*** What, do they make up these numbers? I'm referring to
the CPI, which came out yesterday. The market expected an
increase in the core rate of inflation of 0.2% -- and
that's what it got. But how?
*** "The BLS (Bureau of Labor Statistics) must have
conducted the CPI survey in La La Land," said an item on
Bloomberg. "Fraudulent" is how Bill King describes the
*** BLS had natural gas rising 0.7% in May, and gasoline
prices supposedly fell 3.5%. If they fell, only the BLS
noticed. The Dept. of Energy said gasoline rose more than
10% in the same period. Gasoline prices are now at record
levels. And natural gas futures rose 40% while the BLS has
the gas itself up less than 1%.
*** Investors didn't seem to know or care. Stocks rose and
fell, higgely-piggely, with no destination in mind. The Dow
ended the day up 66. The Nasdaq ended down 53.
*** But gold seemed to know where it was going. The yellow
metal rose a stunning $6.10. August contracts closed above
$290...which, if I recall correctly from yesterday, Harry
Schultz said would be confirmation of a bull market.
*** And while gold got harder, the dollar got little
softer. Don't be surprised if you see a lot more of this
*** The dollar, you will remember, depends on the
willingness of global investors to keep financing
Americans' spending spree, which has reached epic
proportions. "On a net basis," Alan Abelson reports in
Barrons, "Europeans alone have bought over $33 billion
worth of U.S. equities" so far this year. They only bought
$46 billion in all of '99.
*** Meanwhile, Americans keep pouring money into mutual
funds. On a net basis, $154 billion has gone into the funds
so far this year.
*** But even this flood of money cannot seem to raise the
general level of stocks. The Dow is lower today than it was
a year ago. The smart money is draining out the hose.
Insiders are selling out - like Dr. Koop, the former
surgeon general, who sold stock in his dot.com start up
while it was still worth something.
*** Investors Business Daily's index of mutual funds shows
equity funds producing a return of only 3% this year. That
is not going to be enough to feed the meter. Whether people
are investing borrowed money, or savings, the market will
have to do better than that...or the money will go
*** The meters of DrKoop.com and many of the other Internet
companies are almost out of cash already. The companies are
consolidating. Petstore.com was bought by Pets.com for
$13.7 and Ebay bought Half.com for $374 million in stock.
Advice to Half.com shareholders: sell the stock as soon as
*** Defense stocks have been mentioned here - and in the
Fleet Street Letter (http://www.fleetstreetletter.com)- as
a contrarian opportunity. War may be out of style, but
styles change. Bell bottoms and mini skirts seem to be
coming back; maybe war will come back too. In any event,
"after 14 years of defense-procurement budget cuts," writes
George Putnam III in the Turnaround Letter, "the U.S. is in
its second year of defense-budget increases." Putman
mentions several of the companies we've talked about here:
Raytheon, Litton, Northrop Grumman.
*** "[W]e're in the first phase of a bear market that could
be long, tedious, grinding and very painful," says Richard
Russell, interviewed in this week's Barron's. "Before it's
over, I believe we'll see pig pools of money moving out of
stocks and into cash. I also believe we'll see absolute
slaughter in that dinosaur industry, mutual funds. There
are now an absolutely ridiculous number of equity funds. In
time they'll be decimated, with literally hundreds of them
closing down as investors bid them good-bye."
*** But for now...there is a lot of optimism in the
marketplace which will take a while to wear out. Al Gore is
betting that this good feeling about the economy will last
beyond the November election. He's staking his election on
his kinship with the Clinton administration's economic
record. But the Clinton regime can no more claim paternity
of the economic performance of the last 8 years than Gore
can claim to have fathered the Internet. A blood test would
show that the current boom was sired by Reagan's tax cuts
and Volcker's tight monetary policy, followed by "Easy Al"
Greenspan's loose policies...
Like a wilding in Central Park, Greenspan was assisted by a
gang of fortuitous events - the collapse of Communism, the
bear market and recession in Japan, the baby boomer's need
to finance their retirements and the rise of the Internet
- which held off inflation and focused attention on the
excitement of the New Economy.
*** "If you are an extreme contrarian who likes
astronomical dividend yields on extremely beaten down gold
stocks," Dan Ferris writes... "here's a stock that just
paid a $1.25 dividend on May 30, 2000. The share price just
before then was around $2.68. So you could have had
yourself a nice, fat 45% dividend. Every $10,000 invested
turned to $14,500 in the blink of an eye...They pay
dividends semi-annually, not quarterly. But man, do they
"Throughout 1998, the stock traded for less than $2. That
year, it paid $0.4166 in regular cash dividends -- 20%.
...And actually, shareholders in 1998 earned a lot more ...
Total dividend payments to shareholders of
record in 1998 were $11.6163 per share. No typo, Bill.
$11.6163 PER SHARE, a little under 600%. Ever heard of
anything like that in your life?"
*** Yesterday, the Manhattan U.S. Attorneys made the
biggest securities fraud bust in history... 120 people were
hauled in. Members of five NY mob families were among the
suspects. "They go where the money is," said U.S. Attny
Mary Jo White. Where is the money? Need you ask? As part of
the overall scheme," says a journalist on the AP wire "the
Internet was... used to promote stocks and companies were
falsely touted as Internet or 'dot.com' companies to induce
investors..." who lost an estimated $50 million.
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"Desire and necessity" said my friend Michel at lunch
yesterday, "have no clear boundaries. People only really
need a few calories per day...and a little heat when it is
cold. Everything beyond that is want, not need."
Needs follow wants, like my daughter following me into a
department store. I wanted to take her shopping, but soon
discovered that she needed a new jacket for summer, and a
dress for the wedding, and a pair of shoes to go with the
dress, and a purse to go with the shoes...and of course, a
new hat to go with the shoes.
A man wants to buy a bigger house in a better neighborhood.
Then, his wife informs him that they need new furniture,
and a new washing machine, and someone to tend the garden.
Wants end up being more expensive than you expect. The
needs trailing behind them expand proportionately.
This is why (I will come to the point right away) desire
needs to be controlled. That is what interest rates,
ticking meters, investment strategies and marriages do for
"Without discipline," wrote Mark Hulbert in his AAII
Journal article, "we are all too likely to dump a strategy
at the wrong time - and then compound the problem by
jumping on the bandwagon of a winning strategy just at the
time it is about to lose its "hot hand."'
So it was the Stanley Druckenmiller, George Soros' partner
decided that he had to abandon the value-oriented strategy
that had served the team so well for so long. In the 1999s,
value investing looked like a loser. Value investors were
dinosaurs, hopelessly retrograde in their thinking, and as
out of style as a Nehru jacket.
I have already recounted Mr. Druckenmiller's cautionary
tale. Mr. Druckenmiller did not like being out of style. He
wanted to be ahead of the curve, not behind it. Then,
following the TNT (techs, nets, and telecoms) bandwagon, he
walked right over the edge of a cliff in April.
One of the most popular bandwagons of stock market history
is the remarkable case of the Cisco Kids. This too, is a
story already told in these letters.
"The Industrial Age is over. The Computer Age is over. The
Internet Revolution is five years old in the U.S. and just
beginning in Europe, Asia, China and Japan (wherever they
are, ed.)," thus writes another veteran of the newsletter
investment advisory business, Donald Rowe.
Rowe, editor of the Wall Street Digest and a man who once
liked gold but now likes capital letters, believes that
"the Wireless Revolution is just beginning in the U.S., but
will spread rapidly to the rest of the world. Selling Cisco
to purchase GM is backward thinking. Cisco is the bluest of
the blue chip Internet stocks, a company you should own and
hold for at least five years or more. I see Cisco's
revenues increasing 30% a year for the next five years
because of the worldwide wireless/telecommunications boom."
The 30% per year figure is the result of analysts'
guesswork. But even if it were right, what would be a
reasonable price for the company? You don't even need a
calculator to figure it out. A municipal bond will bring
you, say, 6% per year. You would expect to do at least as
well with Cisco, wouldn't you?
Currently, even if all Cisco's earnings were paid out,
you'd get less than 1% per year. But hey, it's growing
fast. By the fifth year, says Stephen Kofler of First Union
Securities, Cisco's revenues will be triple what they are
today. So, in year 5 - assuming earnings kept pace -- you'd
get, well, less than 3%.
The meter is ticking. It makes no sense to own the stock -
unless you could buy it at 80% discount. Every year you
hold it, you lose money - unless there is some bigger fool
willing to pay an even daffier price for it.
But the argument against Cisco is not merely a matter of
arithmetic. It's a matter of desire.
People will pay a lot of money for something they really
want. And what they really seem to want right now is to
feel that they are a part of this great new world...and
that they won't Miss Out or be Left Behind in the march
into the Next Millenium.
Owning Cisco stock satisfies the desire, even if it is very
unlikely that it will make an investor any money.
But there's an arithmetic of desire too. People will pay a
premium for something they really want to own. A classic
Corvette...a fine bottle of Taitinger wine...a Rolex
watch...a Harley-Davidson motorcycle. If you can control
the brand, you can enjoy a generous profit margin for many
years. Cisco has no way of controlling the "hot stock"
Who wants a Cisco? What is a Cisco anyway? I don't think
I've actually ever seen one. And who could pick one out of
a pile of trash - even if their life depended on it?
I don't know about you, but I've never seen anyone with
"Cisco" tattooed on their arm. Nor has anyone ever taken me
into his garage to show me the new Cisco he just bought. No
one is proud to own a Cisco product - just the stock.
That's because Cisco products, whatever they are, are not
"want" products...they're "need" products. They're
commodities: the useful, anonymous nuts and bolts of the
digital age. But I don't recall anyone making a fortune
producing nuts and bolts in the industrial age?
Cisco has competition. And the very attractiveness of Cisco
and its stock price will draw other competitors. And some
of them will do whatever Cisco does, but better, faster,
and cheaper. People will substitute other devices for those
of Cisco. Price competition will be devastating. Whatever
margin Cisco enjoys today will become smaller. People will
not need Cisco's products.
Finally, owning Cisco stock will no longer be cool either.
It will be the mark, not of someone who is on the cutting
edge of the New Economy, but someone who is being cut down
by it - someone who is unaware that Cisco's time has come
and gone...someone who sticks to old ideas long after they
have been discredited...someone who has no vision...and no
In short, somewhere in the not too distant future,
investors will neither want nor need Cisco. For the moment,
it may be one of those things investors desire, but will be
harmful to them in the long-run.
Your very disciplined correspondent, sticking with the
program, day in and day out, no matter what...
The Daily Reckoning:
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Last modified: April 02, 2001
Published By Tulips and Bears