*** Very slow news day...markets closed...nothing much to
*** More darned cheap stocks...builders...polluters...what
more could you ask for?
*** Christmas endgame for the e-tailers...Cisco's money
*** Not much news today. Markets in the U.S. were closed for
Thanksgiving. Foreign markets barely budged.
*** The euro stayed about where it was on Wednesday.
*** You may have noticed in the figures I gave you yesterday
that stocks in builders have done pretty well this year. I
suggested a few early in the year; I hope you were able to
take advantage of them.
*** But there are still some `darned cheap' stocks among the
builders. Fund manager Jeff Gendell, interviewed in Barrons,
makes some recommendations: Kaufman & Broad, the biggest of
them, is expected to earn $4.50 a share in the coming year.
You can buy the shares for just $30 - a P/E of less than 6.
*** Meritage Homes stock almost doubled in the last few
weeks. Still, the P/E on next year's estimated earnings is
barely 5. Ryland should earn $6 and shares are selling for
*** Or how about an ugly, polluting coal producer? Coal is
decidedly dmod. Ambitious young men do not dream of making
their fortunes in coal. Nor do you find many coal
billionaires on Forbes' lists of the richest people in the
country. In fact, my own grandfather was in the coal
business in the 1920s - and went broke in the depression.
*** Still 55% of the nation's electricity is generated from
coal. And with prices of gas and oil double and triple what
they were a few years ago - coal is looking pretty good.
Gendell mentions Arch Coal and Fluor - about which I have no
further information, but they might be worth a closer look.
*** Related to coal is a Dickensian-sounding product called
carbon black - used in hardening tires, toner for copiers,
and so forth. A company called Cabot makes the stuff, and
Gendell expects it to earn about $2 per share next
year...and maybe $3 a share in the year following. At $23
Cabot could also be a reasonable buy.
*** At least Cabot's management thinks the stock is a buy -
they recently announced a 10 million-share buyback program.
Buying your own shares makes sense - when the shares are
*** By contrast, Cisco systems is setting new records for
the number of shares it lets loose on the world. Currently,
notes Jim Grant, the 7.5 billion shares outstanding is equal
to "more than one share for each of the planet's 6.1 billion
people." But printing your own `currency' is a hard habit to
break. Even as the value of each of Cisco's reichsmarks, I
mean shares, falls...Cisco's managers keep creating more of
them. Analysts were told to expect further dilution of at
the rate of 80 million more shares per month.
*** DR reader, FM, wrote to tell me that another dot.com,
Garden.com, bit the dirt. The stock flowered at $13 last
year, but withered to less than $1 this week. The company
said it would close its doors and lay off all employees.
*** The future looks bleak for the Internets. Even Henry
Blodget seems to have re-invented himself as a dot.com
realist. The pure e-tailers, he notes, have a very hard time
competing against the big `clicks and mortar' stores - such
as Wal-Mart. "If they wanted to give away product for free
for the next five years they could," said the Merrill Lynch
*** This Christmas season probably represents a `make it or
break it' period for many of the e-tailers. For the most
part, they've stopped spending money on foolish image
advertising. They are conserving cash, switching to more
efficient direct marketing techniques - and hoping to prove
that they can be profitable in this shopping season.
*** But meanwhile, reports suggest that sales growth online
is slowing. And big, old-economy retailers - such as Wal-
Mart - are bound to be taking more of it.
*** "Retailers with well-established brand names and
hundreds of stores in malls have a huge advantage over their
purely Internet cousins," writes Leslie Kaufmann in the NY
TIMES. After more than 3 years of insufferable boasting,
warning and laptop-thumping from Gilder, Saylor, Bezos and a
whole starry-eyed constellation of New Era prophets,
Kaufmann concludes: "even big-name retailers, from Nordstrom
Inc. to Barnes & Noble Inc. have not been able to show that
Internet retailing is anything but a money-losing venture."
*** This day marks the anniversary of Darwin's publication
of the Origin of the Species.
Steady Returns From The Market's SECRET SWEET SPOT
Bear market sentiment works hardest against the bull's
highest flyers: Intel, Sun, Oracle, AOL - you name a big
tech, we've chronicalled it's demise. Meanwhile the market's
Secret Sweet Spot is up for the year...
Your FREE report: "While The Nasdaq Burns" will show 7
companies deep in the heart of the market's sweet spot,
remarkably immune to the bear. Imagine what your neighbor
would say...you can make money while the Nasdaq tumbles.
Read your copy today.
"Big bottom...big bottom...
How can I leave her behind..."
Of all the market events and chart formations that investors
cherish, none is so appealing as the Big Bottom. It is like
the moment in a dipsomaniac's life when he finally realizes
that he cannot continue as he has. After what might have
been decades of decline, he arises from the gutter...
stumbles over to the nearest Presbyterian church, where at
that very moment, if he is lucky, an Alcoholics Anonymous
meeting is taking place. From that moment on, his life can
only get better.
I had thought that Mr. Deshais, our gardener, had been
through this process recently. Unshaven...rumpled...he had
begun to look like a day trader... And in the spring, he
reported that he had been thrown out of the house...and
reduced to sleep in the fields.
But since August he had seemed more alert...and more
chipper. His pants seemed zipped up more often and his eyes
Then, one day recently, he came over - not on his moped,
which has been his customary form of locomotion since the
local gendarmes took away his driving license - but in an
automobile. Along with him, a middle-aged woman who showed
signs of considerable wear and tear but was otherwise not
unattractive, emerged from the vehicle.
"This is Madame Deshais," he introduced me.
Elizabeth and I were happy to see that Mr. Deshais had put
his life back together and was once again living in conjugal
harmony. Alas...in life, as in markets, Big Bottoms, do not
come along every day. Mr. Deshais wobbled badly last
Sunday...suggesting that the Big Bottom is still in the
future, and that his August to November rally is over.
"So where do we go from here?" asks Brian Durrant in the
U.K. edition of our Fleet Street Letter. "There are two
scenarios. The first is that the Nasdaq is undergoing a
healthy correction and that bargain hunters will help form a
platform from which the Nasdaq will recover as it did
towards the end of last year. After all, Intel and Microsoft
have touched multiples of 25 and 28 times earnings
respectively, levels not seen for quite some time."
"The second scenario," says Mr. Durrant, "is that this is
only the beginning of the meltdown in tech stocks."
Either we have seen the Big Bottom...or we have not, in
At a bottom, everything gets better. It is a no-lose
situation for investors. A no-brainer. A bottom is a bottom.
It doesn't get any worse. So it can only get better. Prices
improve. People make money.
On the backside is the best possible place for investors to
be. There is no downside. Only upside.
The bulls think they see bottoms everywhere. Stockpicker Al
Frank on November 1st: "I feel that the bulk of this year's
correction has run its course and that we will see a
powerful November-December rally..."
Harry "Dow 35,00" Dent warns that we haven't quite gotten to
the Big Bottom...but he can see it coming: "It will probably
get worse before it gets better," he said to a Barron's
reporter in early November. "We have been warning since the
start of this year that the Nasdaq composite could test new
lows, possibly dropping down to the 2300 level."
But at that point - it's Bottom City according to Mr. Dent:
"...that would end up creating a tremendous buying
According to Barron's, Dent's outlook did not stop his funds
from making "major bets," at the end of August, on stocks
such as Intel, Cisco, Nortel and Oracle.
Dent must have confused his stock market anatomy. A bottom
is the low point. A top is at the other end. Cisco, Intel
and Nortel were selling as though they were at a top, not a
A bottom is far better than top. In fact, it is the mirror
opposite in every way. At a top, everyone is bullish. Happy.
Optimistic. That's when they buy the market leaders - such
as Intel and Cisco - at prices that can hardly even be
imagined at a bottom.
At a top - all the good news is out. All that remains to be
disclosed is the bad news. And the only way the market can
react is negatively - downwards. An investor cannot win at a
market top - unless he is brave enough to sell short.
Contrariwise, at a bottom an investor cannot lose - that is
unless, he is foolhardy enough to sell short.
Is Microsoft a bargain at 28 times earnings? Is all the bad
news out? Is there only upside?
"Microsoft's stronger-than-expected quarterly results do not
necessarily make it a bargain," Mr. Durrant continues.
"Closer examination of the accounts suggests that
Microsoft's growth rate is maturing into the 10% - 15% range
not untypical of successful, old-economy stocks."
Do successful, old-economy stocks sell for 28 times earnings
at market bottoms?
P/E multiples tend to be very high at market tops and very
low at market bottoms. In 1948 P/Es were at the bottom of
the range - with a median multiple of 5.8. Then, the bull
market of the `50s drove up the multiple to 19.4 by 1961.
Stocks collapsed in 1968...but then something funny
happened. By 1970, investors thought they saw a bottom.
Ignoring most of the beaten-down stocks of the time, they
bought shares in the leading growth companies. This created
a confusing picture - the `two-tiered market' of the early
70s. Most companies continued falling in price...and sank to
P/Es of 5 and 6...but the top growth companies - known as
the `nifty fifty' - soared. By the end of March, 1973, these
50 companies had a median multiple of 48.4.
One of the great growth companies of that era was Avon
Products, which at one point had a market value greater than
the entire steel industry. But by 1973 Avon's growth rate
had declined - like Microsoft's - to something rather
ordinary, between 15% and 20% per year.
What happened next?
"The destruction of the Nifty Fifty," writes Marc Faber,
"which followed in 1973 and 1974, was extremely severe...a
very large number of stocks...collapsed by 80% or more.
"After 1968, the U.S. stock market sold off until May 1970,"
explains Faber, "from where it rallied to a new high for the
Dow and the S&P 500 in January 1973...However, if we take
into account inflation as well as the more than 30%
depreciation of the U.S. dollar between 1971 and 1973, then
the high of the US market was not in 1973, but in 1968."
The false bottom of 1970 proved deadly. David Dreman has
pointed out that 150 money managers were asked to pick their
top five stocks for the coming year. Their favorites:
companies such as TWA, Polaroid, Burroughs and Levitz
By early 1973, some of the top picks had fallen by as much
as 60% and new choices were made. By the end of the year,
they were down a total of 67%. Polaroid lost a total of 85%
of its value. Levitz Furniture lost 95%.
Another way to search for bottoms is by looking at the
returns stocks give investors. Over the past 100 years, not
including dividends, investors have gained about 5.3% per
year. But, as Richard Russell explains, the Dow has given
investors an unusual rate of return of 24.6% for each of the
last five years.
Investors do not typically enjoy 24% annual rates of growth
just before hitting a market bottom. Instead, such growth
normally proceeds a top. The rate of growth you would expect
at a bottom would be negative. After a few years of negative
growth, you might expect stocks to hit bottom...and begin to
recover. After years of above-average growth, on the other
hand, you'd expect that they would top out...and slow down
to the 100-year mean.
Getting back to the mean now, Russell points out, implies a
one-year drop in the Dow of 54.6% or no Dow gains at all for
the next 16.3 years. Thus, you could expect the bottom
anywhere below Dow 5,000 - or, in the year 2016...whichever
With best wishes to you,
The Daily Reckoning:
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Last modified: April 01, 2001
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