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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
*** Morgan Stanley Dean Witter analysts decided it was time to re-rate a
group of big tech stocks yesterday. The analysts quietly forgot whatever
they had predicted for the techs previously...and downsized their targets.
*** There were, said one analyst, “eye opening reductions in earnings” that
forced them to reconsider.
*** The result? The Nasdaq dropped 151 points, about 5%. It’s back to its
level of October 1999, well below 3,000 and down 29% for the year.
*** Cisco lost $1.50. Juniper fell $32.50. eBay was down more than 20%.
Amazon dropped below $24.
*** And Yahoo lost $2 after a French court told the company that it had to
keep Nazi memorabilia away from France. Nazi paraphernalia is illegal in
France. But Yahoo has no way to keep the French from getting on the
Internet and visiting its U.S. site. Yahoo is now priced below $50 � a loss
of 80% from its high.
*** The biotech index fell 10% yesterday. Maybe biotech’s moment has come
and gone too � faster than we expected.
*** But the damage was not confined to the techs. The Dow fell 167 points
too.
*** There were 977 advancing issues on the NYSE yesterday, compared to 1849
declining ones. 67 stocks hit new highs...while nearly twice that number
hit new lows.
*** U.S. investors are not alone. Markets are falling all over the world.
Taiwan lost 6% on Monday alone. Stocks in Taipei have split, the hard way,
since March. You can now get 2 for the price of 1.
*** At the meeting of the Foreign Policy Association in NY last week, Paul
Volcker: “They [international investors] are happy now, but one wonders
whether this trend of importing more and more capital can be sustained.”
*** The trend worldwide is towards softer equity prices and tighter credit.
“Over the past 17 months,” says economist Nancy Lazar interviewed in
Barron’s, “we’ve counted 150 central-bank tightenings and the U.S. Fed
accounts for six of those.”
*** As long as other central banks tighten along with the Fed...and equity
prices fall more or less in tandem � there may be no reason to expect that
foreign investors will stop financing U.S. spending.
*** But, says Ms. Lazar, “my inclination is that the next major move on the
part of the Fed will be to ease...” Why? “The slowdown is here,” she
explains, “The question now becomes how prolonged and how deep and how
pervasive will it be. Is it just a U.S. issue, or does it end up being
global? On all those questions, we lean towards things being weaker,
longer, everywhere... We have odds of a recession at 40%...”
*** Signs of a slowdown continue to grow � in both
the ‘old’ and the ‘new’ economies. Copper and lumber are sinking. Scrap
steel is at a 14 year low. Dram prices have collapsed 56% in the last 17
weeks, and the growth rate in semiconductor orders has slowed from 38% to
just 4%. “Outplacement” firm Challenger, Gray and Christmas estimates that
more than 20,000 jobs have been lost in the Internet economy in the last 10
months.
*** Consumer and investor confidence are still high. But America is now a
nation of portfolio holders, with large debts and no savings. “A drop in
stocks to lower levels...” writes investment advisor Kenneth Coleman in
Barron’s Market Watch section, “would lead to a lower GDP and a lower
economy...”
“The huge buildup in wealth in our nation,” he continues, “didn’t come from
wages or longterm investment that finally paid off. According to a poll,
70% of those who were expected to vote in the presidential election own
stocks...”
*** “It would seem to me,” wrote Marc Faber recently, “that stock prices
will increasingly dictate not only financial policies but all government
policy decisions...”
Falling equity prices, lower earnings, recession, put together, will mean
lower standards of living. The Fed will find the pressure to ease rates is
irresistible. Will that solve the problem? Maybe not...more below.
*** Until now, and perhaps until then, bonds have been a good place to have
your money. 30-year Treasuries are up 16% this year. Plus, there’s the 5%
interest yield.
*** The euro bounced ever so slightly yesterday. Gold rose against the
dollar too � up 60 cents.
*** I may have been unfair in characterizing George Gilder’s relationship
with his ‘sponsors’. My apologies to Mr. Gilder, who says that his
investment recommendations were not influenced by the $100,000 companies
paid to sponsor his conferences. I have no reason to believe he is not
being truthful. But the bias to bullishness is subtle, pervasive and
insidious � throughout all the financial media. Advertisers, sponsors,
clients, IPOS, ‘insider’ shares � who can resist the persuasion of money?
*** Not I, dear reader, not I. Amazon...great company... [Note to Bezos:
please keep buying those books from us. Uh...and don’t forget to pay us for
them before you go broke...]
*** “What about OPEC?” asks Dan Ferris. “It's finished,” he says. “In
Jamaica last week I predicted $10 oil by the end of 2001 and said I'd eat
the piece of paper it was written on if it didn't come true.”
*** The anniversary of the decisive moment of WWII passed without notice on
Sunday. On November 19, 1942, the Soviet Army counter-attacked at
Stalingrad, where the German army was hammering its head against a wall for
no apparent purpose, more than 1,000 desolate miles from its base of
supply. Using a code name perhaps suggested by a New York Times reporter,
Uranus, the Red Army surrounded the Germans, trapping 300,000 soldiers. The
Germans, led by General von Paulus, surrendered on February 2, 1943. Hitler
was furious that Paulus did not commit suicide, labeling him a ‘weakling’
and a disgrace to the German army. Already weak from cold, disease and
near-starvation...very few Germans caught at Stalingrad survived the war.
This investment has routinely earned 32% average annualized returns in a
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the 1987 stock market meltdown.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
I wallow in the collapse of the techs...slowing down like a motorist on the
highway to gawk at a gruesome crash.
The Germans have a word for it: schadenfroh. It describes the happiness you
feel when an obnoxious neighbor’s house burns down...or you discover that
body lying alongside the highway is that of a tort lawyer or IRS auditor
(and not your own)...
Pere Marchand, our Catholic priest, would be appalled. We are neither
French nor Catholic, but we attend church as if we were. And even an
Episcopalian knows that taking pleasure in the misery of others is a very
un-Christian emotion.
But it is almost irresistible. There is something oh-so-satisfying about
watching the conceits of the new era slip from their polished heights, like
a pompous man’s toupee at a cocktail party. Besides, if it is true that
investors get what they deserve, rather than what they expect � who am I to
argue with it?
Mr. Market metes out his own justice...poetic or prosaic... in his own good
time. And it will not always be to your liking. You might as well enjoy it
when you can.
Thus we see the headline in Barron’s: Death Toll Mounts in Info Highway
Wreck.
“At least 130 Internet concerns have crashed and burned since January,” we
are informed. “About 21 ‘Netcos have gone out of business during the first
half of November alone compared to 22 shutdowns for the entire month of
October... Money and time have simply run out as the public markets no
longer are interested in partaking in the international pyramid scheme
better known as initial public offerings.”
PlanetOut.com agreed to couple itself with Gay.com, we learn. Pets.com
simply “threw in the doggy blanket”. Other web enterprises merely melted
down and dribbled away.
But I write today not merely to share a shivver of schadenfroh....but to
address an important issue: what next?
For some reason, the ‘what next’ question also seems to have been on Pere
Marchand’s mind in church this past Sunday. “We cannot know,” he said,
following a reading from the Book of Revelations, “exactly what the future
will hold. That is for God to know. We will find out only when � and if �
God wants us to. All we know is that the Book of Revelations tells us that
very dramatic events are in store for us. ...God’s world is not boring, or
easy....”
We cannot know exactly what the future will hold, of course. But we do have
some experiences of bear markets that might provide some hints as to what
lies ahead.
“Yes,” writes Marc Faber, “a sharp sell-off a la 1929 or Japan after 1989
is entirely possible. But it’s also possible that the US stock market has
entered a long period of sideward trading during which the indexes are
bound in a trading range for several years, while individual stocks and
sectors move up and down quite sharply, with a bias...to the downside.”
The period � 1968 to 1974 � was a long, confusing sideways market on Wall
Street. “After 1968,” Faber observes, “the US stock market sold off until
May 1970, from where it rallied to a new high for the Dow and the S&P 500
in January 1973.”
This was the well-known “two-tiered market” in which most stocks fell, but
a few � the ‘nifty fifty’ � staged an impressive rally. To most investors,
it looked as though the bear market of 1968-1970 was over in 1971. It
appeared that a new bull market had begun � which, by 1973, had brought
stocks to a new peak.
But, “if we take into account inflation as well as the more than 30%
depreciation of the US dollar between 1971 and 1973,” Faber explains, “then
the high of the US market was not in 1973, but in 1968.”
Taking one company as an example, Litton Industries had been a Wall Street
favorite until 1968. But in the first leg of the bear market, 1969-’70,
Litton lost 80% of its value. Then, the stock doubled in the rally that
lasted until ’73...and subsequently dropped another 80% of the value it had
left...
Those who expect a quick resumption of the ‘82-2000 bull market may be
disappointed. Major bear trends can be longer and deeper than people
expect. A Mr. Kurt Leln of St. Paul, Minnesota, wrote a letter to Barron’s
explaining that in 1954, the Dow was still 27% lower than it had been 25
years earlier. And, at the beginning of the most recent bull market, in
1982, the Dow was actually 22% lower than it had been in 1966. Investors
had endured 16 years of a bear market...and lost more than a fifth of their
money in the process (not counting dividends).
Looking at a longer period...trough to trough...from ’29 to ’82 � investors
had earned an average capital gain of less than 2% per year for half a
century, again according to Mr. Leln.
Stock market bulls will be quick to point out that the future is never
exactly like the past. This time, like every time, is different. But that
is not necessarily good news.
“To start with,” explains Faber, “the market value of US equities as a
percentage of the economy never exceeded 80% at its high in 1968; compare
that with over 150% now. The price-to-book ratio of the S&P was never above
2.5; it’s currently at 9. And as the bear market began in earnest in 1973,
the P/E ratio (trailing 12 month’s earnings) of the S&P 500 was 18,
compared to over 30 at the beginning of this year. [Not to mention the
Nasdaq, at 150 times earnings.] ...in the late 1960s the S&P 500 yielded
over 3%. Then in early 1973, its dividend yield dropped briefly to a low of
2.7%, compared to only 1.3% at present.”
“Margin debt,” Faber continues, “as a percentage of market values is
presently twice what it was at its high in 1968. Corporate debt as a
percentage of GCP was 30% in 1968, compared to 45% now...total debt as a
percentage of GDP has increased from 140% to 260%.”
“However, what is at present so unusual is that in the longest American
economic expansion on record, during which corporate profits expanded
rapidly, corporate balance sheets have deteriorated badly...In fact, on
both the corporate and consumer level, the rush into debt over the last 20
years or so is unprecedented...”
And so might the future be...unprecedented. Unpredictable. Unfathomable.
And never boring.
Mr. Leln takes a guess: “I suspect that many of today’s investors would
consider it a disaster if the Dow fell to 8500 next year. I can only
imagine their reaction if history were to repeat itself, leaving the Dow
still hovering around the 8500 level in the year 2025.”
If an individual investor gets what he deserves, rather than what he
expects, is that also true for the entire market? Americans are more
heavily in debt than every before. They believe that stocks will make them
rich if they merely buy and hold. They have no savings and an almost
infinite confidence in the U.S. dollar and its guardian, Alan Greenspan.
What do such people expect? What do they deserve?
More tomorrow...
Your faithful correspondent,
Bill Bonner
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