*** The "Turnaround Tuesday" that didn't turn around
*** Best stock on the Dow?
*** "I'm just hiding under my desk..."
*** Yesterday was supposed to be a "turnaround Tuesday."
After four days of falling prices on the Nasdaq, the
strong rally late on Monday suggested that the bull was
ready to come back to the party.
*** But nope. This bull seems exhausted. The Dow fell 120
points yesterday. The Nasdaq was down 199 points -- or
nearly 6%. And the Nasdaq 100 fell 241 points -- or 7.4%.
*** The Nasdaq alone lost capital value of about $300
billion. This is, I believe, what gold has been trying to
tell us -- that a meltdown in equity values will deflate
the economy and the money supply.
*** Bonds seemed to get the message yesterday -- rising
slightly. No one can say, of course, what will happen to
stock prices. I expect them to go a lot lower. But why
worry about it? You can get a yield of 9% on AngloGold.
RJR, the big cigarette maker, has been beaten down so low
that it sports a dividend yield of over 12%. And even
muni bonds will bring you almost 10% after tax.
Historically, the real return on stocks is less than 5%
annually. What is the likelihood that this market will
rise more than 10% in the year ahead? Who knows? But it
seems much more likely that it will fall 10%. The Nasdaq
is already down 22% for the year.
*** The Dow, the S&P and the Nasdaq are all now below
their 200-day moving averages. And Wells Capital
Management reports, in "Barron's," that 81.5% of stocks
on the NYSE are below their '97 peaks...for the S&P the
number is 59.7%.
*** There were 1,336 advancing stocks yesterday, 1,576
stocks declined. And 29 hit new highs while 88 hit new
*** I've been warning you to watch out for the big tech
and Net companies. The little ones -- well, who knows
what they'll do? But the big cap techs have been doomed.
You cannot compound big numbers for very long...you run
out of space. These giants had to run out of market
potential long before they could reach earnings large
enough to justify their high stock prices.
*** CSCO and AOL both dropped near $50 yesterday. ORCL
and MSFT both dipped around $63. And AMZN drifted further
down the river of no returns -- passing the $46 mark
*** "I think people are just looking for any excuse to
sell tech stocks," said one hedge fund manager. Another
who wished he had sold, Robert Loest, portfolio manager
of IPS Millennium and New Frontier, said, "I'm just
hiding under my desk, sucking my thumb." His two TNT-
laden funds were down 24.3% and 34% respectively in the
last three months.
*** Meanwhile, Michael Shaeffer, whose beat is penny
stocks in the natural resource sector, has located a
company whose share price has risen dramatically -- up
500% -- since November. See "Techs Down, Natural
Resources Up" (http://www.dailyreckoning.com).
*** Productivity growth in the 11 countries of the EU is
at a 25-year low. And only 60% of the working age
population have jobs. A "Forbes" article blames European
reluctance to adapt new technologies. Citizens in EU
countries have fewer computers, fewer phone lines and
fewer cable television subscriptions than Americans.
*** But I doubt Europe's sluggishness has anything to do
with technology. Instead, the drag on economic growth in
Europe is of the old-fashioned kind -- taxes and
regulations. The absence of phone lines might actually be
a benefit. There is an amusing headline in this week's
"Time" -- "Wireless Shrugged." I didn't have the patience
to try to figure out what the article was about...but the
headline makes sense. Online, plugged-in and connected
all the time...some guys have the newer type of
cellphone, with just a small microphone in front of their
mouths. They walk through airports apparently talking to
themselves. People today must have a lot of important
issues on their minds. Or else, immediacy provides an
illusion of urgency...which provides an illusion of
*** Including his bonus, John Chambers, 50, made $121
million last year as the CEO of Cisco systems. After five
years in the job he is the fifth highest paid CEO in the
*** Today, by the way, is the anniversary of the
beginning of the "Victorian Internet." On this day in
1844, Samuel F.B. Morse sent his message, "What hath God
wrought," from Washington right here to Charm City,
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market goes down as you can when it goes up? You can when
you pick the right company. Doug Casey tells you how to
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profits for you. To get this latest addition to our
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"How...can you think and hit at the same time?"
Thinking can be hard work. But there's a time to do the
hard work of thinking. And a time to swing.
The last few years were a good time to swing. Thinking
didn't help investors. Thinking caused investors to
compare the market multiples to those of previous
eras...to look hard at the earnings that TNT (tech,
Internet and telecom) stocks were likely to produce...to
reflect on how manias begin and how they end.
A thinking investor back in 1996 would have or should
have come to the conclusion that TNT stocks were too
expensive. He would have stayed out. And he would have
missed a huge opportunity to make money. Last year alone,
the Nasdaq rose 80%.
That is the trouble with the real pros in a manic market.
They can't stop thinking...comparing...analyzing. They
are paralyzed by it -- and unable to step up to the plate
And that is why the amateurs did so much better. No
historic ratios intruded upon their thoughts as they
bought Qualcomm or Oracle at hallucinogenic levels. No
memories of bear markets complicated their decisions. Not
even the fear of margin calls or the knowledge of the
credit cycle disturbed their nights. They slept the sleep
of innocents, dreaming of the riches that awaited with
the morning light.
Napoleon noted that there were at least two jobs that
amateurs did better than professionals -- prostitutes and
generals. To that short list, I will add investors -- at
least in a Big Momentum market.
I am still recounting the story of the Battle of Britain,
the crucial events of which happened almost exactly 60
years ago. For 80 days, from May 10 to July 31, 1940,
Hitler and Churchill fought for control of Western
Europe. Both were professional politicians, but amateur
generals. And both stepped up to the plate swinging.
This was the difference between Churchill and
Chamberlain, and most of the rest of the English War
Cabinet. Apart from Churchill, the English wanted to
think, to talk, to analyze. Churchill, who had already
done his thinking and made up his mind, was ready to
fight. Once engaged, Churchill scarcely ever thought
again. That is, he never reconsidered his fundamental
position. Instead, he thought only about how he would
bring it to fruition.
In this respect, the Soros/Druckenmiller hedge fund team
might have learned a valuable lesson. Few people did more
serious thinking about markets than they. In the early
part of 1999, they had come to the same conclusion about
TNT stocks that has long been expressed in these letters
-- that they were overpriced. Soros and Druckenmiller bet
heavily against the TNT sector in the first half of the
year, only to lose 20% of their funds.
Then they began thinking. They decided to reverse course.
They brought in Carson Levit who, as the report in the
"WSJ" puts it, "didn't mind paying sky-high prices for
tech stocks." Mr. Levit recalls that in the eight-hour
interview, Mr. Soros "looked at me like I was a sort of a
Levit was hired by Soros and soon had replaced the Old
Economy stocks in the fund with New Economy ones. Some of
his picks were great successes. VeriSign was bought at
$50 and rose to $258 by February 2000. "This is insane,"
said Mr. Druckenmiller, commenting on the action of one
of these stocks.
Both Soros and Druckenmiller were right. Levit was a nut.
And the stocks he bought were insane. But 500% gains are
a hard habit to give up voluntarily. And soon, Mr.
Druckenmiller had joined the Levit camp. He, too, had
become a nut -- believing, against all his training,
experience and professionalism -- that insane prices
would become more insane. After VeriSign had risen more
than fivefold, Druckenmiller stepped up to the plate and
bought more. He had become an amateur.
But neither markets nor battlefields reward amateurism
all the time. 1999 was a good time to be an amateur in
the TNT sector. 2000 was not. In a few weeks, VeriSign
began to fall. Soros warned him that "VeriSign is going
to kill us." But Druckenmiller, who was heavily
leveraged, held on. The stock then fell below $100.
On April 18, Druckenmiller resigned.
Churchill was an amateur general. Some of his plans were
harebrained and foolish. He proposed, just before
Dunkirk, to try to keep a beachhead of British troops in
western France (which would have provided the Germans
with something else to demolish). He then suggested that
France and England form a political union, to forestall a
unilateral French capitulation. "Fusion with a corpse"
was how Petain put it contemptuously.
But Churchill operated within a gradualist, consensus-
oriented group. His personal power was limited. His worst
ideas were beaten down immediately, while his fighting
spirit...his willingness to swing at the enemy...were
"We shall fight on the beaches," declared Churchill, with
celebrated grandiloquence, "we shall fight on the landing
grounds, we shall fight in the fields and in the streets,
we shall fight in the hills; we shall never surrender..."
His opponent, on the other hand, had eliminated most of his
internal opposition. He had made himself into a dictator,
whose ideas, no matter how foolish, were implemented.
At the beginning -- in May 1940 -- His opponent's amateurism
seemed to pay off. He took risks his generals were
fearful to take and realized insane success. But the
early success only fortified his opponent's faith in his own
instinctive abilities. He was like a new stock picker
whose first selections go up. He believed himself a
genius. But amateurism only succeeds in a bull market. As
the war continued, his opponent's mistakes were magnified,
unrestrained and, eventually, fatal.
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Last modified: April 02, 2001
Published By Tulips and Bears