*** Telecom debt...Bernie Ebbers - from hero to zero...
*** Alan spoke! The markets choked. And everybody's going
*** "Take a look at this," said Beth calling me over to see
the Nasdaq chart yesterday afternoon. "There goes my
*** The chart looked awful. After rising in anticipation of
Greenspan's speech...then hesitating as investors tried to
figure out what it meant...the line just seemed to fall
*** The damage was no worse than on a lot of other days, but
the disappointment was greater. Investors still believe they
are protected by the Greenspan Put...but the Fed chairman
refused to use it yesterday. Instead, he merely announced a
change of bias - from fighting inflation to fighting
*** The Nasdaq ended the day down 113 points. The Dow
slipped 61 points. Advances and declines were about
even...and there were twice as many stocks hitting new highs
on the NYSE as new lows.
*** Microsoft and Cisco both fell - and both to $44 and
change. Cisco is the only big tech that has not yet admitted
any weakness. It has never issued a profit warning and never
failed to meet or beat its earnings and sales targets. Cisco
remains the world's second most valuable corporation - with
a market cap of $300 billion. But the stock price is falling
anyway - and will probably go down much more before it comes
*** Amazon fell too - along with almost all the dot.coms.
AMZN closed at $18. Will the company survive? The dot.com
index fell 8% yesterday.
*** "I let myself down," humbly confessed WorldCom CEO,
Bernie Ebbers, recently. WorldCom's market cap was $150
billion a year ago. Now it's about $50 billion.
*** "Even in the twilight world of dot.com zombies," opined
the Economist, "it is hard to find many who have gone from
hero to zero quite as spectacularly as Mr. Ebbers."
*** And here's something interesting - the XAU, the index of
gold mining stocks, rose 3%. Investors are getting worried.
Not so much about inflation...but about solvency...the
quality of debt...and the integrity of the financial system,
generally. Gold may become more popular as those fears
*** "'Today my 16-year-old niece explained the wondrous
concept of compounding and the time-valued money to me',"
William Fleckenstein wrote on January 19th, 2000, quoting a
reader who'd written in illustrating life at the height of
the bubble. "According to my niece," his correspondent
continued, "her teacher assumed, that by investing in
`technology stocks,' that a `reasonable rate of
return' for the foreseeable future should be on the order of
50 percent annually." Those were the days, huh? (program
note: In an attempt to send 2000 off in style, The Daily
Reckoning will be featuring "Air Ball: Revisiting The Bubble
Blow-off" - Bill Fleckenstein's 9-part series plumbing the
depths of this year's stock market mania... check it out:
*** Margin accounts peaked out in March at $278 billion.
They're down to $219 billion now.
*** And even the trade deficit may have peaked out in
September at $33.7 billion. October's number was $33.2
billion. If the dollar collapses, as expected, the trade
deficit will fall too.
*** The dollar gave up a little more ground to the euro
yesterday. The euro, thought to be hopeless a month ago, has
risen nicely since then.
*** Oil fell 63 cents yesterday.
*** Asia is a mess. The Tokyo stock market is only a few
points above its record low of 1998 - more than 60% below
its high of 1989! Korea's biggest companies are on the verge
of bankruptcy - or already `in chapter'. And Taiwan no
longer publishes consumer confidence numbers - they're
thought to be too depressing.
*** The whole region suffers from the effects of monumental
debt, overcapacity, and bad investments. Could America be
hit with similar problems? Nah...don't worry about it.
*** The Industry Standard reports on what it calls "gadget
fatigue." Sales of consumer electronics are slumping. A
trade association notes that more new products will enter
the market between '98 and 2003 than in the entire history
of the industry. Who can keep up with all this stuff?
*** Sales of Winnebagos have fallen 23% during the most
recent quarter, compared to a year ago. Profits are off 18%.
*** Bianco Research says investors expect a quarter point
drop by the Fed in the first quarter of next year. But so
far, investors - and the Fed - have underestimated the
intensity and speed of the current slowdown. More than
likely, the Fed will act sooner...and more vigorously than
expected. That will be surprise number one. Surprise number
two? It won't work.
*** "The very quality that makes the stock market such a
good place to invest, most of the time," repeating my
quotation from Smithers and Wright's "Valuing Wall Street,"
"means that it has to be a lousy place occasionally. One of
those occasions is now." A quarter point won't make much
difference. Japan took its rates down to zero - and even
that didn't make much difference.
*** Mt. Vernon Square is coated in white this morning. The
snow has covered the patches of hard-beaten earth, and
cigarette butts... The Winter of Woe begins tomorrow.
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As most of the market has gone down - two very curious
stocks have gone up. Fannie Mae shares rose more than $3 on
Monday to close at $87.81. Both Fannie and her brother
Freddie Mac are at near record highs. Indeed, Fannie Mae
shareholders have realized a 41% gain for the year. Freddie
Macs owners have done even better - with a 45% boost.
The burden of today's letter - to come right to the point -
is that these two companies give us a glimpse into the
future, and it isn't very pretty.
The two companies are GSE's - Government Sponsored
Enterprises. They are neither fish nor fowl - neither
creatures of the free-market, nor purely bureaucratic
agencies...but monsters, half market, half politics (half
man, half beast you might say) whose effect on the nation's
economic future may be, well, monstrous.
"Fears of a U.S. credit squeeze have been growing," observes
the Financial Times, "amid mounting evidence that
corporations borrowed too much during the recent boom and
will have trouble paying back their debts."
Credit used to be controlled by bankers. The banks would
suffer through the credit cycle - alternately lending too
freely and then too miserly - and take their losses
according to their merits. Occasionally, following a period
of especially reckless lending, banks would go bust along
with their customers.
But something has changed. Now, "loans are mutating into
another form of tradeable paper," says the FT, "as fit for a
mutual fund or an insurer..."
Or a GSE!
Bloomberg reports that "Banks are selling mortgages,
possibly their safest assets, because their corporate loans
are going bad and aren't marketable." Banks need the money -
and they can sell their mortgages - to Fannie and Freddie.
Freddie Mac buys these bank-generated mortgages in bulk -
and is increasing its purchases at a 50% annualized rate.
Altogether, Freddie and Fannie - chartered by the federal
government to make mortgage money available to people who
couldn't otherwise quality - now own 40% of the entire $5.5
trillion U.S. mortgage market.
Those are the facts. They are readily available and, I
suppose, true. But the valuable truth is the one that is
harder to see: what do these facts mean?
"When Standard & Poor's measured exposure to the troubled
telecoms sector at leading global banks," continues the FT
article, "it found that none of them had anything near a
dangerous level of risk. A decade ago, a big bank might have
made commercial real estate loans equal to 80-100 per cent
of its tangible equity. Using information not available to
the public, S&P calculated that most leading lenders have
limited their telecoms exposure to about 8 per cent of
Telecom debt, S&P concluded, had been `atomised' - spread
across the global financial system. The same might be said
of mortgage debt. A local banker would succeed or fail, get
rich or go broke, on the strength of his personal judgment.
If he misjudged a credit risk, the loan would go bad and he
would suffer the consequences.
But now the loans are `atomised' - sold off to the largest
holders of mortgages in the world...carrying, between them,
debt paper equal to 20% of the nation's entire GDP.
If a mortgage goes bad, the banker who made the loan will
not be the one who suffers. Instead, the suffering will be
widespread. The risk, in other words, has been
collectivized. It has been removed from the shoulders of the
person responsible for it...and placed on those of
thousands, or millions, of equity holders.
It may eventually fall on taxpayers too - when the GSEs'
reckless lending finally catches up to them..
The risk is no longer that a bank or two will go belly
up...but that the whole financial system will go belly up.
More to come...
P.S. One of the more interesting debates among intellectuals
concerns the effects of the new information technology on
ideas. Most people expect the Internet, for example, to
allow thousands of flowers to bloom. Mass communications and
mass ideas are supposed to give way to millions of
This is consistent with the notion of Darwinian
specialization. Ideas, like life forms and businesses, are
supposed to evolve and become ever more differentiated,
specialized and sophisticated.
And yet, what we have seen is that increases in the division
of labor and knowledge seem to lead to collectivized
stupidity. Unable to form an opinion on the quality of the
meat they eat...nor on the quality of mortgage debt bought
by Fannie Mae... they turn to the mass-marketed and most
widely distributed ideas available.
Ideas, it turns out, are not immune to Metcalfe's Law. They
more widely they are taken up, the more value they give to
each holder. The more people who believed that the stock
market was going up, for example, the more it went up. And
the more people who agree with what you believe - the more
you are inclined to believe you must be right!
Uniformity, however, comes at a price. Vulnerability. When
everyone is in the same boat, a single leak can sink them
More on this too...as I get it figured out.
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Last modified: April 01, 2001
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