In Today's Daily Reckoning:
*** Not much movement in Dow, Nasdaq, the dollar or bonds.
*** But the meter is running...and the cash is running out
*** Cooking the books...a 'nuts and bolts' company with
real promise...and more
*** The Dow is still see-sawing around the 50% retracement
mark. It was up 26 points yesterday - amid little
*** The Nasdaq rose 48 points for no apparent reason.
*** The dollar was mixed. Bonds mixed. Gold fell $2.
*** So, there is not much to say today.
*** I've always wondered how is it possible for huge
companies with billions in sales to be able to forecast
earnings within a penny or so of the actual number. In our
very small business, there are always surprises. Nothing
ever seems to happen as forecast in the budget. But quarter
after quarter, GE, CISCO and many other biggies bring in
earnings of 1 penny per share more than they expected.
*** Now, I know. CUC officials admitted that they simply
"cooked the books." It was "a culture that had been
developed over many years," one testified.
*** Despite some recovery, the Dow is still down 6.8% for
the year. Margin accounts, which hit a record of $278.53
billion in March, have fallen to $240.66 billion. No one is
making money in this market. The insiders are dropping out.
And speculators are getting knocked out.
*** "Why can't the market just level off and stay
relatively high?" This question was posed to Richard
Russell in this week's Barron's interview. "When the bull
dies," replied Russell, "the bear takes over, and the
correction process begins. In this process, things go
wrong, sentiment changes and dirty water begins to seep out
from under the closet door. Secrets are exposed, corruption
shows itself, fantasies turn to nightmares, and bull-market
dreams become bear-market horrors."
"Don't ask how or why," advises the guardian of the Dow
Theory flame, "It's simply the way bear markets work. The
sad part of it is that bear markets work just the opposite
of bull markets. Just as bull markets climb a wall of
worry, bear markets descend on a ladder of misplaced
*** As I have been pointing out, a bubble is created on
credit. The bigger the bubble gets, the more the credit
costs. It's like buying horses. You may want the additional
horse...but each one needs to be fed and cared for. After a
while, you can't keep up.
*** Among the big eaters in the stable is the US current
account deficit - which results from buying more globally
than we sell. That deficit - nearing 5% of GDP - takes 70%
of the entire world's savings to finance.
*** Richard Russell mentions an estimate of total debt of
$35 Trillion. At 7% interest, this credit costs $2.45
trillion annually. I'm not sure what this figure means -
but it's big enough to be very scary, representing more
than a quarter of US GDP.
*** In the same Barron's issue Alan Abelson shows a chart
illustrating how the Fed is now tightening up on the money
supply. You will recall that the Fed (in fact, all the
world's central banks) rushed to fatten up the world's
financial system - supplying plenty of money in
anticipation of Y2K problems. In this sense, the Y2K scare
was real - and it had an enormous effect on markets. Given
a big bucket of Y2K oats and molasses, the Nasdaq nag
spurted ahead by 50% in the last quarter of '99.
*** Now, rations are being reduced. MZM, measuring cash, is
growing at only 3.4% according to the latest figures.
*** As I explained yesterday, nobody harbors a burning
desire to own a Cisco product. People do not save their
money so they can buy one. Owning one will not make you, as
Isaac Hayes sings of "Shaft", "a sex machine to all the
chicks." Nor is a Cisco product indispensable, like toilet
paper. Women do get say to their husbands, "Honey, would
you be sure to pick up some Cisco products on the way home
*** No, on both desire and need...Cisco gets weak marks. Of
course, the same might be said of GPC, a 'nuts and bolts'
supplier for the automotive age. Founded in 1928, GPC must
be one of the greatest business success stories in America.
Genuine Parts has been increasing revenues for 50
consecutive years. Dividends have risen for 44 consecutive
years. And during the early 70s, GPC was one of the 'nifty
fifty' with a P/E above 40. But who cares? No one,
apparently. Its P/E ratio now is less than 1/10th that of
Cisco's. You can buy a share at about 11 times profits,
yielding almost 5% cash dividend. Both GPC and Cisco may be
good companies. But only one is likely to make investors
money. Guess which.
*** "Currency strength or weakness," says Dr. Kurt
Richebacher, contradicting me, "is determined not by
perception, but by hard economic facts." And in this
respect, he ranks the "euro-zone" economy well above the
American economy. Euroland has a 44 billion euro surplus in
the current [trade] account...a gross investment ratio of
19% of GDP and a personal savings ratio of 9% of GDP, as
opposed to almost zero in the United States." What's ahead
for the dollar?
***** "The first problem with vacations is lowering your
pace of thinking and living from the hectic securities
business," says Ray Devoe, securities analyst and FSL
contributor. "The second... is getting back up to speed and
determining what has been going on in your absence." After
returning recently from Ireland, Ray was puzzled to find
"the old 'momentum game' and super-optimism has returned,
as if the wild convulsions and gyrations of the March 10-
May 24, 2000 period never happened..."
*** And something else...France has some of the toughest
gun control laws in the world. Private firearms were
confiscated and outlawed in 1940 when Hitler took control
of France. But that did stop someone from taking shots at
people yesterday - at the Porte de la Chappelle. No reports
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"There is always a disposition in people's minds to think
that existing conditions will be permanent," wrote Charles
Dow in 1902. "When the market is down and dull, it is hard
to make people believe that this is the prelude to a period
of activity and advance. When prices are up and the country
is prosperous, it is always said that while preceding booms
have not lasted, there are circumstances connected with
this one which is unlike is predecessors and give assurance
of permanency. The one fact pertaining to all conditions is
that they will change."
I regret, almost daily, that I have not been granted the
gift of prophesy. Wouldn't that make the whole thing so
much easier - to be able to merely sit down with a copy of
the Wall Street Journal from some time in the future...and
see what actually happened!
We romantic contrarians are often confused with moss-backed
traditionalists. It is assumed that we are just "negative"
or anti-progress, or backwards party poopers.
"The 'bah humbug' modern-Luddite, hard-asset, deep-value
crowd tends to cringe at the thought that a spurt of
innovation and investment like we are currently
experiencing will actually change anything..." wrote George
Schott, of Tellus Capital.
Schott has written an interesting article, to which I will
return in a moment. But, first, let me clarify:
Change is a feature of life - a permanent feature. But how
will things change? Perhaps the Internet will revolutionize
life on the planet. Maybe the Nation State will disappear.
"Shaft" could win an Academy Award. You and I can speculate
about these things. We can try to figure out what is going
on and try to look into the future to guess about what may
But there is no way of knowing. We have no future editions
of the WSJ to read. And usually, the most important events
of the future are those you do not expect. Unforeseen, you
take no action to avoid or accommodate them.
More predictable are the moods with which people greet
events and react to them. They range from euphoria and
complacency...to despair and panic. These moods are what
make the difference between a P/E of 150 for Cisco and one
of 11 for Genuine Parts. These moods change episodically,
but never fundamentally.
Sixty years ago this week, one of the most dramatic changes
in public mood in history occurred - centered right here in
Paris. At 3:40 AM on June 14, 1940, a lone motorcyclist
crossed the Place Voltaire. There was no shortage of
motorcyclists in those days, but this one had never before
been seen in Paris - he wore a German uniform.
This was astonishing in several respects. The largest army
in Europe was not that of the Germans. It was the French
army. On paper, at least, the French were bigger and better
equipped. What's more, they had constructed a marvelous
defensive breastwork - the Maginot Line, fully stocked with
guns and ammunition to drive back any assault. Paris, well
behind the Maginot Line, enjoyed the 30s - it was the
gayest, most exciting city in the world. Parisians, in the
spring of 1940 sat in their cafes talking about Hitler
(socialism was the Next Big Thing back then)... Who among
them could have imagined what would happen next?
The Germans did not come by the expected route. They did
not attack Maginot's impressive line; they by-passed it.
Events took an unforeseen turn. Not only did Hitler
outflank French defenses, he cut off and rolled back French
troops with surprising speed. From the day he announced his
attack on France, to the day German troops arrived in Paris
only a little more than four weeks had elapsed.
Churchill wanted the French to fight for Paris. "Can't you
imagine," he urged them, "how a big city like Paris can tie
down enemy troops? We can fight in the big squares, in the
little streets, at the corner of every building, every
street corner. We can defend ourselves neighborhood by
neighborhood, block by block, street by street, house by
house. Whole armies can be buried there!"
The idea struck the French as absurd. The idea was to save
Paris, not destroy it. "It makes no sense," replied General
Weygand, "reducing Paris to cinders won't have any effect
on the final outcome."
Instead, Paris was declared "an open city." French soldiers
escaped to the south, many making their way to Spain and
then to North Africa, where they joined the Free French
Half the population of the city fled. Those who could not
leave - or chose not to leave - met the Germans with a
combination of dignity, horror and opportunism. The great
surgeon, Thierry de Martel, hung himself. A few others took
their own lives. But by the evening of the 14th, the
brothels were back in business - with a new source of
Things change dramatically in the financial world too. But
they are changes you can anticipate. After a boom; a bust
is inevitable. After a bust...expect a boom.
"Gold prices peaked in the first month of the new decade on
January 21, 1980," wrote George Schott, the analyst
mentioned above, "when gold hit $850 per ounce (today's
spot price is $282). In the next two-and-a-half months,
gold shed 43.5% of its value, as the price slid to $480 per
"The very end of the 1980s coincided with the peak of the
bubble in Japan. The Nikkei 225 hit an all-time high on
December 29, 1989, the last trading day of the decade for
the Japanese market, when the index hit 38,915 (the index
stands at 18,480 at this writing). After kicking off the
decade of the 1990s with a nasty downslide, the Nikkei did
rebound in the latter part of January 1990, edging back
towards 38,000. Then, the avalanche started. By October 1,
1990, the Nikkei had lost 48% of its value..."
"Anyone see a pattern developing?" asks Schott.
I do not know what will happen next in world events -
though I spend a lot of time thinking about them. I don't
know what new innovations will succeed, and which will
fail. But I do know that despair will eventually replace
If the pattern repeats itself, the Nasdaq high of March 10,
2000 will not be seen again for at least another 10 years.
Your correspondent in Paris,
P.S. A couple of interesting events next week: I've been
invited to the Procession of Garter Day in Windsor Castle
on Monday...and to the Ascot Races on Tuesday. Stay tuned
for a full report.
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Last modified: April 02, 2001
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