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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 27 SEPTEMBER 2000 

 

Today:  Berserking

*** 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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BERSERKING


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.
 
 
 
 
About The Daily Reckoning:
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