In Today's Daily Reckoning:
*** Big drop in the Dow on Friday...but bonds rose
*** Cash is drying up
*** Why can't the English master the rules of grammar?
*** Not much time to write. Like figures in a comic strip,
we made our way to the train this morning. The husband
laden down like a beast of burden. The wife walking
sprightly ahead, carrying a hat box. We were off to Windsor
Castle for Garter Day...about which more tomorrow.
*** The Dow fell 265 points on Friday. The Nasdaq rose 14
*** For the week, the Dow lost 1.5%. The Nasdaq was just
*** But the broad market, as measured by the
Advance/Decline ratio, showed improvement. 1898 stocks
advanced; 1445 declined. 203 hit new highs; 159 hit new
*** This is a market that can't make up its mind which way
to go - or wants to give that impression.
*** Bonds rose on Friday. Bond investors seem to be
anticipating a recession. Autos and homebuilding are both
down. The auto makers are closing down assembly lines, to
give inventories a chance to lighten up. And building
permits were down for the 4th month in a row in May.
*** MZM, which measures the amount of cash in the system,
keeps going down. This cash, by the way, is what is needed
to feed the debt meter. Looking back, we can see how a tide
of cash served to float the Great Bull Market of 1982 -
1998 into Mania-land. The LTCM bust, and the currency
implosion in the Far East in '98 induced central bankers -
notably Alan Greenspan - to boost liquidity (that is, make
more cash available). Then, in late '99, another flood of
cash was released - in anticipation of Y2k problems. But
now the cash is drying up. MZM is increasing at less than
*** "Inflate or Die" says Richard Russell. Either Greenspan
puts a lot more cash in the system...allowing debtors to
feed their meters...or the boom ends.
*** But credit bubbles don't end in consumer price
inflation, says Dr. Kurt Richebacher. They always end in
deflation... We will see.
*** Gold fell 90 cents. Oil is still over $32.
*** The Internet and other very modern innovations are
impressive, but not as impressive as electrification,
refrigeration, the internal combustion engine and inside
plumbing. "[C]ompare our current roster of new technologies
with the transforming technologies of the late 19th and
early 20th century," suggests economist Paul Krugman, "and
[you will] find our latest gizmos relatively trivial by
*** Front page headline in The Times: "England face threat
of expulsion." The article begins: "England were threatened
with expulsion from Euro 2000" and explained how hooligans
may drive Britain out of soccer tournaments. But the point
I am making is this: If the English want to be part of the
English-speaking world, they're going to have to learn to
speak the language.
*** Ralph Nader, one of America's leading humbugs, owns
$1.2 million worth of stock in Cisco. Mr. Nader is slightly
embarrassed by his riches. I predict that he will be less
embarrassed in a few months.
*** 60 years ago yesterday, Charles de Gaulle issued his
"appel" from London rallying the French to fight on against
the German invaders. De Gaulle looms large in a new gallery
in the Invalides museum.
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It was paradise out at Ouzilly this weekend. Summer has
arrived there too. But instead of pretty women, the roses,
Linden trees, and flowers are in full bloom.
Nature is so alive this time of year; the Linden tree next
to the house hums. In C minor, I believe. I did not know
that trees could hum. But this one sounds like an
electrical power station.
The source of the noise is not the tree itself, but the
swarm of bees taking advantage of the Linden blossoms. All
day long they buzz around the tree - thousands of them.
Elizabeth did not come down this weekend. So, the older
children and I were able to work without the interruption
of social obligations. By evening, we were worn out, as the
bees must have been.
But it is hard to sleep on a beautiful night. The moon was
so full and so bright, I felt that if I looked hard enough
I'd be able to see the American flag on it.
I opened the windows wide, inviting the moonlight into the
bedroom. Too much moonlight is supposed to make you crazy.
But I decided to take a chance. Live a little.
Meanwhile, on the other side of the world are a whole race
of people graced by neither summer sun nor the light of the
moon. They live, if you believe the press, in total
darkness. And they deserve it.
For somehow, the Japanese - who were the world's smartest
business people just a dozen years ago - are now the
biggest numbskulls on the planet. And not just the Japanese
- the entire Orient is now populated by losers...people too
dumb to enter the New Era...too slow and backwards to goose
up their economies with loose credit policies and too
uptight to spend money.
As evidence, I give you a group of stocks from the dark
side of the planet, suggested by Marc Faber and George
Take Sampoerna, for example. The company sells for
approximately 7 times year 2000 earnings. It makes Kretek
cigarettes - which don't exactly have the appeal of
Marlboros...but Marc says they are good smokes. But it is
something else they lack that makes Kretek cigarettes
especially interesting - litigation. Philip Morris is as
cheap as Sampoerna. The North Carolina tobacco company is
being pursued all over the world by lawyers. The Indonesia
cigarettes, on the other hand, rarely suffer lawyers,
gladly or otherwise, because cigarette taxes are the
government's largest and most reliable source or revenue.
Here's another example: remember Pohang Steel? It is one of
the world's largest and most efficient steel makers. Every
product ordered via Internet is delivered in a truck made
of steel. But while Internet companies sell for 200 times
earnings, Pohang Steel, the South Korean steel maker, can
be bought for only about 6 times earnings.
What is it that causes the light of the New Era sun to stop
a few degrees east of Greenwich meridian? If the Internet
did anything at all, you'd think it would spread the
blessings of technological progress beyond the frontiers of
NATO members. Yet it is as if some "iron curtain," to coin
a phrase, had been drawn along the Urals. To the west, the
Internet and related technological breakthroughs are
thought to be producing staggering improvements in human
progress - such that the old "metrics" for valuing
investments no longer apply. And to the east, the old rules
not only apply - they are enforced without mercy.
Schott lists a Hong Kong Internet company as #1 on his
roster of "Fair Values." E-New Media "provides billing and
payment solutions for e-commerce and telemarketing..." Gee,
you'd think this would be a big hit with TNT investors.
Instead, it is selling below book value, at a P/E of 11,
with 55% of the stock price representing net cash.
Ng Fung Hong is another Hong Kong company - this one in the
business of distributing livestock. Its earnings have grown
17% per year since '94. How come the growth rule - the idea
that a stock should sell for a P/E equal to its growth rate
- does not apply here? You can buy Ng Fung Hong now at 7.5
Midland Realty is the largest real estate broker in Hong
Kong. It's available for 8 times earnings.
HM Sampoerna, mentioned above, is the second largest
cigarette maker in Indonesia. Sales have recovered
"smartly" since the crisis of '98. But, says Schott, it's
"still trading at a crisis-level valuation."
Another Indonesian company may be more familiar to you:
Komatsu. You see the name on heavy equipment all over the
world. Like everything else East of the Urals, Komatsu was
hit hard by the currency crisis of '98. But it has
recovered. Net current assets represent 55% of the stock
price. This leaves the implied value of its core business
selling for just two times earnings, before interest,
taxes, debt and amortization. The current P/E ratio is just
These stocks may be fair values now. But there's no law
that says they won't be even fairer values in the future.
Still, a fair value is better than a not-so-fair one. Or
maybe I've had too much moonlight.
Your moonstruck correspondent...
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Last modified: April 02, 2001
Published By Tulips and Bears