
would buy a big enough block of GM stock to be able to
force the company to sell the Hughes shares.
The entire company - at today's stock price - has a value
of about $36 billion. Here is where non-collective
thinking comes into play. Imagine that you, personally,
could buy the company. For $36 billion you would get a
company with $10 billion in the cash register. So, you'd
only really be $26 billion out of pocket. And then, you
could sell the Hughes holding for $15 billion...so the
rest of the company would really only cost you $11
billion.
This gives you the world's biggest company...producing
cars, trucks, and other things you can put your hands
on... Heck, there's probably a spare '66 Corvette in a
garage somewhere that you could drive around. Factories,
real estate, giant machinery...you get it all. Plus,
you'd earn about $6 billion each year. Expressed in
conventional terms - the operating part of the world's
largest company has a p/e of just 1.83. From your point
of view, as owner, you'd get your investment money back
in about 20 months...and earn about $6 billion every year
after that.
Thinking collectively - using the slogans and feeble-
minded dicta of the financial media - you might want to
avoid it. GM is 'old economy.' It's a has-been company
that can't seem to get its act together. Owning GM is
definitely not cool.
Carl Icahn doesn't worry about being cool. I discovered
in the N.Y. Times article that he has a Ph.D. in
philosophy from Princeton. In his thesis, he developed
the idea that collective thinking is invalid: "Knowledge
is based only on what you observe. You talk to me about
something, you must relate it to something that's
observable."
(Icahn, an analog man, must not read the editorial pages
of the N.Y.Times. They are a waste of time, except as an
observation point, like an overlook at the zoo, for
watching the herd animals.)
GM's way of making money is observable. Its products are
operable. Its results are a matter of record for anyone
who wants to look at them.
By contrast, looking at Amazon.com - the River of No
Returns - all we can observe is abstractions, ideas,
hopes, and losses.
GM may have the world's largest sales figures. But
Amazon's ambitions go even further. It says it is "the
planet's" largest virtual store. It has 23 million
registered customers and Jeff Bezos says it will continue
getting bigger and bigger - growing at a compound rate of
50% for the next 10 years.
Hmmm...that will give it more than 1.3 billion customers
by the year 2010. Wow. And sales should hit more than
$100 billion. Soon it will be the biggest virtual store
in the whole blooming galaxy. What madness! It could
happen, of course. But so could the Second Coming.
Bezos did not reveal, at last week's presentation to
investors, just how the company would reach its targets
without going broke first. What one can observe at Amazon
is that the company has earnings of negative $3.37 per
share. Even this may understate its losses. Amazon books
the stock it receives from its commerce partners as
though it were real income. "They should not be recording
these deals as revenues. Period." said an analyst with
the Center for Financial Research & Analysis quoted by
Barrons.
But imagine that you had never heard of Amazon nor of the
New Economy. Imagine that Jeff Bezos came up to you and
offered you his company. It has $2.1 billion in revenue.
Assets of uncertain value. Billions in debt. And it loses
more than $1 billion a year. He wants $14 billion for the
company. What is your reaction? Would you pay $14 billion
for the privilege of losing $1 billion per year (which
would have to come out of your pocket)? Or would you
suppress a laugh...and politely show him the door?
Icahn had the right idea. He sold the dot.coms short in
1998 and 1999. At one point he had a paper loss of more
than $60 million on his shorts. "He said he was certain
that the stocks would never be able to earn enough money
to justify their valuations," says the Times article.
Now, with the Internets off 80% and more from their
highs, his shorts have turned "highly profitable."
More...more...and still more...to come.
Bill Bonner, enjoying a gorgeous day in the City of
Light.
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