In Today's Daily Reckoning:
*** Is this still a bear market?
*** Dell computer's 6% earnings growth
*** Working on the 'blue yodel'...
*** The Dow fell a bit on Friday. The Nasdaq rose a bit.
More than a bit, actually - 88 points.
*** The week ended with the Dow up nearly half a percent.
The Nasdaq rose more than 3% over the week.
*** More stocks rose than fell during the course of the
week - 1917 vs. 1421. Is this a bear market? Yes...but it's
the strangest bear market ever. Which makes sense...because
the bull market was the strangest, the most extreme, in
*** We're in a period in which stock prices are mostly
falling. But it's the 'summer of love.' People still think
that everything will get better. Sure, the Internet stocks
are getting crushed. The e-tailers, B2B, and content sites
seem on the verge of bankruptcy...but everyone now claims
to have realized that their valuations were insane...and
maybe they should never have been taken public in the first
*** Following the 'summer of love,' most likely, will be
the 'autumn of anxiety' and the 'winter of our discontent.'
But that is, of course, in the future... and we seen into
the future darkly, if at all.
*** "An unusually high number of companies have already put
Wall Street on notice that they may fall short of profit
estimates," says today's Reuter's article. The New Era, as
I explained in an earlier letter, may produce marvels, but
profits are not among them.
*** Dell computer reported a very healthy earnings growth
in the last quarter. According to the company, earnings
rose to 19 cents per share, well above the expectation of
16 cents. David Tice, writing in Strategic Investment,
reports, however, that "a closer look at the numbers
reveals that despite rapid sales growth, EPS grew only 6%
when gains from investments were removed. That's hardly the
typical growth rate for a company with a 70 P/E."
*** Well, at least it has earnings. And at least they are
growing. In fact, Dell - one of the leading "New Economy"
companies - has earnings growth very near to the average
growth rate of corporate earnings for the last 40 years -
5.7%. Maybe 'new' is not-so-new, after all.
*** Bees go where the honey is. In the mid-90s only 6% of
IPOs were for foreign companies. But in the first half of
this year, nearly a third of the money raised on Wall
Street through IPOs was destined for overseas firms.
*** Gold rose 80 cents on Friday. Platinum, which Harry
Schultz (http://www.HSLetter.com) says will go to $800
before the end of the year, rose 50 cents.
*** Today, the purchasing managers will give their number -
showing the rate of price increases at the wholesale level.
But, on the eve of the 4th of July, few people will be on
hand to react. Friday, payroll numbers will be disclosed.
*** And tomorrow, Japan unveils its Tankan Report. This
document is supposed to pave the way for the elimination of
Japan's zero interest rate policy. Free money from Japan,
lest we forget, has been one of the major contributors to
the U.S. hyper-bull market.
*** What else is interesting? Hmmm...100 years ago
yesterday, Jean Sibelius premiered his "Finlandia" - one of
the great achievements of musical history. And Hemingway
committed suicide on this day in 1961.
*** Last evening, I was working on my own music -
practicing my version of Jimmy Roger's 'blue yodel.' I
believe I am the best blue yodeler in the greater Lathus
area. I was by myself on the veranda. But the animals
seemed to like it. The cows bellowed and the chickens
squawked. Or maybe they didn't like it.
*** It's summer vacation time in France. Everyone who could
left Paris on Friday evening or Saturday. I got down to
Ouzilly in time to meet the group of International Living
(http://www.internationalliving.com) subscribers who were
learning how to cook a la francaise under the tutelage of
master chef Jean Rouget. I've been eating their delicious
leftovers all weekend. But Edward, 6, took a bite out of
the terrine de saumon and pronounced this verdict - 'yech.'
Edward is no gourmet.
*** While the Parisians begin taking it easy, the farmers
are working almost around the clock. It's `peach pickin'
time in Georgia' for them.
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Emotions interfere with investment judgment (not to mention
everything else in life). Would we be better off without
them? Would the purely rational man be a superior man?
Maybe even the 'new man' of the Marxist imagination?
Imagine the discussions with your teenaged children -
without drama, heartaches, or emotional eruptions. No more
Vesuvius at the dinner table. No more Krakatoa at
breakfast. No Mount St. Helens at lunch.
Without the force field of emotion to persuade the data in
one direction or another, an investor could coldly
calculate the pros and cons...weigh out risk and
opportunity...as analytically and honestly as a butcher
without thumbs or a stockbroker with a conscience.
Matt Ridley, in his book, The Origins of Virtue, cites a
remarkable study of brain-damaged people. "There is a small
part of the pre-frontal lobe of the human brain," he says,
"which, when damaged, turns you into a rational fool.
People who have lost that part of their brain are
superficially normal. They suffer no paralysis, no speech
defect, no loss in their senses, no diminution of their
memory or general intelligence. They do just as well in
psychological tests as they did before their accidents."
This sounds pretty good, so far, but he continues, "Yet
their lives fall apart for reasons that seem more
psychiatric than neurological...They fail to hold down
jobs, lose their inhibitions, and become paralytically
"But this is not all that happens to them. They also
literally lose their emotions. They greet misfortune,
joyful news and infuriating checks with equanimity and
reason. They are simply flat, emotionally."
In short, a person with this kind of brain damage is a
less-than-ideal candidate for a game show contestant. He
would not jump and up down as expected. Nor could he be
relied upon to hug his wife or bring a tear to his eye at
the appropriate moment.
Nor would he be an ideal investor. "Patients become so
cold-blooded about rationally weighting all the facts
before them," says Ridley, "that they cannot make up their
What a shame. A small operation on the brain - and whammo,
you might be as good an investor as, say, Warren Buffett
before 1997. Or, maybe Jesse Livermore before he went
But it won't work. Because the more you greet the world
with equanimity and reason, the more the world confounds
you with facts. There is an endless supply of information
you must throw into the balance. The Internet merely speeds
up the delivery and lowers the cost.
But "this time IS different" writes my old friend, partner
and school chum Jim Davidson in Strategic Investment. I
have yet to read a persuasive argument for why or how this
'new era' really is different. But if anyone could make
such a case, Jim could do so. His powers of reason and
rhetoric are compelling.
"My basic contention," says Jim, "is that the advent of the
Information Economy has fundamentally changed the
conditions which contributed to the bust phases of previous
Why? Because "as New Growth theorists like Paul Romer have
shown, ideas are not only more important in realizing value
than economists have traditionally thought, they are also
less subject to diminishing returns than physical capital
As near as I can tell, Jim believes that the data, facts
and ideas now so prodigiously being loaded on the scales of
reason will produce a self-reinforcing prosperity of the
sort the world has never seen.
Why this would be so, I do not know. But I do know that
Jim's reasoning once led him to a very different
conclusion. "I spent years looking through the telescope
the wrong way around," he confesses. But "at the end of the
day," he writes, having finally turned the telescope
around, "one must be either exceedingly smart or downright
stupid to persist in a practice that is as economically
punishing as being globally bearish was in the 1990s."
Jim was definitely wrong in the 1990s, though I might have
forgotten to tell you at the time. But is he right now?
Jim is aware of the tug that emotion exerts on reason. "If
I were fully self-aware," he writes, "I would admit that at
least part of my new attitude might reflect wishful
thinking, in that I have extensive investments in high-tech
companies which I wish to see come to fruition."
'Where thy purse is, there also is thy heart' it says in
the Bible. This little gem of wisdom is like the Lost
Dutchman mine - neither Bible scholars nor I have ever been
able to find it. (Perhaps it doesn't exist...but it
But none of us live, as Jim puts it, "immaculately in a
textbook." We all have hearts and purses. Even I have an
investment of sorts - a reputation for believing the New
Era is nonsense. I would not want my reputation destroyed,
anymore than Jim would relish the destruction of his New
And so perhaps it is back to reason, after all. And luck.
What more do we have to work with? Que sera sera.
Your exceedingly smart, or downright stupid, but in any
case hopelessly devoted man-on-the-scene,
down on the farm in Ouzilly, France...
P.S. Why doesn't reason work better? Because the reasoning
process is not digital. We do not pile facts upon
facts...as though we were building a pyramid. Instead, we
know and understand things by analogy. That is, we
understand things creatively, not logically. In a moment of
recognition, we say, 'Oh that is like...' That is why it is
so hard to talk to people about the politics...and why
intelligent people of good will and good judgment may
disagree about almost everything. They use different
analogies to understand the world around them - which leads
to very different conclusions about how things work and how
thing should work.
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Last modified: April 02, 2001
Published By Tulips and Bears