In Today's Daily Reckoning:
*** The Nasdaq is still flying...but losing power
*** "Two-tiered" market...good stocks fall, bad ones rise
*** Elmer Gantry of the Internet...
*** The summer rally is a wretched one. News of a slowing
economy is getting around. It is hitting the 'old economy'
companies that actually make and sell products.
*** The Dow, for example, fell 122 points yesterday. Autos,
restaurants, lumber, office equipment - they're all down
nearly 20% in the last month.
*** But the Nasdaq rose back above the 4,000 mark
yesterday. (Still, a long way from 5,000.) The logic of
this "two-tiered market" is that an economic slowdown will
depress earnings. But companies that have no earnings have
nothing to worry about.
*** The idea is preposterous. It's just money, after all. A
dollar will go wherever it can earn the highest rate of
return. Companies without earnings are doomed. Either they
get earnings - or they disappear. Unless they are
*** "Whenever, following a powerful advance, the market's
dynamics become less favourable," wrote Marc Faber in his
Gloom, Boom, and Doom Letter, "it leads to 'churning,' with
investors desperately jumping from one theme to another in
the hope of achieving some short-term gains. This churning
process is always characterized by high volume and extreme
*** Almost every day a major company seems to get whacked
after an 'earnings warning.' Yesterday, it was Carnival
Cruises, which lost about 20% of its stockmarket value. The
day before it was Honeywell. Even these big, institutional
blue chips rest on shaky ground. Marginal changes in the
market's perception cause them to crash suddenly.
*** 'Easy Al' Greenspan must notice how fragile stock
values have become. For that reason alone he may not dare
to raise rates again this month. What he most wants to
avoid is the blame for a major crash and recession.
Besides, he will reason that he can always cure inflation
with tighter rate policies later, whereas the damage from a
crash may be hard to correct. We'll see...
*** There were 1264 stocks advancing on the NYSE yesterday,
against 1613 declining. 77 hit new highs. 67 hit new lows.
*** Oil rose $1.36. There was little action in gold or gold
*** Morgan Stanley says that half of the 377 Internet
stocks it follows are below their IPO prices. The IPO party
seems to be over.
*** The Elmer Gantry of the New Economy was in the news
again yesterday. Michael Saylor, CEO of MicroStrategy, is
well known for his bombastic statements about the future of
the Internet. He believes his company has a mission - to
make information flow like water...and thus make the desert
bloom. But, taking no chances, he decided to divert the
stream of information to water his own back yard. He
reported a profit of $12.6 million on revenues of $205
million at a time when the company actually lost $33.7
million on revenue of $151.3 million.
*** But what is really amazing is that investors still buy
the stock. While companies with earnings get hit hard when
their earnings decline, those with no earnings, and little
hope of ever having any, rise. Even the pros seem to be
suffering from sunstroke. A private venture capital firm -
Promethean Asset Management decided to chain itself to the
barren rock of MicroStrategy - putting up $125 million of
good money for a ridiculous 4% of the company. All of
MicroStrategy is not worth $125 million. It may not be
worth much of anything. Yet, investors have bid up the
share price so high that Saylor's personal stake in this
losing operation is worth nearly $2 billion. May vultures
gnaw on all their intestines!
*** Meanwhile, Professor Robert Gordon joins me in
questioning the real economic value of the Internet. He
believes the internal combustion engine, telecommunications
and electrical power were "first order" innovations. They
changed life radically. But they were all invented in the
late 19th century - and had saturated the Western economies
by the early 1960s. The Internet may not be a first order
invention. Instead, it is merely another step in the
telecommunications revolution that began with the invention
of the telegraph and proceeded through the telephone, radio
*** What's more, the Internet threatens to be a big waste
of time - like television. The Economist reports that "web-
surfers tend to access entertainment sites more frequently
at work than they do at home." The magazine cited a study
showing that employees visit eBay and financial trading
sites when they're supposed to be working and traffic on
consumer-oriented sites peaks during working hours, not in
the evening. Of course, I'm sure this doesn't happen in my
*** And finally, on this the longest day of the year, the
Evening Standard reports that "one of Britain's leading
Druids...appealed for calm." Stonehenge, off limits to
Druids as well as Presbyterians and vegetarians for the
last 16 years, opened up to the public at 11:30 last night.
*** I packed up my old grey suit, which was still as dumb
as a Democrat and shapeless as a Republican, and Elizabeth
and I left London last night. We boarded the Eurostar for
the trip back to Paris. I think I've drunk enough champagne
in the last two days to lift the share price of LVMH...but
they offered me a glass on the train. "Avec plaisir," I
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I will soon be on a first name basis with the Queen. I saw
her again yesterday...and she waived to me. Or perhaps she
just gestured to the crowd of thousands who doffed their
top hats as she passed.
Economists have an expression: Everything happens at the
margin. But in this crowd of thousands, I doubt her majesty
"Everything happens at the margin" refers to the way that
change occurs in economic systems. People don't all decide
to suddenly do something different. Instead, only a few
change their behavior - often with stunning consequences
Most stockholders, for example, rarely look at their
portfolios and rarely make changes. But the value of the
portfolio is determined by the active buyers and sellers.
More specifically, the price of every share is set by the
last two people to trade it.
I couldn't help notice that it also applies to almost
everything else in life. The winning horse in the third
race at Ascot was only a few feet ahead of his rivals. Yet,
this small margin made all the difference. He was a winner.
The rest were also-rans. I was a winner too - for I had bet
on the horse.
At least one historian believes the crucial battle of the
Civil War, Gettysburg, turned on the actions of a single
soldier. A Union officer, who later became governor of the
state of Maine, was in a critical place at a critical
time...and in a critical situation too. His men were out of
ammunition and about to be overrun by the advancing
Confederates. But rather than retreat, as a sensible
soldier should have, he ordered his men to fix bayonets and
charge. They did and the Southerners retreated. The line
held and the battle was won.
A few people, at the margin, have enormous impact.
The price for houses in an area may be fairly stable; there
may be about as many buyers as sellers. But an influx of
new buyers, at the margin, can drive prices up rapidly.
They have to live somewhere...so they will raise their bids
until housing is available to them.
That is what has happened in London. The whole Southeast of
England is booming. London is rich and lively; despite
appalling weather, new residents seep in from all over the
world, like water leaking into a basement. The London Times
yesterday recorded the grim evidence - 58 people died
trying to smuggle themselves into Britain in a cargo
container. They suffocated.
Property prices have soared. The hotels are so full, I
overheard a man on the train say he was forced to go back
to Paris for the night, because he could find no lodgings
And nowhere was prosperity more in evidence than at the
Ascot races yesterday. If you, dear reader, have not yet
"done" the Ascot races, let me encourage you. It is a rare
combination of tradition and modern hustle. It is another
example of Britain's clever marketing of itself.
Moss Bros. has outlets all over London. They were as busy
as the proverbial one-armed paper hanger on Tuesday. Media
moguls from Dubai and dot.com entrepreneurs from Chelsea
jockeyed with Baltimore newsletter publishers to rent the
appropriate costume for Ascot -- a morning suit, with black
or grey tails and a top hat. For about $100 you can wear
this get-up for an entire day. For another $600 you can
spend the night at Claridges. And for about $1,000 more you
can rent a box at Ascot, from which you and a group of a
half-dozen friends can once again (following Garter Day)
gawk at the Royals who parade by in open carriages, wearing
outfits similar to yours. Add the expense of cab fares,
restaurants, drinks and shopping; it is no wonder London's
economy is booming!
Our party assembled in the lobby of Claridges yesterday
morning. We were all enjoying looking at ourselves in the
mirror. I had been in such a rush to get yesterday's letter
to you...and then get myself ready to go out...that I had
not even noticed my wife's new suit and new hat.
"How do I look?" I heard her voice ask. But I had a hard
time connecting the words to the lips that spoke them. All
I saw was a hat. I had to stoop down and peer under the
brim in order to see her pretty face, lit by the pink light
of the hat.
Anyway, if you were standing in Waterloo station yesterday,
and you saw three swells in top hat and tails walking buy,
one of whom was talking to a large, pinkish hat, it was
Of course, Elizabeth is always the most beautiful woman in
any group. But she had some stiff competition yesterday.
Our small band included a young woman from Australia with a
stunning face...and the woman I mentioned to you
yesterday... The latter woman, a delightful and intelligent
companion, had on such a revealingly low cut leather suit
that I was afraid she would be stopped at the gate and
arrested for indecency. In my mind, I rehearsed how I would
gallantly volunteer to accompany her into captivity, to
help her call her lawyer.
Later in the day I found out something about this woman
that seemed to answer a prayer...but perhaps I should keep
you in suspense about that.
My subject today is margins, and how important things seem
to happen at them. A quarter inch less fabric, that is to
say a very marginal amount of cowhide, either on the top or
the bottom of my friend's little suit, would have been
So would a little teeny bit of selling in the stock
market...or perhaps a tiny increase in interest rates...or
maybe an itty-bitty decline in the dollar. Except in the
case of women's clothes, you never know where the critical
Everyone dresses up for Ascot. Men in their morning suits,
often with cellphones clamped to their ears...and women in
bright, exciting dresses and the kind of hats you only see
at fancy weddings or in movies. It is a little like My Fair
Lady's famous Ascot scene. Audrey Hepburn's day at the
races improved upon the real thing. Now, Ascot revelers try
to live up to the standards set by the movie.
They did a pretty good job of it this year. The stands were
packed with people -- many of whom were stunning.
If you saw these people in everyday dress, you might find
them attractive, but not stunning. The costumes helped. At
the margin, they improved almost everyone.
I studied the people I passed. Rarely was a man so hopeless
or a woman so homely that a marginal improvement couldn't
produce nearly sensational results. I thought I should
offer some advice: one woman merely needed to stand up
straight. Another needed to smile. Still another needed a
little exercise. But I kept my counsel to myself. Surely, I
needed it, too.
Success in life happens at the margin too. "Ninety percent
of genius," said Aristotle, "is habit." In the course of
the ordinary day, the successful man may not accomplish
much more than the unsuccessful one. These were successful
men and women here at Ascot. The event draws a crowd very
different than, say, the Worldwide Wrestling Federation.
The wrestling fan, for example, may finish his work at
5:30...while the Ascot aficionado continues for another
hour or two. In any given day, the difference in results
may not even be measurable. But over a lifetime, the small
gains compound like the interest in a savings account. By
the time the Ascot fan reaches my age, he typically has
gained a lap or two on the WWF devotee. And so not only can
he afford a night in an expensive hotel, he can also pay
the credit card bill when his wife comes home with her
hatbox. (For the benefit of those who have never attended,
women do not wear fancy hats to heavy-weight wrestling
events...they wear baseball caps with profound statements
translated from the original Greek and Latin...such as "I'm
But even the Ascot fan, like the WWF one, operates at the
margin. When he is feeling expansive and positive about the
future, he lets his credit card get more use. When he is
feeling fearful, he tends to keep it in his wallet. Maybe
he decides that he does not need to go to Ascot this year.
Lines at Moss Bros. become shorter. Taxis and hotel rooms
become easier to get. Property prices in London may even
fall - as the marginal buyer begins to believe that his
money will be more fruitfully employed elsewhere - perhaps
on the other side of the planet, where the sun is just
starting to shine again.
Behavior changes at the margin - with often sensational
results. We are now in what I believe will be the last
summer of such positive, expansive sentiment for many years
to come. The markets have already cracked. The dollar, the
last holdout of the New Economy fantasy, seems to finally
be in a bear trend. The turnaround in investor psychology
that I warned you about, perhaps far too soon and far too
often, may to be coming at last.
Your starstruck, moonstruck, champagne-soaked
And completely marginal correspondent,
P.S. I did not forget. I promised to reveal what I
discovered about my friend in the leather dress - about her
You remember those underwear ads in Paris that I told you
about? They are so racy and so ubiquitous, that even a dull
Episcopalian like me cannot fail to notice. Ms. X, it turns
out, was a model for the La Perla underwear ads.
I spent some time talking to the Australian woman and the
La Perla mannequin, both of whom were as charming as they
were pretty. A married man has to appear to be interested
in these young beauties - even if he really has eyes only
for his wife.
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Last modified: April 02, 2001
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