*** Dull day on Wall Street...but am I a 'sourpuss?'...
*** Cisco's accounting under fire...and bond investors
are betting that Amazon will go belly up...
*** Three Darned Cheap stocks...Prometheus still
suffering...Why Americans love gridlock...and more.
*** Not a very exciting day on Wall Street. Blue chip
stocks rose. Techs fell. 1278 stocks advanced on the
NYSE; 1574 declined. There were 50 new highs registered,
78 new lows.
*** The Dow ended the day up 45 points. Half of that gain
came from acquisition target Honeywell. But the buyer,
GE, saw its shares fall $2.50...below $50.
*** Sellers did better than buyers, in other words. But
that is the way it works in a bear market. It is time to
be a seller, not a buyer. Sell the rallies. Don't buy the
*** The Nasdaq fell 14 points. Cisco dropped $1.50.
Microsoft fell $3. Amazon fell below $30 again.
*** I reported on the curious accounting practices at
Cisco last week. This week's Barron's follows up with an
article on the Cisco Kids' habit of 'pooling' acquisition
*** "Just to refresh your memory," writes Abe Briloff in
Barron's, "under the pooling method of accounting for a
business combination, if Company A acquires Company B
paying, say, $100 million in stock, it would show as its
cost a mere $10 million, assuming that was the amount
listed on Company B's books as its shareholders' equity."
*** In 1999, for example, Cisco bought GeoTel for $2
billion in shares. How much did the Cisco Kids report as
the acquisition cost? Just $41 million, reports Briloff.
*** When you print your own money - as Cisco did with its
share certificates - you become pretty casual with the
way you spend it. Thus did Cisco pay out $6.9 billion
worth of shares for Cerent in June 1999. In the five
previous months, Cerent had revenues of less than $10
million...and lost $2 for every $1 in sales. Hey, but
with this kind of funny money, who really cares?
*** A similar acquisition of ArrowPoint cost the company
$5.7 billion in shares - and showed up as only $40
million in costs on Cisco's books.
*** The funny money is also useful for disguising labor
costs. Employees get options that are not recognized as
current operating costs. What would the P&L statement
look like if they were forced to account for the options
correctly? "If Cisco had treated the exercise of options
as they should be treated - that is, as a charge to
income," concludes Briloff, "the company would have
reported not the $2.1 billion in earnings it did report,
but a loss of $363 million..." I don't mean to be a
sourpuss, but investors should know what they're getting.
*** Elsewhere in Barron's I noticed what could be a much
more interesting company. Federated Dept. Stores is
selling at just 7.2 times estimated forward earnings.
Shares were recently at a 5-year low. Well, it's not
technology, but earnings are rising at about 30% from
last year to this.
*** "Compared to other 'value of a dollar' retailers like
Wal-Mart, Family Dollar, Target and Ames," writes Grant's
Investor Jay Akasie "Consolidated Store's price to equity
ratio of 13.3 is the lowest of the bunch. Because
discount retailers deal in a business with razor thin
margins, the close-out guys have a bit of an advantage.
Aided by acquisitions, Consolidated outpaces all its
competitors with a five-year average gross margin of 41%
and a five-year sales growth of more than 20%. If
discount retailing becomes more popular with the masses,
Consolidated is ready for a lead role." (see: Consolidated: Value Play At A Bargain Price)
*** And yet another Darned Cheap stock: "...the absolute
antithesis of so-called New Era stocks. It's in the most
beaten-down, unglamorous sector in the market," says The
Fleet Street Letter's Ned Harper. "Its average one-year
revenue growth is a gargantuan 2,042% higher than the
industry average. And at about $11 per share, this stock
is a steal - and priced to gain 70-100%. Despite
increasing cash flow of 20% or better for six years
running, it's ridiculously undervalued: a P/E of 5.2 and
a price-to-sales ratio of less than half a percent."
(see: Crushing the Steel Sector)
*** Meanwhile, Bridgewater Associates notes that Amazon's
junk bonds are now yielding 16.5%. They are trading at
about 50 cents on the dollar - implying, according to
Bridgewater's analysis - that bond investors give the
company about a 54% chance of going bankrupt. Why then
does the stock market put a $10 billion value on the
company? Who will be right - bond investors or stock
buyers? Stockholders might want to remember that in
bankruptcy, the bondholders get to pick through the
wreckage first. Maybe they will get to wander through
Amazon's warehouses, pulling their favorite books off the
*** "Don't say anything bad about Amazon," urged my
friend Michel, with whom I am in the book business in
France. "Amazon just made a major purchase of our books.
But we don't get paid until December." Okay. Amazon -
great company. Great future.
*** "The only bad publicity is in the obituaries," said
Sid Vicious. So, I guess the MONEY magazine mention of
the Daily Reckoning wasn't all bad. The author described
himself as a 'fan' and described it as 'charmingly
mordant.' But he also called me a 'sourpuss.' Gee, I
didn't feel like a sourpuss, until I read that.
*** George Gilder, herald of the 'Promethean Light' of
bandwidth plenty, warns in an editorial in the WSJ that
Al Gore, the father of the Internet, may turn out to be a
abusive parent. Well, metaphorically speaking, of course.
A billion new Internet servers are expected in 10 years,
which will require "an estimated total of four thousand
trillion watt-hours, or close to half of the world's
current electricity use. With the restrictions negotiated
in Kyoto, a global broadband Internet cannot happen."
Gore backs the Kyoto agreement restricting the use of
*** Another thing investors might want to remember:
progress does not come without cost. Prometheus, who
stole fire from the gods, was punished. He was chained to
a rock in hell, where the crows peck at his pancreas for
*** Investor's Business Daily reports that between them,
Circuit City, Xerox, Polaroid, AT&T, Lucent, Motorola,
Gap and Amazon have lost more than a half trillion
dollars of value this year.
*** The NY TIMES reports that the cost of the average
apartment in Manhattan has fallen in the 3rd quarter by
7.7% - from $850,000 to $780,000.
*** Gold fell to $272. Oil rose 81 cents. The euro...oh
la, la...fell below 84 cents as the dollar index rose to
a new high of 117.44. Rick Ackerman - who has been right
about the euro since the get-go - says it will drop to 73
cents before it reverses, or disappears altogether.
*** One of the curiosities of the presidential campaign
is that both candidates are promising to 'get things
done' in Washington. Yet, this is just want Americans do
not want. Jim Bianco, president of Bianco Research,
explains why Americans love gridlock: "When the federal
government is divided, regulatory growth grinds to a
halt. Under unified government - when the executive
branch and both houses of Congress are controlled by the
same party - regulatory growth is 2.5 times greater than
in all periods."
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
"There's a dark and a troubled side of life
But there's a bright and sunny side too...
Keep on the sunny side, always on the sunny side,
Keep on the sunny side of life."
The Sunny Side of Life
Pere Marchand took up another interesting Bible passage
on Sunday. Again, I listened carefully.
James and John had come to Jesus to ask for a favor. They
wanted to sit at his right and left hand - positions of
power, authority and prestige.
Naturally, the other disciples caught wind of the
discussion and were annoyed with James and John.
Jesus turned to them all and said, in effect:
Politicians, lords and rulers set themselves up one over
another, "but so shall it not be among you...for
whosoever of you will be the chiefest shall be the
servant of all."
Jesus understood the difference between politics and the
market. In politics, people tell others what to do. They
threaten and murder...and in modern mobocracy, invoke the
first person plural, we, to cloak tax rates and
regulations that the Sun King would have envied. Grand
larceny is okay, as long as the majority approve of it.
But in the rest of life things don't work that way. You
only get ahead by serving others, rather than ordering
them around. In marriage as in mass-marketing, it is
service that brings rewards, not bullying.
Mankind is sufficiently diverse and complicated that
service can take many different forms. Mother Teresa
might have been 'chiefest' for her service to the poor.
Bill Gates is 'chiefest' for serving more people with
software than any person who ever lived. Ray Kroc may not
get to sit at the right hand of Jesus, but you might
imagine that he'd at least get invited to the dinner
table. No one ever served more burgers to more people
than the man who built Golden Arches all over the world.
This distinction between politics and the rest of life is
one of the things that made America different from
Europe. In every European country, for example, politics
and religion were intertwined. The Queen of England is
still the head of the Church of England. In France, the
church is officially separate, but there are a number of
ambiguous connections. My children, for example, go to
Catholic schools, but the schools are supported and
controlled by the state. They get the same brainwashing
as all public school students, with Papism thrown in at
little extra cost. If they are lucky enough or quick-
witted enough to get into a "good" school - such as
Henry's St. Jean de Passy, they are encouraged to believe
that serving God and serving the French state are as
compatible as whiskey and branch water.
The things that are most admirable and charming about
America are the things that reflect the simpleminded
optimism and the quirky spirit of adventure of its
people. Americans will try almost anything. They are as
free from shame and embarrassment as a poodle. They aim
to 'stay on the sunny side' and ignore life's dark and
Anyone can imitate the European building styles...or
affect Parisian manners. But it takes real chutzpah to
build a mobile home out of rolled aluminum or to serve
fried chicken wrapped so thickly in batter that even
Colonel Sanders himself remarked contemptuously that
"it's not but a damned fried dough-ball."
Even evangelical Christianity probably has its roots
somewhere in the Anabaptists or other European
schismatics. But the sects flourished and bloomed nowhere
as in America. Today, the evangelical churches - mainly
in the South and West - are overflowing. Some have
thousands of members. And all offer a very simple message
of pure optimism - everything will be all right if you
remember your ABC's, reject the devil and follow Christ.
'Keep on the sunny side, always on the sunny side.'
You may be wondering, dear reader, what this possibly has
to do with investment. That answer: little. Still, it is
a part of our attempt to understand collective thinking
and how it affects investment markets.
I am leading up to something that I think is important:
what to do in a world of ignorance, and what to do with
your money now. Pardon me for taking such an indirect
root...but the scenery on the back roads is so much more
Evangelical Christians do not share the European idea of
the unified church and state. They believe that they
should be free men, answering only to God - and guided by
simple principles, such as the Bill of Rights and the Ten
Commandments. Everything else is free for
The Eastern Liberal Establishment, now bi-coastal, has a
very different idea of the way things should be. The dour
Yankees were perfectly happy to go along with Jefferson's
Declaration of Independence - where he proclaimed that
people have the right to decide for themselves what kind
of government they would have. Getting free of England
was good for New England's business. But scarcely 4 score
years later, the Yankees were imitating King George...and
willing to kill hundreds of thousands of men to maintain
their hold over the Southern colonies.
"In work, in game or play,
Suppress all fear and hate.
Show forth a spirit generous
True, for God and for the State."
David Ignatius, executive editor of the Washington Post
and former school chum of Al Gore at St. Albans, a "good"
Episcopalian school for the sons of movers and shakers in
Washington, remembers the school song. It "must sound
ridiculous to modern ears," he writes in the state media,
I mean in the Washington Post, "especially the part about
serving God and state."
Even Ignatius, card carrying member of the Eastern
Liberal Establishment, Gore supporter, and collective
thinker, didn't have the cajones to capitalize the 's' of
Like the Europeans they would so love to imitate,
Ignatius and Gore, see no distinction between God and the
"This is a man," he writes of the Eastern Establishment's
wooden champion, "who wants to do good, to make his
headmaster proud, to serve God and the state."
Jesus knew this was rubbish. You can't order people
around while serving them at the same time.
At least George W. Bush has managed to appeal to that
strain of evangelical Christendom which is so popular in
Texas. Like Ronald Reagan, he espouses simple principles
and a distrust of Big Government.
It is a fraud, of course. Dubya is almost as much a part
of the Eastern Liberal Establishment as Gore. But at
least he didn't go St. Albans, has no desire to make his
headmaster proud, and he has the good sense to recognize
major league bleeps when he sees them. And he offers to
help voters stay on the sunny side.
Your correspondent...trying to avoid being a sourpuss,
The Daily Reckoning:
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Last modified: April 01, 2001
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