*** Bill at the Wealth Symposium... 12 very unnerving
earnings warnings overnight...
*** Facing a "true" Energy Crisis?... the market that
ought to be on every investor's mind...
*** A delicious "seasoning" recipe for the CPI... the Big
Mac celebrates... and more.
*** As Bill is still in Las Vegas, living it up at the
Agora Wealth Symposium... Addison is writing the notes
today... below you'll find a Daily Reckoning Greatest
*** The Nasdaq - home of "one sick-looking tech sector" -
was all the news this morning... as she stiffened up a
bit, struggled out of bed and rose 67 points. At days end
the index was resting at 3,523, up nearly 2%. The
previous three sessions had conspired to knock 8.5% off
*** Still, as anyone who's been laid up for 3 days
knows... the flu is hard to shake. And sure enough, late
in the day, Dell threatened to take the index down with a
fresh round of earning shivers.
*** Dell warned investors that "weak demand in Europe
would lead to softer-than-expected revenues." Dell traded
down $3 after hours, coming to rest at $25.
*** William Fleckenstein: "First Intel, then Apple and
now Dell pre-announces. In Dell's case, the most
significant part of the announcement is a rather large
revenue shortfall for Q4. The question isn't what's
happening. [Regular readers already know that.] The
question is whether any of the dead fish will be able to
connect the dots tomorrow, or will they try to maintain
that all three are company-specific and therefore we
should buy Compaq and Gateway."
*** Company-specific? Well let's see... "we had another
12 negative pre-announcements overnight..." Larry Wachtel
an analyst with Prudential Securities told Reuters. "It's
*** Oracle, too, fought negative territory. Again, Bill
Fleckenstein, "Taking a page out of the duffer golfing
handbook and take a Mulligan, Oracle said it wasn't
trying to issue a sales or profit warning yesterday,
it hadn't changed any guidance and it didn't think
its margins would contract. I guess seeing the stock
drop 20 bucks was too much for Larry Ellison, so the
company had to attempt a rewrite - after being down
about eight bucks, Oracle closed down only a buck and a half."
*** The Dow climbed 64 points, closing higher for the
third straight session at 10,784. The Dow was helped, in
part, by gains at Boeing, Dupont, IBM and Home Depot, but
remains down 6.2% for the year.
*** The S&P 500 gained almost 8 points to close at 1,434.
*** The dollar held steady at 114. Gold was down $1.60 to
$273. Oil... fell 60 cents to $31.43.
*** In a speech to the Energy Institute of the Americas
in Oklahoma City this past Monday, Matthew Simmons noted:
"I feared we would face an Oil Shock. I was wrong. We are
now facing a true Energy Crisis..." He went on to say,
"Let me be clear. The world has not run out of oil and
North America has not run our of natural gas...What we
have run short of is any way to grow the supply of each."
*** "Mr. Simmons went on to point out," says IMRA's Kevin
Klombies, "that there are only a handful of major new
supply projects on the go at present with little chance
of a meaningful increase in supply until perhaps 2005."
(see: Skyrocketing Energy Prices and Consumer Confidence
*** Meanwhile, "the largest commodity market in the U.S.
is not oil... but electricity," says Real Asset Investor
Dan Ferris. "The United States spends more than $220
billion a year on electricity. Crude oil might be our
number one import, but only because we can't import
electric power." Right now, Ferris contends, "this market
ought to be on every investor's mind. It's one of the top
few markets to search for the biggest and best
opportunities in." (see: The Internet's Dirty Secret,
*** "No matter how good the next report on consumer
prices [due out October 18th]," writes Jim Grant, "It will
likely pale before the previous one, which featured the
first monthly decline in 14 years... a revelation
government statistics keepers partially explained by
noting a seasonally adjusted FALL in energy prices."
*** As "virtually everything we do in the economy depends
on the CPI," it's worth looking at some of the
adjustments the government bean counters have implemented
in the last decade - in effect to combat an upward bias
on the inflation rate. Grant's list:
1991: Hedonic pricing introduced for apparel; greater
recognition of discounted air fares.
1992: Improved imputation methods for new product models
1994: Quality improvement recognized for reformulated
1995: Generic pricing recognized when drugs lose patent
protection; "seasoning" procedures introduced for food to
eliminate upward bias.
1996: "Seasoning" extended to other products.
1997: New procedures for pricing hospital services.
1998: Hedonic pricing of home computers.
*** "One of these days," muses Grant, "it will be
interesting to learn what share of the inflation rate has
been assumed away by the calculations."
*** By the way, as Bill noted earlier this week, we've
signed an agreement with the good folks at Grant's. As
part of it, you gentle reader, have been invited to
receive a one month subscription to GrantsInvestor.com -
free. If you haven't already, you can avail yourself of
this opportunity by following this link and filling in
the appropriate registration information:
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * * A DAILY RECKONING GREATEST HIT, First Aired October 5th
1999... one year ago today. (For a little context... when
this issue first ran we we're on the eve of an
unprecedented run-up in Internet stocks, fueled in part
by an increase in the money supply in preparation for
I was trying to read the "Forbes'" ASAP issue on the
topic of convergence on the airplane. There were some
good people in the issue - George Gilder, Tom Peters and
so forth. But the more I read, the less I found.
The idea of convergence is, from a technological
standpoint, the combination of TV, Web, telephone...the
idea of putting all the world's knowledge, entertainment
and business together into one seamless communications
system. That will take shape, or not, in due course. It
is part of the reason that the telecom stocks shot up
yesterday (remember, this is a year ago...ad). People
think convergence will make them more valuable.
On another level, convergence is the discussion we've
been having here...about how the virtual and the real
come together. The "Forbes'" writers clearly had no idea
what to say...or what to think. Even Muhammad Ali was
asked his opinion...which he gamely gave, recalling the
importance of religion in his life.
Webhead, futurists and "new era" investment advocates
believe that this development is of transcendent
importance...sort of like the Second Coming or an
invasion from space. They seem to think that the real
world will come to resemble, more and more, the virtual
world. Investors who take up this line of thinking
believe that the stock valuations of Internet companies
will one day apply to all companies...as they will all
become Internet companies or go out of business. If you
ask for evidence of this...you are dismissed as an "old
fogey" who just doesn't get it.
There is no denying the Internet is an important
innovation. It makes this message possible. Is it as
important as the printing press? Air conditioning? The
internal combustion engine? I don't know. I've argued in
these messages that it will have a big effect on the real
world...just not the benign effect that investors seem to
expect. Regular companies will not morph into Internet
companies and suddenly be worth a lot more money.
Instead, Internet companies...those few that survive...
will grow up and act more like regular businesses...with
stock prices to match.
They will have profit margins to worry about...
inventory... employees...competition...and all the other
things that make running a business tough work. That is
the convergence that has already begun.
The virtual world, on the other hand, will remain
virtual. People will not sleep on virtual mattresses. Nor
will they eat virtual hamburgers. They will sit in
cramped airplane seats...and long for an increase in
material comfort, not the virtual kind... 98.2% of the
economy is still much like it was 10 years ago. And
though almost everyone uses a computer now, productivity
is not rising. Indeed, the rate of productivity increase
is lower today than it was before Jeff Bezos was born.
Readers will recall from yesterday's message that the
"productivity miracle," in which productivity began
rising in the United States in the last quarter of 1995,
is a sham. The statisticians created a new way of
measuring output that transformed a real increase of $2.4
billion in computers into $14 billion in chained dollars.
In every quarter thereafter, the actual numbers have been
replaced by these virtual numbers. And no one seems to
notice that it is all phony.
This is not an isolated statistical curiosity. The U.S.
financial structure rests on these virtual numbers...
stock prices, the dollar, bonds...all amplified by a
hundred TRILLION in derivatives. When the virtual numbers
converge with reality...there will be hell to pay...
(For a current update as of October 5, 2000 see: Two-Tier
Statistics, Not Two-Tier Economy.
In the Wall Street Journal Dorothy Rabinowitz' has done
superb reporting on the child abuse hysteria that washed
over the United States in the `80s.
"Believe the children," jurors were told...not realizing
the children had been prodded, coaxed and pressured into
making accusations that, as one judge put it, "no
rational person would believe." The children were not
telling the truth...they were telling a virtual
truth...the one the prosecutors and abuse specialists
asked them to tell.
Today, the only evidence for many of the fantastical
child abuse cases is the fact that people are still in
jail for them. But now the mania has passed. Innocent
people are slowly getting out of prisons. And except for
the ambitious prosecutors, child psychologists and Janet
Reno, who used the hysteria to benefit their careers,
almost everyone has sobered up and realizes it was a
So, too, will the Internet mania be one day regarded.
People will ask themselves, "How could I ever have
thought that company was worth so much?"
Well...it virtually was.
Your faithful correspondent,
The Daily Reckoning:
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