*** Whew...the bear market is over! MSFT is back up to
half its value a year ago. Hallelujah... and amen.
*** Trade deficit shrank in August - is that good news?
*** Signs of a slowdown...as the human body undergoes
"measurable perturbations" in the Autumn of Anxiety...
*** "The worst is now over," said a Lehman Bros. analyst.
"The perception is that the market isn't going any
lower," said another analyst to a Reuter's reporter.
We've just witnessed the "capitulation" of the bear, said
yet another.
*** Whew! I'm glad that bear market is over.
*** Investors went to Redmond, yesterday, searching for a
heart of gold - and they thought they found it. Microsoft
said earnings rose more than expected and its Windows
2000 was selling as forecast. So, MSFT shares shot up
almost 20%.
*** Nokia gave out similar good news - and its share went
up 27%.
*** The Dow rose 167 points on the good tidings to close
well above 10,000. And Nasdaq rose a stunning 247 points
to close even weller above 3,000.
*** Intel climbed almost 10%. Broadcom added $24.75 to
its share price. Cisco and Yahoo were each up about $6.
Sun Micro rose almost 7%. LSI Logic jumped 23%.
*** Advancing stocks beat declining ones more than 2 to 1
- 1949 to 927. But the number of new highs was still
disappointingly low - just 28, compared with 94 new lows.
*** The bullish sentiment even carried over to the old
economy as Gillette posted a 17% gain after its CEO said
he would leave.
*** This was the 3rd largest gain ever for Nasdaq. Of
course, the 2nd largest gain and the first largest gain
also occurred during this year. And so far for this year
the index is down 18.4% - even after yesterday's gain.
*** The Dow, meanwhile, is down 12.4% for the year.
*** What's going on? Is this rally going to chase Mr.
Bear back into his cave for an early hibernation? Will
the indexes recover, as Abbey Joseph Cohen forecasts? I
don't know...but at least I know that I don't know...and
what to do when I don't know. More below...
*** Not all the stock news was good yesterday. AOL lost
$1.47, off 3%. Apple lost 6%.
*** Even after its surge yesterday, MSFT is only worth
about half as much as it was last December. Analyst Doug
Cook increased his target for earnings per share from
MSFT but decided it was time to move his price target
from $90 to $65, "to reflect the correction in the
market."
*** Henry Blodget, a longtime AOL bull, noted that the
company was "clearly seeing the impact from the dot.com
shakeout."
*** Does anyone take these analysts seriously? I hope
not. Wasn't Blodget the one who said Amazon was worth
$200?
*** "Clearly, the great consumer goods companies that
were hailed as the 'winner-take-all' companies of the
globalisation movement of the 1990s have fallen on hard
times," writes Marc Faber. "Why is this the case? After
all, the 1.2 billion Chinese and 1 billion Indians are
increasingly purchasing soaps, films, razorblades, soft
drinks, and jeans. In this respect, I remember well an
investors conference hosted by a major investment bank in
1997 in the Bahamas at which companies such as Kellogg,
Gillette, and Coca-Cola were touted as the 'must own'
stocks of the future. Why have these companies performed
so poorly since then?" (see: There's Always A Bull Market
Somewhere)
*** "We're an investment bank that knows technology,"
says the ad for Goldman Sachs on FT.COM, "or is it the
other way around?" You'd think they would know the
difference between a bank and a tech company. Goldman has
hitched its wagon to 'Technology' the way the Chase
Manhattan Bank once hitched itself to third world debt.
Good luck.
*** But Alan Greenspan assured investors yesterday that
all was well - investments in high tech have held down
inflation...and there's little evidence that this
investment surge is coming to an end. What's more, said
the former jazzman, higher oil prices are not yet posing
a threat to the economy.
*** Also buoying investors' spirits yesterday was the
news that the trade deficit shrank in August. But this
might not be the good news investors think. The trade
deficit is an indirect measure of how much Americans are
willing to go into debt. When they are feeling rich from
the 'wealth effect,' they do not hesitate to spend. But
when the 'wealth effect' turns negative, so does their
willingness to part with cash or turn to credit.
*** The 'wealth effect' has turned sharply down this
year. Half of the nation's families own stocks. And
stocks are down, on average, at least 15%. The most
popular 'must own' stocks are down a lot more - like
MSFT, AMZN and INTC...down 50% or more.
*** So consumers are beginning to de-leverage themselves.
And the real economy - like the trade deficit - is
feeling the effects. USA Today reports the Coca-Cola Co.
is laying off 5,000 workers. Ingersoll Rand is laying off
4,000. And 6 of the nation's largest movie theatre chains
have declared bankruptcy in the last 13 mos.
*** Outside of the smoky information technology sector,
manufacturing output in America has been stagnant for the
last 3 years. "Excluding high-tech," writes Caroline Baum
on Bloomberg.com, "manufacturing output, which accounts
for 88 percent of industrial production, is at the same
level as it was in October 1999, according to the Federal
Reserve. High-tech output is carrying the entire factory
sector on its shoulders, with a 52.8 percent year- over-
year increase in September from a year earlier.... Output
of motor vehicles and parts plummeted 20 percent at an
annualized rate in the third quarter, the first quarterly
decline since the first quarter of 1999 and the biggest
since the first quarter of 1996, which coincided with a
General Motors strike."
*** And even in the computer sector there are signs of a
slowdown. Apple announced a hiring freeze last week and
Intel said it would be "far more cautious" in the months
ahead. Our guess is that consumers are going to be more
cautious...and investors, too.
*** It is, after all, the Autumn of Anxiety. Caroline
Baum adds this note: "Paul McCrae Montgomery, a market
analyst and money manager at Legg Mason Wood Walker Inc.,
had studied the literature of cycles and knew some
theorists found the power of the autumnal equinox, when
the length of days and nights is equal, to be compelling.
He never took it seriously, however, until he read some
research from the Department of Neuroanatomy at Yale
Medical School. 'They found that the human nervous system
typically undergoes measurable perturbations,' coincident
with the vernal and autumnal equinoxes, Montgomery says."
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"Don't know much about the middle ages.
Looked at the pictures and then I turned the pages.
Don't know nothin' 'bout no rise and fall.
Don't know nothin' 'bout nothin' at all."
Sam Cooke
"What are you working on today..." asked my trusty right-
hand man, Addison, this morning.
"I don't really know," I answered, truthfully, "but I
think it is important."
Yesterday, we marveled that even a stone at the bottom of
the Pacific Ocean...where it could never be found and
never seen...might be an effective store of value.
Ignorant of its location...or what it looks like...or its
weight...color...geological make up - ignorant of
everything about this stone, even its actual existence,
Yap islanders would nevertheless trade it for valuable,
tangible, consumable assets.
A private investor, buying a business, rather than a
submerged stone, usually has access to much more
information. He is able to go on location and ask
detailed questions - often of the employees as well as
top management. He is able to inspect the books, usually,
and verify key numbers through independent audit.
He also typically buys a business that he understands. He
has what Nietzsche called "erfahrung" - direct, personal
knowledge. Often a guy who began his career pumping gas
will eventually buy up other gas stations. Printers will
buy other print shops - or maybe expand into related
enterprises.
Erfahrung reduces risk. The more real knowledge you have
- the more able you are to guess about what the business
may do in the future. But even with thorough research
before the check is sent, my experience is that only
about one of two purchases works out as you expect.
Buyers hedge the risk by demanding low prices. Private
purchasers in the publishing business, for instance, may
pay only 3 to, say, 10 times what they think the business
will produce in profit annually.
But in the public markets, a stock buyer has no personal
experience...and no ability to closely examine, or make
sense of, the business. Instead of erfahrung, he has to
rely on "wissen," the same sort of collective ignorance
that politicians, busy-bodies and editorial columnists
rely upon.
David Ignatius, executive editor of the Washington Post
and columnist for the IHT, of which the Post is half
owner, recently visited a meeting of oil companies in
Venice.
"One executive explained for me the paradox of $35-a-
barrel oil," he writes, describing how markets work as
though he had discovered it for the first time in his
life. "In this topsy-turvy industry," he notes, a
Promethean light striking his frontal lobe with
unaccustomed force, "executives have to make billion-
dollar investment decisions for the long run based on a
price that fluctuates wildly over the short run."
Oil executives, like stock market investors, labor in a
penumbra of ignorance only slightly less somber than the
total blackout at the IHT editorial office. Despite the
explosion of information...the bandwidth-a-plenty
described by George Gilder...and the vanishing cost of
data transmission, oil executives can't tell you whether
the price of oil is going up or down. And investors, no
matter how many computer screens they have in their
family recreation rooms, cannot know whether they would
be better off betting their next $500 on a doggy tech
stock or a nag at Pimlico racetrack.
Newspaper editors, like public market investors, seem to
have no direct experience with anything. Instead, they
use big, dumb words that give them the pretense of
knowledge. Technology, Globalization, Global Warming,
Democracy, Terrorism...the words mean almost nothing - or
anything you want them to mean. They are empty, puerile
and misleading. But they are the building blocks of
collective thinking...piled one on top of another...and
capped with a stone inscribed with the first plural
pronoun - "we".
"We need to get serious about the election," writes Ellen
Goodman. "We should support marriages," says Linda Waite.
We need to act like a "grown-up nation" says Paul
Krugman. We need to look more carefully at globalization,
says Robert Samuelson. We "can no longer run away from
the ugly realities of the shadow war directed against
[America]," says Jim Hoagland.
But, rest assured I am not writing today's letter about
the editorial page of the International Herald Tribune.
My subject today is ignorance, which is the only reason
the IHT leaped into my thoughts.
The investor in publicly traded stocks relies on the same
sort of knowledge as the editorialist - wissen...
indirect, abstract, collective 'knowledge.' If there is
an 'oil crisis' in the news, he expects his oil stocks to
do well. If 'technology' is increasing productivity as
Alan Greespan says, he jumps into Juniper Networks or
Amazon.com.
And yet, he really has no idea what the future will
bring. He makes an investment that he hopes will bring
him more money...but he has no way of knowing what will
happen. Nor does he even know what money is! He can count
his wealth in dollars - but what are they really worth?
What will they be worth tomorrow? Are they really any
different from the Yap stones at the bottom of the ocean
- which might as well be imaginary, and have value only
as long as people agree that they have value? Thus, the
money itself is a sort of collective illusion.
People buy stocks whose SEC reports they have never read,
in industries they do not understand, with products they
have never used, run by people they've never met.
And then they measure their success in terms of dollars
of whose real value, if there is any, they are completely
clueless.
But so what?
"The problem with your views," said my wife Elizabeth,
who finds many problems with my views, and probably
speaks for a fair number of Daily Reckoning readers "is
that you are so cynical about everything. A person has to
make decisions. You can't just go hide in cave
somewhere..."
Yes, you have to make decisions. And you can't always
have the flashlight of erfahrung in your hand. So what do
you do?
Tune in next week...for 'why it's not a good idea to kill
people...or buy 'must own' Tech stocks at 200 times
earnings...'
...and what you should do with your money now, without
any illusions about being able to predict the future...
...and why America's currency is an "accident waiting to
happen..."
...and more about gold, too...and politicians...and
newspaper columnists...and...and...
...I'd better stop...my brain hurts.
Your humbler and humbler servant,
Bill Bonner
P.S. Best wishes for a beautiful autumnal weekend. I will
leave you with the same advice that James Cramer's wife
gave him: If you feel the urge to buy the Big Techs and
dot.coms at today's 'bargain' prices - go out and rake
some leaves.
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Last modified: April 01, 2001
Published By Tulips and Bears
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