*** Dow down again...Nasdaq too...will IBM, MSFT and
Intel come to the rescue?
*** TIME's Man of the Year getting poorer...
*** Another 'must own' stock to sell now...buying
votes...and more...
*** "Homicide," answered one Wall Street broker to a
reporter's familiar question yesterday, "we're getting
killed." Another referred to the "devastating blow to the
market."
*** Both were exaggerating the damage in yesterday's
trading - in which the Dow fell 1.46%, equal to 149
points...and the Nasdaq lost 76 points. Both averages
seem to be heading for decisive, psychological breaking
points - with the Dow soon to fall below 10,000 and the
Nasdaq perhaps dropping below 3,000.
*** And they are not likely to stop there. The big
surprise to today's investors will be that stocks can go
down as much as they go up. In his commentary yesterday,
Richard Russell reminded us that the Dow tends to go down
in real bear markets until stocks yield 6%. That would
put the Dow at about 3,000. In 1932, though, the Dow fell
to a 10% yield.
*** Also, the bear market psychology can take a long time
to take hold and work itself out. The Tokyo stock market,
for example, fell below 15,000 this morning - nearly 11
years after than market hit a high of almost 40,000.
*** And John Myers sent me these number on the
unemployment picture following the '29 crash:
Is it possible that we will once again see 24%
unemployment? I don't know. But unemployment today is at
its lowest level in 30 years. The unemployment picture -
like the stock market picture - could darken considerably
before it brightens again.
*** AOL lost 17 dollars to close at $43.60. Yahoo dropped
$6 - closing at $49.
*** And TIME's Man of the Year, Jeff Bezos, lost another
9% of his wealth. Amazon.com dropped more than $2 to
close at $21. It's down about 80% from its high of last
December. But even here, the stock still has a capital
value of $7.8 billion - a lot of money for a company that
has earnings per share of negative $3.37.
*** 807 stocks advanced on the NYSE yesterday. 2134
declined. 35 hit new highs. 239 hit new lows.
*** "The next 24 hours are critical," wrote Bill
Fleckenstein, after the market closed. "If Intel, IBM,
and MSFT can save the day, maybe we can have a rally for
a little while....But if they are unable to do so...then
things are liable to get very ugly..."
*** Alas, instead of saving the day, IBM announced
yesterday evening that while earnings were up 18%...sales
had risen only 3% in the latest period. Investors were
disappointed. In after-hours trading, Big Blue got
knocked down $14 - to below $100.
*** "One of the things that I've been doing for about a
year," writes Porter Stansberry this morning, "is
attacking AT&T, Kodak and IBM. AT&T and Kodak have
capitulated. IBM looks to be doing the same. I shorted
Kodak at $85 after Barron's predicted the stock was going
to $100 in 1998. Today it's at $36. I shorted AT&T...and
the put options ...have gone up 400%. I warned in July
that IBM was in serious trouble..."
(http://www.pirateinvestor.com)
*** The euro rose slightly yesterday. Gold fell 50 cents.
*** Oil rose a trifling 7 cents a barrel in yesterday's
trading, but then the API came out and said U.S. crude
inventories had slipped another 3.11 million barrels last
week, after having dropped 3.9 million barrels the week
before. In overnight trading oil rose 67 cents.
*** Magazines are great sell signals. Worth Magazine, the
same publication that once said I was a "genius" -
really, I'm not making this up - this week lists the "5
Tech Blue Chips You Must Own." The list: CSCO, EMC, AOL,
MSFT, INTC. Daily Reckoning readers know that when
something becomes such a popular sensation that the
financial media describes it as a 'must own' investment -
it is time to sell. More below.
*** Also, watch for the November issue of MONEY, which is
said to mention the Daily Reckoning - favorably, I hope.
*** "It was even worse than I had thought," writes Ray
Devoe. He recently updated a list of dot.coms he has been
following since March. "The median decline from their
highs for the 65 stocks was 90.5%, and the arithmetic
mean showed a slightly smaller loss of 87.8%. If you took
out the five stocks that were down "only" 57.8% to 69.8%
(some only marginally Internet related), the mean and
median loss would be almost identical." (see: The Dot.Com
Shakeout: Fallen Angels, Still Falling
http://www.dailyreckoning.com/body_headline.cfm?id=638)
*** Finally, the debates are over. Not that I saw any of
them on TV - but I read about them. And the candidates
seemed to have defined each other in the traditional
terms - pandering to envy, avarice, fear and collective
mumbo-jumbo as the opportunities presented themselves.
Gore accused Bush of being a brainless pimp for Big
Business. Bush accused Gore of being a soulless shill for
Big Government. Both are probably right...
*** But the worst part of the whole campaign is the nags
who urge you participate in the fantasy of democracy by
voting. "It's time to get serious about the U.S.
elections," writes International Herald Tribune columnist
and Gore supporter, Ellen Goodman. "I venture this
thought," writes the woman who rarely has one, "because
the world has begun to intrude." Goodman worries about
the mideast, Slobodan Milosovic, and other remote news
items, and comes to the silly conclusion that what
matters most is who is in the White House.
*** Meanwhile, an addled Internet entrepreneur has set up
a web-auction site where you can sell your vote. The
going rate is said to be $19.61 in California and $12.38
in Illinois - perhaps reflecting the difference in
available loot between the Silicon Valley and the Chicago
suburbs.
*** No matter what its creators may think, the site is a
spoof - because there is no way for the buyer to take
delivery of his votes. And yet, the very idea of buying
votes is so disturbing that election officials are
threatening legal action with "felony charges and prison
terms." Buying votes, said one democrat, threatens to
"undermine democracy." What it really threatens is the
illusion of democracy - that a majority, bribed with
money or just promises, have the right to tell other
people what to do.
*** The dreaded "digital divide" is widening. In August,
32.6 percent of blacks and 33.7 percent of Hispanic
households owned computers, compared with 51 percent of
households nationally.
*** Today is my son Will's 22nd birthday. Happy birthday,
Will.
One company is up 168% - it's stock has already doubled
and is set to double again...
Natural gas prices are up almost 70% in the last five
months, and there are serious concerns about natural gas
supplies for the winter. Even if you don't use gas to
heat your home, the shockwaves from this "crisis" could
mean serious money in your wallet.
In this week's Free Investor's Library we'll take a look
at textbook profits from a commodity squeeze. You'll
learn how these markets operate... and why "supply
volume" isn't the issue at all. You'll also learn about
the company whose stock is up 168% since January, and
stands to double again before the "crisis" subsides.
From an e-mail sent to the now defunct web company
Pseudo.com:
"You are all a bunch of spoiled, arrogant,
conceited thieves who robbed your investors blind.
So how much missing equipment IS in your
apartments? Go to hell all of you."
"They don't give us enough information," said Brian at
last week's meeting in Baltimore.
"I checked the package they sent out..." he continued,
"and then went to the documents filed with the SEC...but
it is impossible to figure out how much the business is
worth."
We were sitting around a conference table trying to
figure out how much to offer for a publishing business
that was up for sale. The company had put together a
thick package of documents and asked for a bid. But a
careful study of the figures revealed missing items...and
confusing details...that might have made millions of
dollars worth of difference. Even in the Information Age,
we labored in ignorance.
"Well, Brian," I challenged, "surely the disclosures to
the SEC will tell the tale. Otherwise, why would so many
people, including underwriters and large institutional
investors, have paid so much money for the stock?"
"They didn't know what they were getting," was his reply.
The company was a public company. On the basis of the
published information - less extensive and less detailed
then what we had in front of us - investors had spent
millions to buy the shares. And yet, 4 people with about
80 years combined experience in the publishing business
were unable to figure out if the company were worth $10
million - or perhaps nothing. One thing was clear -
whatever the company may have been worth - it was a lot
less than the public shareholders were paying.
Nietzsche's distinction may be useful - if not for
understanding this paradox, at least for elevating the
intellection pretensions of today's letter.
"Wissen" describes the kind of abstract, collective
knowledge of public shareholders and voters. "Erfahrung"
is another type of knowledge - the kind you get from
direct personal experience.
"Wissen" is what makes overpriced stocks in dubious
businesses "must own" investments. "Erfahrung" is what
you get after you buy them and watch them get killed.
The latest list of "must own" investments includes a
company Daily Reckoning readers will recognize - Cisco.
As the Promethean light of the New Era spread its warmth
across the entire continental U.S. nowhere did it shine
more brightly than San Jose, California...and nowhere
more intensely than the headquarters of the Cisco Kids.
A lot of people have gotten rich on Cisco stock. Many
more hope to do so. After B2C, B2B, content plays, and
other Internet disasters - Cisco is thought to hold the
key to Internet success. The company is an infrastructure
play - manufacturing the switches and routers that make
it possible to send this message to you.
I don't know what happened to the companies who made
electrical switches during the electricity boom of the
20s, but I doubt that millions of people got rich from
them.
And I doubt that many people will get rich from Cisco.
One can imagine how a small accounting department could
produce numbers that don't make sense. But you would
think that one of the biggest companies on the face of
the earth could get its numbers right - if it wanted to.
But Cisco's numbers are almost as confusing as Maria's
geometry homework or Edward's sentence structure.
The Grant's team went to work on Cisco's latest 10-k
report:
"What might be a simple matter is anything but. To the
forthright question, By how much did earnings per share
increase in the latest fiscal year? There are at least
three answers."
The increase of earnings per share is not a trivial
matter. Upon it rests a market value of $384 billion,
which comes to 151 times earnings. A multiple that great
only makes sense - if it does at all - if the company is
growing so fast that its future earnings may soon be 10
to 20 times greater than present ones.
But on that point, James Grant is less than sanguine:
"[W]e believe," he writes, addressing the issue of EPS
growth in the latest fiscal year, "the correct
answer...is zero. Nil is exactly the rate by which net
income per share would have increased if the company had
given effect to the cost of employee stock options."
If earnings are not really growing, a more reasonable
price for the firm might be gotten by multiplying
earnings by an ordinary number - say 10 - rather than by
an extraordinary one like 151. Instead of being worth
$384 billion, Cisco might only be worth, say $23 billion.
But even that may be generous. Because once the Cisco
Kids realized that they could print their own money -
that is, use shares in CSCO to pay employees, it seems
also to have dawned on them that they could use the
currency for other things. Pockets bulging, they have
been on a buying binge for the past several years...
buying up technology companies all over the country - and
paying with the CSCO paper.
As if to prove that the habit of inflation is not limited
to central bankers, Cisco stock multiplied like Wiemar-
era deutchsmarks. "In August 1994," reports Grant's, "a
split-adjusted 4.6 billion Cisco shares were outstanding;
today, the fully diluted share count tops seven billion."
In addition to buying companies of uncertain worth, Cisco
raised huge amounts of cash, which was used to buy T-
Bonds of much more certain worth. This produced the
rather curious situation of a company that now earns
about 15% of its total earnings annually from its bond
portfolio. But buying a share of Cisco is not a very
efficient way to own T-bonds. In fact, it transforms a
bond yield of about 6% into an earnings yield of 3/10ths
of 1%. But at least that portion of Cisco's earnings is
relatively straightforward and reliable. The rest is not.
For example:
"Word for word," writes Grant, "the most mysterious
passage in the Cisco 10-K is one concerning unfilled
orders: 'The company's backlog at Sept. 25, 2000 was
approximately $3.83 billion, compared with a backlog of
approximately $922 million at Sept. 20, 1999,' it says on
page 10. Yet, in the fourth quarter, inventories climbed
to the equivalent of 52.85 selling days, up from 45.21
days in the April period."
Inventories rising at the same time as backlogged orders?
It doesn't quite add up. But Grant's reports that "our
Cisco contact had no ready answer."
In the popular imagination, in analysts' reports, and in
the wissen of the financial media Cisco is a buy - maybe
even a 'must buy.' But the erfahrung of bubble
veterans...and those who look long enough and hard enough
at Cisco's actual business...leads them to a different
conclusion: Sell Cisco.
Until tomorrow...
Bill Bonner
P.S. The de-leveraging of America will not be a smooth
and easy process. People who jump on bandwagons feel the
right to hold the driver responsible for where they end
up. As the details of Cisco's reporting emerge - and
people lose money - look for lawsuits and recriminations.
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Last modified: April 01, 2001
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