*** Losses in dot.coms as great as the S&L debacle...
*** Now what? The Dow and the Nasdaq both rose
substantially on Friday. The Dow was up 82 points by the
close of business. And the Nasdaq was up 144. Breadth was
unusually solid, too, with 2076 advancing stocks on the
NYSE, compared to just 816 declining issues.
*** But then, along came the Florida Supreme court...
tipping the balance of the election scales in Mr. Gore's
direction. Investors didn't seem to like it. Either they
didn't like the idea of a Gore presidency...or they just
didn't wait any longer to see who was going to be Mr. Big
in Washington. After hours, futures trading took stocks
down the equivalent of about 200 points.
*** But the U.S. Supreme Court also spoke up over the
weekend. Advantage: Bush.
*** And here we are...only 12 more shopping days until
Christmas...and still no President-elect...and no sign of
Santa's big bottom...
*** But the good times can't last. The Supreme Court is
threatening to end the election uncertainty...and Mr. Bear
may have quietly decamped for his holiday retreat over the
weekend. His departure would allow investors to fatten
themselves up over the holiday...providing even more
delicious and delectable targets when he returns.
*** "Sell me everything you have," invites James Cramer,
co-founder of TheStreet.com. Cramer says he's given up
managing money - and has no operational role at the on-line
publisher he helped set up. Cramer does not say if he is
buying shares in TheStreet.com. The stock sold for as much
as $60 a share a year ago. Now you can buy it for $2.50.
*** Mr. Cramer, along with most analysts and most
investors, still have faith in the Greenspan Put. They
believe the Fed chairman will lower rates next year - and
that this will set the market on an upwards course again.
Why that is unlikely...below...
*** So much is riding on Mr. Greenspan that the U.S. Senate
decided it had better keep him happy. By act of Congress,
Greenspan's salary was raised from $141,300 to $157,000.
*** Unemployment increased 0.4% in November - as expected.
Hourly wages increased to $13.94, or 4% for the last 12
months.
*** Ollie Curme, a venture capitalist with Battery
Ventures, predicts that losses from failed Internet
startups could total more than $150 billion - or about as
much as the S&L crisis. Both debacles had the same
cause...and both will come to the same bad end. Again, more
below...
*** The on-line stock site, VTO Report, tracked 215
Internet companies over a year. As of Nov. 30, the average
company had fallen by 93%. This makes companies such as
TheStreet.com and the Internet incu...bator, CMGI, about
average. CMGI has fallen 93% over the last year.
*** Analysts' estimates for profit growth for the 4th
quarter average 9.2%. This is the first time in 2 years the
number has been below 10%.
*** The dollar went down about 1% last week. Not a
spectacular crash - but probably the beginning of something
big. Meanwhile, foreign ownership of U.S. assets grew by
$207 billion in the 3rd quarter.
*** Maytag announced that it was cutting back on its e-
commerce efforts.
*** Gold fell to $275 on Friday...gold stocks fell too.
*** The Rockefeller Center is up for sale...the Chrysler
building too. The Rockefeller Center became the focus of
Japanese attention at the end of their boom in the 80s.
They bought it...and then sold it back after the bubble
burst in Tokyo - losing millions in the process.
*** What investment strategy worked over the last 11
months? Value! The Thornburg Value Fund rose 12.2% and has
been rated as #1 by Morningstar, for tax-adjusted returns
over the last 5 years.
*** "It's time to plant," said Mr. Deshais, our gardener
and keeper of the local traditions. We were watching a
beautiful full moon rise at about 5:30 in the after noon.
"But you can't plant anything now....it's almost winter," I
protested.
"Oh yes. It was St. Catherine's day last week," he replied,
adding a little rhyme, which went something like this:
"After the day of Ste. Catherine, trees begin to take
root." Well, okay, it doesn't rhyme in English...but trust
me, it rhymed in French.
And so, we dutifully called the local nursery...and soon
its owner, a Mr. Robin - a stout man wearing checkered
pants - came bob, bob, bobbin' along. We toured the grounds
with him making comments and suggestions, and then Mr.
Robin took his leave, promising to send over a proposal.
Like everything else about this property, the gardens are
now threatening to be a much bigger deal, and much more
expensive, than I ever imagined.
- "Lynn, I wanted to thank you for [your] efforts...
in the last couple of weeks the information [you
supplied] has produced a realized total of $23,210."
With Lynn Carpenter's F-O-X system, you'll be alerted to
early price volatility in stocks like American Express.
Lynn's readers bought bargain call options when the stock
was at $54.38...
When last week came to a close, the protagonist of our
story, Mr. Alan Greenspan, was widely credited with not
merely reversing the bear market on Wall Street, but of
saving Life As We Have Known It.
Life, as we have come to enjoy it, has been one long
continuous boom. Stocks have been rising since before the
Internet was invented - that is, for so long the memory of
man runneth not to the contrary. And the economy has
enjoyed its longest continuous period of growth in nearly
40 years.
In the few instances - such as the LTCM scare, the Asian
Currency crisis, and the Y2K worry - in which growth seemed
threatened...Mr. Greenspan and his fellow central bankers
provided the necessary grease to keep things rolling along
smoothly. And thus, only a cynic or a crank (or a sourpuss)
would gainsay Mr. Greenspan's power of lubrication now.
Millions of investors are counting on The Greenspan Put -
as traders refer to the Fed chairman's power to slather
liquidity onto the economy's moving parts. Investment and
business strategies...even vacation and retirement plans...
rely on Mr. Greenspan to such an extent that he has come to
assume a god-like stature. Not long ago, Fortune Magazine
ran a cover story called "In Greenspan We Trust."
So, today, we continue our story...keeping in mind my
dictum that people get from the markets not what they
expect, but what they deserve.
Will our hero, Alan Greenspan, succeed in keeping the bull
market/growth economy alive? Will he manage the `soft-
landing' that he hopes for? Will the Greenspan Put be in-
the-money at the crucial hour?
Or, looked at another way - will this story turn out to be
a comedy, or a tragedy? In the interest of economizing your
time, dear reader, I will flip ahead to the end: Mr.
Greenspan will fail. The story will turn out to be neither
tragedy nor comedy, but farce.
The mechanism by which the Federal Reserve influences the
economy and the markets is complicated, but the concept is
simple. The central bank can either make money easier to
get or harder to get. An increase in the fed funds rate,
for example, makes it - all other things being equal -
relatively harder to borrow money.
In a perfect world, prevailing interest rates operate as a
kind of speed governor on the economy. At any given time,
people contemplate all manner of spending. A concrete
merchant imagines adding new mixer trucks to his fleet. A
couple dream of a winter cruise in the Caribbean. In both
cases, the significant calculation can be reduced to 2
questions: what will it cost...and what will it return?
The return on consumer spending tends to be unquantifiable,
so consumers focus mostly on the first question: how much
will it cost, which begs the corollary, can I afford it?
The higher the interest rate on the borrowed money - the
more expensive the vacation becomes.
Businessmen, on the other hand, can look ahead at the
likely financial return on borrowed money. If the return
exceeds the cost of funds - with a margin for error - it
makes sense to borrow and spend. Thus, the lower the rates,
the more projects make sense and the faster the economy
moves ahead.
Markets, however, have a kind of perverse complexity. What
really concerns people is not the nominal rate of return -
that is, the rates as persuaded by Greenspan & Co. - but
the real rates.
An economist named Pigou once noticed that "people's
spending habits are influenced not only by how much they
are earning, but also by how wealthy they feel." He was
describing what is known today as the 'wealth effect'. The
insight may be broadened to the realization that when
people decide whether to borrow and spend, they look at the
effects in the widest way they can.
The real cost of borrowed money has been phenomenally low.
You might have borrowed $100,000 in 1982, put it into Dow
stocks - and today, you would have about $1,000,000 in
stocks, and owe less than half that amount, including
compound interest, on the original loan. For nearly 20
years, the real cost of borrowed funds - when the money was
put into stocks - was about minus 8%. It paid to borrow.
The more the merrier.
Venture capitalists raised money from investors - and often
borrowed money too. But in the hey-day of IPO fever, they
earned as much as 1,000% profit. The cost of the borrowed
funds was negligible.
Of course, when you give away money - you have to expect
people to take it. Consumers mortgaged their homes, spent
some of the money on themselves...and invested the rest in
stocks. With such low real rates, they could spend up to
half the borrowed money on new cars, houses, vacations -
whatever they wanted - and still come out even over time.
Publicly traded businesses, too, found that they could
borrow obscene amounts of money - the telecoms, for
example, took up 40% of all newly issued bonds between '97
and `99...Amazon.com alone borrowed $2.2 billion, even
though it still has no proven business model. For a while,
it seemed as though the more they borrowed, the higher
their share prices went. Investors seemed to care only
about growth and momentum, not about credit quality or
balance sheets.
Even speculative junk - at the peak of the Information Age
mania - was taken up with coupons as low as 7.5%. Investors
were blind to risk - even from the shakiest borrowers and
the most absurd business plans.
Bloomberg reports that U.S. investors, for example, just
lost $75 million of commercial paper seized from Demirbank
- a Turkish bank in the Caymans. The Bank of America, which
can't seem to resist a bad loan, had issued a letter of
credit.
Even in the 3rd quarter of this year, debt was still
increasing - by $414 billion of 'total market debt'
compared to an increase of $390 billion in the 2nd quarter.
But eventually, investors stop worrying about the return on
their money and begin to fret about the return OF their
money. Dodgy stocks and bonds fall. Junk bond yields soar.
The cost of credit, for unproven or questionable projects,
rises to 20% and more...and then disappears altogether. And
for good reason; investors need to be compensated for the
risk they run. Moody's projects that one out of 10 junk
bonds will default next year.
This is the point where we find ourselves today. Credit,
which was very cheap and very abundant only a few months
ago has suddenly become expensive. The average junk bond
has fallen 10.85%. A bond buyer, using borrowed funds,
would have a real cost of funds exceeding 18%. An investor
who mortgaged his home in March of 2000 in order to buy
tech stocks paid an effective interest rate - over the last
9 months - of greater than 50%. His stocks probably fell at
least 50%...and he probably pays an additional 8% or so on
his mortgage.
Ed Yardeni is still confident, though. He believes our
hero, Alan Greenspan, has the weapons he needs to defeat a
credit crunch. "There are 650 basis points between the fed
funds rate and zero," says he, pointing to Mr. Greenspan's
ammunition belt.
But real rates have gone from minus 8 percent to
plus...what...plus 20%...30%...50%?! And there are 900
basis points between Treasuries and Merrill Lynch's high
yield index. Mr. Greenspan will be outgunned.
Your correspondent
Bill Bonner
P.S. Several readers have asked, "Why do you live in
France?" Tomorrow: an introduction and an explanation.
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