Contributed by Bill
Publisher of: The
Fleet Street Letter
TUESDAY, 2 OCTOBER 2001
*** Another rate cut? Why not!
*** Sell Cisco...better late than never...
*** The Fear Economy...Indian stocks...Manhattanites
flee...the $3 million baseball...and more!
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The Fed meets today. Most likely, another rate cut
will be forthcoming - the 9th so far this year. Will this
one do what the other 8 have thus far been unable to do?
Or, will the Fed have to take rates all the way down to
zero, as they did in Japan, and still not get a positive
In the wake of the September attacks, the Fed,
Congress, consumers, investors - everyone has been
mobilized to fight against terrorism, bear markets, and
recession. Rates have been cut, liquidity injected into
the system, and new spending programs approved by
Congress. Hundreds of billions of dollars in new credit
have been created.
In the popular mind, all this new loot can't help
but trigger a victory for the American economy. And just
to make sure it happens, consumers are encouraged to
plunge, once more into the breach, with their credit
cards in hand...and investors, like Wellington's
infantry at Waterloo, are urged to hold their ground.
"If you believe in the strength of American
resolve, hard work, and innovation," writes Peter Lynch
in an ad in the Wall Street Journal, "then take a long-
term view and believe in our economic system. I
Thus are the gullible lured into debt and
investing at what might turn out to be one of the worst
moments to do so in history. The entire world economy
seems to be slowing down and growing cautious. Trillions
of dollars worth of paper wealth are being destroyed. A
single company - Cisco - has been reduced in value by
Eric, what's the news from Wall Street?
Mr. Fry in Lower Manhattan:
- The stock market was so sedate yesterday it scarcely
resembled the same manic-depressive creature that has
been tormenting investors for the past two weeks. A
token early morning sell-off pushed the Dow down more
than 100 points. But stocks clawed higher throughout the
rest of the day to close only slightly in the red.
- The Dow finished 11 points lower at 8,834. The Nasdaq
had a little rougher go of it, weighed down as it is by
the ever-falling semiconductor stocks. The index fell
1.2% to 1,480.
- Worldwide semiconductor sales dropped 42% in August
from a year earlier, according to the Semiconductor
Industry Association. On a month-to-month basis, the
trade group reported that August sales fell 3.4% from
the July level.
- The semiconductor sector's woes typify a widespread
phenomenon in the U.S. stock market: Earnings are
falling faster than share prices. The result is that
even though stock prices have dropped substantially,
valuations remain very high. A year ago the S&P 500
Index was selling for just under 29 times its trailing
12-month earnings. Since then, the index has tumbled
more than 27%...now the S&P 500's PE ratio is a point
- Yet, the famously bullish Abbey Joseph Cohen thinks we
should put 75% of our savings in stocks like those that
make up the S&P 500. A question for Ms. Cohen: Why?
- Several thousand miles away in India, stock prices are
falling even faster than the S&P 500's. But there's a
difference. Corporate earnings are rising in India.
Given that the Indian stock market has fallen more than
50% from its all-time high, sits on 8-year lows, and
sells for less than 12 times earnings, Indian stocks
might be a good thing to own.
- What's more, since exports account for just 13% of
Indian GDP, the country enjoys some insulation from a
global economy that grows gloomier by the day.
- German, Italian, and French manufacturing all touched
new multi-year lows in September. Greg Weldon of
Weldon's Money Monitor observes that the European
Purchasing Managers Index contracted for the sixth
straight month. The news out of Japan was even worse, as
the so-called Tankan report of Japanese economic
activity fell to its lowest level in more than 2 years.
The large manufacturing companies surveyed for the
report predicted that profits will fall 18.7% in the
year ending March 2002.
- Meanwhile, Valero, a new edition to the DR Blue
portfolio, "is one of the first companies to benefit
from the new war on terrorism," says Dan Denning.
"Earlier this week the company announced it had been
awarded $142 million in jet fuel contracts by the U.S.
military. The contract more than triples what Valero had
previously been providing the government."
- "Scores of lower Manhattan residents plan to flee to
leafy suburbs to distance themselves from the threat of
more terror," the New York Post reports. "Brokers in
Westchester, Long Island, and New Jersey say [the
exodus] is causing business to boom." One New Jersey
real estate broker has inked a staggering $40 million
worth of new contracts for home purchases just since
- The Oxford Club's C.A. Green, echoing a point I made
yesterday, says some REIT's stand to weather the
slowdown fairly well. "It's the first time in 40 years,"
Mortimer Zuckerman, head of Boston Properties, told the
WSJ, "that I have been in business where there is no
excess supply going into an economic decline." Boston
Properties has holdings, among other locations, in mid-
town Manhattan. (Green suggests three REIT's worth
looking at in the October 1st Oxford Alert:
- Perhaps it is no coincidence then that shares of
American Home Mortgage, a local New York mortgage
lender, soared more than 12% yesterday to a new 52-week
high of $19.62. Mortgage lenders are among the stock
market's brightest lights these days. Nationwide, a
resilient housing market together with a Federal Reserve
that can't seem to cut interest rates fast enough, adds
up to good times for mortgage lenders. The stocks are
trading so well that they seemed to be almost lighter
than air - you know, like a bubble.
- The Fed is expected to cut rates another 50bps to 2.5%
today at roughly 2:15pm. To what end? "Lower rates allow
businesses to borrow more money," suggests Gary North,
"but businesses don't want to borrow more money. Despite
all the cheerleading on TV and in the financial press,
businesses decided a year ago that the consumer was
- San Francisco Giants outfielder, Barry Bonds begins
the final week of the baseball season with 69 home runs
- just one shy of Mark McGwire's one-season record of
70. Most baseball fans are pulling for Bonds to break
the record. Todd McFarlane is not.
- In 1998, Mr. McFarlane spent $3 million to buy
McGwire's 70th home run ball. No doubt, McFarlane
assumed the record would stand for a while. After all,
Babe Ruth's record 60 home runs held up for 34 years and
Roger Maris's 61 home runs went unchallenged for 37
- It would probably take at least 37 years to make $3
million seem like anything other than a ridiculous sum
to pay for an historic baseball. But then, wasn't $3 mil
merely "chump change" back in 1998 - when the mere idea
of a "B2C e-commerce platform" was worth about $50
million? Today, however, it is doubtful that Bond's 71st
home run ball (if he hits that many) would even fetch
$500,000. McFarlane's ball would be worth something
- We Americans still love baseball, just as we still
love stocks. But that doesn't mean that we will still
pay any amount of money for either one. Times have
Mr. Bonner, back in the City of Lights:
*** Among the Forbes 400 richest families in America
alone, $250 billion of paper wealth has been lost in the
last 12 months. The nation's stock market wealth is down
$5 trillion from its peak last year. And this doesn't
count the billions of dollars worth of employee stock
options that vanished when stock prices went down.
*** "The late boom in stock prices created wealth for
the stock owners," writes Dr. Richebacher, "but for them
only, not for the economy as a whole. Generations of
economists would never have thought of rising stock and
house prices as 'wealth creation.' They would have
derided it as pseudo or paper prosperity."
See: False And True Prosperity
*** Mr. bin Laden cannot be that hard to find. A friend
of mine, it turns out, had tea with him a few years ago.
"...Back in '95. In those days, the Pakistani border
guards went home at night, so you could cross into the
Nuristan region of Afghanistan by horse - when it comes
to landmines, better the horse gets it than you. Anyway,
I got sick over there with a nasty case of typhoid and
ended up camping on the local mullah's (a heavy hash
smoker, by the way) front porch (closest part of the
house to the latrine). Ol' Osama came by with a band of
what were then known as "Black Turbans." Not much of a
conversationalist. He kept stroking his beard and
muttering something about killing Canadians. Not the
sort of fella I'd go fishin' with."
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RETIRED IN ORDER
by Bill Bonner
The 3rd millennium began so well...
You will recall, that on the first of January 2001, the
world was in pretty good shape, and America stood on top
of it, unchallenged and invincible.
Nasdaq stocks had already begun their decline, but
otherwise, all of the illusions of the late 20th century
were still in place - New Era, the New Paradigm, the
Peace Dividend, the Productivity Miracle, Long term,
buy-and-hold investing, the Social Security "lock box",
the Federal Surplus, Full Employment, The Golden Age,
The U.S. dollar...and so forth.
And now look at it. All of a sudden, the scales have
dropped from our eyes.
"So many of the various things that had made for the New
Paradigm aren't what they were..." notes Jeffrey
Applegate of Lehman Bros.
Even Henry Blodget has come to wonder. He loved
Amazon.com at $100. But at $6, he has his doubts.
"At $6, or 1.4 times estimated revenue for fiscal year
2001," says he, "the stock is still not inexpensive
enough to provide solid downside protection. Although we
believe the stock is undervalued on an intermediate and
long-term basis, it has not yet reached a valuation
'floor' - especially in this market."
Markets make opinions, as the expression has it. After
$5 trillion of market losses, Blodget, Lazard Freres,
and perhaps the rest of the world are now looking for
"You know, there are so many illusions in life," said a
friend at lunch the other day. "It's always painful when
the illusions are destroyed. But it is necessary...it is
a good thing.
"I thought about that the other day when I was standing
on the platform of the subway," he went on. "Anyone who
wanted to do so could push dozens of people in front of
an oncoming train. But we all felt safe. We all had the
illusion of security."
And yet, occasionally, something comes along and reminds
us how unsafe we are. If it happens during a bull market
in confidence, it is quickly dismissed and forgotten...
like the Gulf War or the Crash of '87. But if it happens
when confidence has reached an epic flood...when it has
scarcely anywhere to go but down...then the great tide
of confidence and bullish sentiment ebbs...and soon
becomes a dangerous rip of fear and bearishness.
"We have lived in a fool's world," writes Gary North.
A year ago, Americans thought they had nothing to fear.
No more wars. No more bear markets. No more recessions.
Now, they have them all...3 out of 3. The illusions of
the late 20th century have all retired in order, as they
say in baseball...
"The psyche of private sector decision-making has been
dealt a lasting blow by the events of 11 September,"
adds Morgan Stanley strategist Stephen Roach. "Like
grief, time will heal. But I suspect the healing will
leave the mindset in a very different place. Matters of
personal, corporate, and national security can no longer
be taken for granted. That will cast a lasting pall on
the values that shape risk-taking strategies - for
consumers and businesses alike. Increasingly risk-averse
investors may be more satisfied to realize moderate, but
safe, returns in a less secure world. In economic terms,
this could well reduce the preference for leverage and
tilt the balance away from the excesses of spending and
back toward a long needed rebuilding of saving."
The preference for spending over saving has a life cycle
of its own. Young people do not typically care to save -
even though a dollar saved at 30 years of age will be
worth many times more in retirement than one saved at
50. Older people, more fearful of the future, will save
whatever comes their way - including old newspapers and
Even without the terrorist attacks, or the post-bubble
economy, the 3rd millennium was destined to be less free-
spending and more fretful than the end of the 2nd. The
simple reason: people are getting older.
As people age, they work less and spend less. Economies
do not charge ahead when people cut back their working
hours and spending habits. They retreat.
And stocks tend to go down too. War or no war, investors
typically switch from growth stocks to bonds and income
stocks as they grow older. Just as the record boom in
U.S. equities in the 1990s can be attributed to the Baby
Boomers' attempt to build capital gains, so might the
collapse of stocks in the next 10 years be blamed on the
Boomers' new concern for income.
"The demographics of an aging population have long been
pointing [towards a shift towards caution and
frugality]...", Stephen Roach explains, "and The Shock
could represent a real wake-up call for saving-short
Americans. A similar jolt might effect the risk-taking
mindset of entrepreneurs and venture capitalists."
Who knows where it will lead? Stocks could go down for
10 years. The U.S. economy could imitate the Japanese
one - with recession, bear market and stagnation until
2011. The "war" on terrorism, too, could drag on for a
decade. And what if the war is lost?
What kind of world has this new millennium brought? We
don't pretend to know. But we can feel the water running
between our toes...
The bubbly tide that once bore American investors to an
epic level of super confidence...may be going out.
Bill Bonner, with his pant legs rolled...
The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.