*** Stocks off on Friday...Stockbrokers off Today
*** A Lot More Supply Coming on the Market
*** 'Ledgerdemain' in Washington
*** Friday, the S&P futures opened up -- as has been
their habit. But the market went the other way...closing
down, as has been its habit.
*** The Dow fell 24. The Nasdaq fell too -- but so
little it is not worth recording.
*** Advancing stocks beat declining ones -- 1493 to 1351.
But new lows far out--paced new highs -- 98 to 38.
*** So, not much happened on Wall Street...but it is a
holiday weekend. Volume was very low.
*** At the beginning of last week, Alan Abelson of
Barron's reminded us of the "Q" ratio -- that is, the
relationship between the value of the stock market and
actual corporate net worth, or replacement cost/book
value. "To cut to the chase," writes Abelson
impatiently, "...q tell us right now that, the market is
more euphorically priced than at any time in
history...[and] indicates that the present downside risk
is that the Dow Jones Industrial Average will decline to
between 4000 and 4500."
*** By the end of the week, the markets were moving in
the direction Abelson and q suggested they should -- with
a more stocks falling than rising...many more hitting new
lows than new highs...and the indices almost all down.
The Dow fell 3% over the week. The S&P dropped 2%. And
the Nasdaq was down 5.7%.
*** The Nasdaq decline may be explained, and further
anticipated, simply by the increase in supply coming to
the market. Bradley Alford, who provides a service
called IPO Lockup.com, reports that 2.8 billion shares,
worth about $121 billion, came onto the market in May.
In June, the total is expected to be 1.3 billion shares,
with a market value of about $40 billion. These are
shares that were previously held off the market --
restricted, or "locked up," for a period following the
IPO. These are shares that owners may have gotten for
pennies on the dollar. Many of them will almost
certainly be sold -- even at much lower levels.
*** The euro looks a bit healthier -- having risen
slightly on Friday. Perhaps this is not so much a
comment on the euro as on the dollar. If faith in
America's miracle economy and its levitating stocks
disappears -- so does the value of the dollar.
*** Higher interest rates are "hurting the rest of the
world more than [the U.S.]" said Ed Yardeni. He believes
capital will continue to flow to the US and its currency
-- thanks to Fed tightening.
*** As we know, raising the cost of capital � point has
no effect on investors who expect to earn 20% per year on
their money. And it has no effect on companies whose
sales are negligible and whose own cost of capital is
zero. But even a quarter of a point has a significant
impact on the rest of the world.
*** Homes sales, for instance, are off 6.2% March to
April, and down 6.9% from the same period a year ago.
And there are a few anecdotal references to real estate
prices topping out in the S.F. Bay area.
*** A few points make a difference to institutions with a
lot of debt. The US Federal government, for example.
Thanks to the 'ledgerdemain,' to coin a word, of the
clerks and the mendacity, to use an old one, of the
politicians, it is widely believed that the US will be a
debt--free nation in 2013. Actually, total debt will
increase by 21% by that time, but the debt holders will
change. There will be fewer private holders of public
debt, and a lot more debt in the hands of the Social
Security administration.
*** "The operating surplus in the US federal budget was
$450 billion," according to H. Erich Heinemann, reporting
in Barron's. The trouble with that is... "A spike in the
federal operating surplus has preceded every US recession
since World War II."
*** And I see Barron's has picked up on a theme I've
talked about here frequently. Remember the "Esperanto
currency?" Barron's labels it the goulash currency (taken
from our own contributing editor, Rick Ackerman):
"...blending so many politically and culturally disparate
elements makes for an unappetizing stew prepared by too
many cooks."
*** Tolstoy said that all happy families are the same.
But I can't imagine that there is another one like ours.
In fact, our family is not even like itself. That is,
the family one week seems completely different from what
it was the week before. It is always like a screw--ball
farce of the 30s and 40s...with the actors coming on
stage in some state of desperation, panic, or madness.
But the plot changes from day to day -- and so do the
characters.
*** Maria, who used to be such a darling -- and had me
wrapped around her little finger -- has changed her role.
What is it about teenaged girls that causes them to lose
their sense of humor -- at least while they are in the
company of their parents? Everything is a crisis. Every
event is a cause for despair. Every comment is either
stupid or insulting.
*** Well, she probably still has me wrapped around her
little finger -- but the position is not as comfortable
as it used to be.
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Early in the 20th century a forgotten politician, Arthur
Balfour, surprised England by stepping down from the
leadership of his party. When asked why he had done so,
a colleague replied on his behalf:
"Mr. Balfour says that there was an Ice Age once, and
there will be one again."
You may recall the quotation from Oskar Lange which
graced my letter from Friday. I will repeat it, but this
time with a slightly different point in mind:
"The system of free competition is rather a peculiar one.
Its mechanism is one of fooling entrepreneurs. It
requires the pursuit of maximum profit in order to
function, but it destroys profits when they are
pursued by a larger and larger number of people."
A man makes a fortune in a dot.com business. Soon, a lot
of men and women are trying to make their fortunes with
dot.coms. Whatever profit margin might have been enjoyed
by the first is soon competed away -- regressing to the
mean. Once it has reached its mean, a simple, rational
market would stop. Why should the dot.com business
produce any lower -- or higher -- profits than any other
business?
But the world is neither simple, nor rational. What's
more, it is subject to epochal trends. Anyone who has
ever had a teenaged daughter...or been in the same room
with one...will need no further proof of this statement.
Every emotion is exaggerated. Every triumph -- and every
setback -- is amplified to the point where it is life--
threatening. Ice ages come every week.
The conditions that were so fecund and flattering to
dot.coms -- and the rest of the stock universe -- seem
to be changing. Dot.com and new tech IPOs are no longer
assured of a favorable reception. Recent buyers of new
economy stocks -- of even such mammoth, and celebrated
IPOs as AWE, the wireless wonder -- have lost money. In
fact, anyone who bought MSFT in the last 18 months is now
in a losing position. The dot.coms have reached their
teenaged years.
This is not merely because free competition destroyed the
profits of the TNT companies. It also destroyed the
profits of investors. Over the last decade, millions of
new investors came into the stock markets. Like the
companies whose stock they bought, as the number of
pursuers increased, the amount of profits each could
catch fell.
The whole process of starting companies and funding them
seems to have many of the same elements as raising
children. Both require incredible faith -- if not actual
self--delusion, as Lange suggests. Entrepreneurs,
investors and parents expend excessive amounts of time,
effort and money -- almost certain to be frustrated.
There are, of course, beneficiaries of these efforts.
Joseph Schumpeter, famed economist and perhaps a parent
too, noted that technological innovations do benefit
society -- by lowering prices, improving quality, and so
forth. But the outsized profits expected by investors in
the new innovations, like the outsized hopes they have
for their children, usually fail to appear.
One contributor to the massive influx of new investors
has been the idea that no special expertise is required
to make money in stocks. You may recognize this as a
vulgate version of the Efficient Market Hypothesis -- or
EMH -- which holds that, over time, all investors get
about the same rate of return.
This produced the notion that a completely ignorant
newcomer to the stock market should do about as well as
Warren Buffett or George Soros. And in the perverse way
of the world, and markets, over the last few years the
amateurs not only did as well -- they did better.
The amateurs' money flooded into the market. The
resulting tide of cash raised all the boats. But not all
alike. The heavily--laden, value--oriented "Old Economy"
stocks rose grudgingly, while the hollow, helium--filled
offerings of the "New Economy" positively floated on the
air itself.
"The market is high," wrote best--selling author Robert
Shiller in Irrational Exuberance, "because of the
combined effect of indifferent thinking by millions of
people, very few of whom feel the need to perform careful
research on the long--term investment value of the
aggregate stock market, and who are motivated
substantially by their emotions, random attentions and
perceptions of conventional wisdom."
The conventional wisdom has two tenets: Hold stocks for
the long term. And buy the dips. Of course, the two are
contradictory, but who's going to quibble with the logic
that, until recently, produced such spectacular rates of
return?
And as long as the market is rising -- that is, as long
as the self--delusion and cash of the amateur investors
holds up -- these convictions pay off. Too bad they
can't last forever. Not only that, but as they
reverse...the same amateurs who bid them up to absurd
levels are likely to sell them down to equally absurd
levels. Extraordinary profits will give way to
extraordinary losses.
If only nothing ever changed! If only Maria could remain
an adorable little 12--year--old forever...and stocks
would rise until the end of time -- or at least through
the next presidential election cycle.
But that is not the way the world works. Ice Ages come.
Teenagers and bear markets happen.
Your humbler and humbler correspondent,
Bill Bonner
P.S. Today's Memorial Day. The markets are closed. I'll have
more to say about this holiday tomorrow.
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