*** Worst month for the Nasdaq in 13 years...earnings
estimates lower...
*** Is there a Big Bottom around the corner? Or a Big
Bankruptcy?
*** Investors, gurus - still bullish...the Return of the
Naughty Vicar, in drag...'Chaos' on the streets of
London... and more!
*** Friday was not a bad day for Wall Street. The Dow fell
off a bit. Still, more than twice as many stocks rose as
fell on the NYSE...and there were more highs than lows, 101
against 93. The Nasdaq even managed to rise a little - 47
points.
*** But November was the worst single month for the Nasdaq
in 13 years. And last week alone took the index down nearly
9%.
*** For the year, the Nasdaq is down 35% - and it is almost
50% below its March high. Many Nasdaq stocks are down even
more, of course, especially the dot.coms, which seem to be
facing not merely a cyclical downturn in technology - but a
mass extinction.
*** Since October 1st, 4th quarter earnings growth estimates
for techs have fallen from 29% to 14%. Altera said it
expects no growth.
*** The Dow, meanwhile, has held up reasonably well. It
dropped less than 1% last week - and has lost only about 9%
for the year.
*** Probably a better measure of what ordinary investors
are experiencing is Investors Business Daily's Mutual Fund
Index. It's off 17% for the year.
*** Hope springs eternal: The Nasdaq decline "does not come
close to the '29 crash," notes a Reuters report, "which
took stock down nearly 90% over a 3 year period."
*** Of course, there's nothing to stop the Nasdaq from
falling for the next 3 years either. But investors have
faith in the master magician of the Fed, Alan Greenspan. If
unemployment numbers become significantly higher...and
other signs point to a slowing economy...it is believed
that the Fed will come to the rescue. Greenspan is
scheduled to speak tomorrow.
*** But what can the Fed do? They can make more money
available. Will that do the trick? Maybe not... more
below...
*** "With over $80 trillion in derivatives out there," says
Gary North "and hot-shot managers who have never seen a
major recession, the risk of collapse is there. In any
case, all talk about `Dow 15,000,' let alone 20,000+, is
whistling in the dark. These whistlers did not tell
investors to get out of the dot.coms last February or early
March. They did not foresee a fall of 50% in the Nasdaq
index. They do not foresee falls. They only foresee
increases." (see: The Return of the Politics of Plunder
http://www.dailyreckoning.com/body_headline.cfm?id=804)
*** The American Association of Individual Investors' has
released a poll showing that investors are actually
becoming more bullish - with 60% expecting rising
prices...against only 17% bearish. Investor's Intelligence
reports that 55% of newsletter advisors are bullish while
only 29% are bearish. And another Reuters reporter noticed
that "there is a growing conviction that a bottom is not
far away."
*** But Big Bottoms don't usually appear until people stop
looking for them. Prices don't stop falling, that is, until
investors begin to think they will never stop falling. Just
as the top arrived just at the time investors began to
think that there was no limit to how high stocks might go,
the Big Bottom will not make its appearance until investors
begin to believe that there is no limit to how far they
will fall.
*** "We don't see the capitulation or the give-up that's
necessary to create a real bottom," writes William
Fleckenstein. "Believe me, after a rout like this, when
it's the bottom no one will know it for sure and folks will
be scared to death - at least that's what I'm expecting.".
(see: Are we there yet? Don't bet on it.
http://www.dailyreckoning.com/body_headline.cfm?id=802)
*** And before the Big Bottom arrives investors will shift
from worrying about the return ON their money to the return
OF their money. That's right, we will have another Big B to
endure first - Big Bankruptcies. Personal filings are
expected to rise 15% per year. But that figure assumes the
economy and the stock market do not get much worse. If
stock prices and the economy continue to deteriorate - as I
think they will - the number of bankruptcies could rise by
more than 20%.
*** Junk bonds are going bad at a 5% rate already. 3.3% of
syndicated loans are in trouble. According to Bloomberg,
Janus is dropping $1 billion a day in assets. But there's a
lot more to come. Between '92 and 2000, financial sector
debt rose from $3 trillion to $8 trillion. How much of this
debt was applied to profitable activity? How much of it
will go bad? We will find out soon enough.
*** Ominously, as the amount of debt rose, so did foreign
holdings of U.S. assets - rising from $3 trillion in '92 to
almost $7 trillion today. This figure didn't matter as long
as the dollar was rising and the U.S. was thought to have
the `miracle' economy.
*** But the euro rose for the fifth straight session on
Friday. It began the week at 83.80 cents and ended it as
87.90 cents. The dollar, like tech stocks, has entered a
cyclical bear market. This, dear reader, marks the end of
the world as we have known it. About which...again, more
below.
*** The Swiss franc rose 5% against the dollar last week.
*** Gold fell on Friday. So did oil. More signs of
deflation...
*** From DR reader LA: "The Bible is way ahead of all of
us. King Solomon says in Ecclesiastes 1:18, "For with much
wisdom comes much sorrow; the MORE KNOWLEDGE, THE
MORE GRIEF." In the New Testament the Apostle Paul writes:
"...We know that we all possess knowledge. KNOWLEDGE PUFFS
UP, BUT LOVE BUILDS UP. The man who thinks that he knows
something does not yet know as he ought to know..."
(First Corinthians 8:1-2)
*** My daughter, Sophia, and I took the train last night
from Paris to London. The train was packed. And London's
hotels are packed too. London is booming. Even late at
night on a Sunday, Leicester Square is mobbed with people.
They've even set up a few circus attractions - including a
ride that looks lethal, called the Chaos. A notice warns
that it is not for people with heart trouble. Sophia, of
course, wanted to try it. I was happy to watch as the
lights flashed and she whirled overhead.
*** I'm pleased to see that that staple of the British
press - the Naughty Vicar - is back in the news. Page 5 of
the The Times tells readers of the Rev. Carol Stone,
formerly the Rev. Peter Stone, making a comeback to St.
Philips Church in Swindon. This story edged out Gore's
election battle by 7 pages and includes a loud observation
by one of the Rev. Stone's parishioners. An elderly woman
interrupted the service with this remark: "You are the work
of the devil. Go to hell."
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 chronicled 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.
"How can wealth actually be destroyed during a bubble?"
asks Doug Noland. "Well, through massive overspending in
projects of little economic value - either through over
investment or malinvestment. "
As I have observed with tedious regularity, no one can
predict the future. But sometimes if you look hard enough
at the present, the future seems to come into focus.
For example, there are occasional reports in the newspapers
of people who do exceptionally dumb things. Every year, the
"Darwin Awards," for example, pay homage to these people -
recognizing their selfless contributions towards cleansing
the human gene pool.
One posthumous award recipient pulled the trigger on a
handgun while simultaneously peaking down the barrel - in
order to see what might be going wrong...another leaped
from a tall building convinced that he could fly. In either
case, you did not have to be a clairvoyant to guess what
might happen next. All you needed was a rudimentary
knowledge of physics...an awareness of gravity...and
perhaps an appreciation of the law of perverse outcomes.
Likewise, guessing about what might happen next in the
stock market and the economy may not require a glance into
a crystal ball. A glance at what is happening now may be
enough.
"Historic overspending in technology manufacturing capacity
- from PCs, to routers, to semiconductor chips - has
created a situation of debilitating over-capacity,"
continues Mr. Noland. "And while the boom was fun and games
while it lasted, now that enormous capacity has come on-
line and growth has inevitably slowed, there is the sudden
and harsh reality that there is too much competition and
profits for no one. "
Staring at the situation, as though down the barrel of a
gun, the U.S. investor and consumer are looking at trouble.
As reported above, financial debt increased from $3
trillion to $8 trillion from '92 to present. Where did that
money go? Did it get invested in new plant and equipment?
In new, profitable businesses? In new activities that add
to America's wealth and quality of life?
Some of it did. But much - probably most - did not.
Instead, consumers used debt to increase their standards of
living beyond what they could afford from higher earnings.
Businesses invested fortunes on mergers, stock buybacks,
and Information Technology. Of the three, only the
information technology has the potential to increase output
- and the evidence suggests that it will not.
Even where investment was put to fairly direct expansion of
existing successful business models - excess credit
produces grotesque consequences.
"The U.S. movie cinema industry provides a much more
straightforward example," Noland explains. "For too many
years, unlimited credit was available to many operators
who, not surprisingly, were more than happy to take the
money and build with reckless abandon in communities
throughout the country. Think of this example: if a small
community has, let's say, two cinemas, then both will
likely operate profitably and service the debt burdens from
business cash flows. If, however, a speculative financing
environment allows four new (megaplex) cinemas to be built,
it is quite likely that not one of the six cinema operators
will operate profitably. So, not only will the debt taken
on to build the four new megaplexes be unserviceable, the
ill-advised lending will also make the once sound debt of
the original two operators unmanageable as well. The costs
of credit excess are clear in this realistic example:
wasted resources and problematic credit losses for the
lending community."
"In an unfortunate situation that is all too commonplace in
our economy, the inevitable costs are now to be paid for
what has been nothing short of an absolute lending fiasco
in the movie cinema sector. Thus far, seven cinema
companies have filed for bankruptcy - Carmike Cinemas,
General Cinemas, United Artists, Edwards Cinemas, Silver
Cinemas, Resort Cinemas and Mann Theaters. Regal Cinemas,
the country's largest operator, stated last week that it
was considering filing for bankruptcy protection. Last
month, the 3,000-screen Loews Cineplex announced, `if the
company is unable to arrive at a longer-term plan to
address its liquidity issue, it faces the prospect of a
restructuring under bankruptcy proceedings.' Loews is
currently negotiating with bankers over a $1 billion loan
due next week, attempting to forestall bankruptcy filings."
We have no crystal ball. Nor even a ball of common glass.
But it would not surprise us here at the Daily Reckoning if
what was true in the movies was also true in many other
parts of the economy.
The dot.coms are disappearing leaving barely a chemical
trace of the billions of dollars spent. More than $3
trillion has already evaporated from the capital markets.
Like morning dew, it has been taken up into the heavens and
won't be seen again until the next spin in the credit cycle
rains down liquidity once again.
How soon will that be?
Wall Street will be unusually quiet tomorrow, as the Street
turns its ear in Mr. Greenspan's direction. If the economic
news is bad - high unemployment, falling sales, fewer new
homes - the Street will take it as good news, and count on
the Fed chairman to his duty and cut rates.
But will lower interest rates fill the over-built
cinemas... and send businesses and consumers scurrying to
borrow, buy, and invest again?
More on this tomorrow - why Greenspan's lower rates will
not work...and why the falling U.S. dollar means The End of
The World As We Have Known It.
Your humble correspondent,
Bill Bonner
P.S. In today's Financial Times a headline informs us that
the "Japanese Fail to Kick Start Economy." For ten years,
the Japanese have been trying `kick start' their economy.
If it were so easy to start the motor of economic
expansion, you'd think they would have figured out how to
do it in the country that produces so many millions of
Hondas, Toyotas and Mitsubishis.
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Last modified: April 01, 2001
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