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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 9 AUGUST 2001 |
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Today:
The
Second Coming of the Bull Market
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*** Investors - and consumers - throwing in the towel?
*** Havoc in the markets - and "beige" is such an
innocuous color...there's that nasty little phrase
again: "conflict of interest"...
*** Home equity "mining" still in vogue - could it be
all that's left...aoutiens and the route de la
"Velorution"... readers react...wealth in the 20th
century...and more!
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*** "Investors could be throwing in the towel," an
investment analyst told Bloomberg. "The market decline
has been such a long, drawn out process, I think they're
giving up." Investors reportedly "yanked" $14.7 billion
from stock funds in July.
*** Our hero, the almighty American consumer, may be
capitulating too. According to the Fed, consumer
borrowing dropped $1.6 billion in June - the first
decline since 1997, and the largest since 1992...the
last time the "r" word was on everybody's lips.
*** And there's that messy little phrase
again..."Merrill Lynch - while refusing to admit any
wrongdoing - has agreed to pay $400,000 to settle a
claim by Debasis Kanjilal, a New York pediatrician,"
writes Prudent Bear's Marshall Auerback.
*** Kenjilal lost $500,000 betting on Infospace - a
Henry Blodgett recommendation. The doctor and his wife
sued Blodgett and the firm for $10.5 million. While they
bought Infospace at close to its peak price of $133,
they had to sell it for $11...the suit claims Blodgett's
recommendation constituted a "conflict of interest".
*** Mary Meeker, Queen of the Internet, may have also
been conflicted. Meeker has been named in a suit by
several investors who lost money on Amazon and eBay.
They accuse Meeker of making positive recommendations
based on "her desire to attract and retain investment
banking clients for Morgan Stanley."
*** Revulsion...retrenchment, recrimination...is this
all just "negative drivel"? Perhaps. More in a "guest
essay" below. First, let's check in with Eric.
*****
Eric Fry reporting from the scene of the crime:
- Beige...it's such a nice, neutral color. It seems like
the Roy Rogers and Dale Evans of color - one that could
not possibly offend and certainly not one that could
cause any harm. But now we know better.
- From the moment the Federal Reserve released its
"beige book" yesterday, investors gaped in horror and
fled for their financial lives. By the time the
pandemonium had subsided, the Dow had dropped 165 points
to 10,293. The Nasdaq spiraled down about 3%...falling
61 points to 1966.
- Few stocks escaped unscathed, with all Dow components
except Coca-Cola finishing lower on the day.
- Bonds celebrated the grim economic news by rallying
sharply - the 10-year Treasury note yield falling down
to 5.05% from 5.17% on Tuesday.
- The so-called beige book is an anecdotal survey of the
economy produced by the Fed. The latest edition,
released Wednesday, featured an economy down on its
luck. Specifically, the country's months-long
manufacturing slump is now reverberating throughout the
entire economy.
- "Manufacturing activity declined further in recent
weeks," the survey concludes, "as producers responded to
ongoing weakness in demand and worked to balance
inventories. Reports of reduced work hours, lost
overtime, forced furloughs, plant shutdowns, and layoffs
were pervasive."
- Low-lights included: "Conditions in real estate
markets softened"; "Many districts noted that airline
bookings, hotel occupancies, and hotel room rates fell
in recent months"; "Retail sales generally remained weak
in June and July"...
- The beige book "does not paint a pretty picture,"
First Albany Corp.'s chief investment officer Hugh
Johnson told smartmoney.com. "The illusion of a second-
half economic recovery is now transmuting into the
prayer for a recovery in the first half of 2002,"
cautions my friend Michael Lewitt of Harch Capital
Management. "Don't bet your last dollar on a recovery
anytime in 2001 or early 2002 - or it may become your
last dollar."
- As a hedge fund manager specializing in junk bonds,
Lewitt enjoys a front row seat from which to view
economic booms and busts. He observes, "U.S. companies
defaulted on $53.8 billion of corporate debt in the
first six months of 2001 and may break last year's
record of $131.8 billion."
- Yet despite the "repayment optional" mentality that
many borrowers exhibit, banks continue to lend willy-
nilly to corporate and consumer borrowers alike.
- Meanwhile, home-equity "mining" has become, for some,
a kind of career. "There are people [in hot areas] who
live on refis of appreciated housing," observes James
Grant citing the Mortgage Bankers Assoc. "Mortgage
originations this year will reach [a record] $1.54
trillion...fully half of this year's refi transactions
have put money in the borrower's pocket."
- In 1945, Americans owed mortgage creditors just 14% of
the value of their homes - the rest, 86%, was theirs in
equity. In 1985, they owed 32%. As of the first quarter,
they owed 45%, leaving 55% in equity. During the
fabulously prosperous 1990s, homeowners ran down their
equity by almost 10 percentage points.
- Tell me again what "savings" the boomers are counting
on to fund their retirement years?
*****
To Addison, back in Paris...
*** You may remember, back in March, that our own Thom
Hickling was on the scene as a coalition of Socialists
and Green party activists won the mayoral election in
Paris. While partying in the streets in front of Hotel
de Ville with the victors, Thom snapped a photo of some
celebrants holding a sign reading: "Deviation".
In case you didn't see it the first time:
http://www.dailyreckoning.com/body_photo_true.cfm?id=990
*** At the time, we were puzzled by the sign's meaning.
Not anymore. Soon after the election, the Green Party's
Alain Lipietz named a three-mile stretch of road along
the right bank of the Seine the "route de la Velorution"
- a compound of the word for bicycle and revolution. He
banned cars from it, through Aug. 15. The rest of the
story made international news.
*** "For the aoutiens, as Parisians who stay in town are
known," says UPI, "the sweet days of empty streets have
vanished. Vehicles that usually use the George Pompidou
way, as the segment of road is properly named, are being
obliged to use and clog up the streets." Now even the
socialists have joined in condemning the pollution and
traffic problems caused by the Greening of Paris.
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The Daily Reckoning Presents: A Guest Essay... a
rebuttal of sorts.
THE SECOND COMING OF THE BULL MARKET
by Addison Wiggin
"You plant a rose, you get a rose...you do not get a
potato."
Her accent was thick, but since the discussion had
veered headlong into the subject of religion, we had
abandoned my French altogether.
La Fete de la Vierge - a religious celebration in honor
of the Virgin Mary - is next Wednesday. My French
colleagues will be taking the day off from work.
"Well, I don't know anything about it," I said.
"What denomination are you?"
"I'm a deist..."
"What's a deist?"
"Um..."
"Is that like being a Buddhist? I'm a Buddhist. Sort of.
I'm Catholic by birth..."
"A deist is a kind of agnostic, but respectful."
"Do you feel responsible?"
"For many things...but I don't expect much personal
attention, er, from above."
"Me either. You plant a rose. You get a rose."
Yesterday Porter suggested that while we'll "undoubtedly
have continuing economic cycles - booms and busts - I'm
more convinced than ever before that Bill's view of the
20th Century as a period of ruin for humanity is totally
wrong. And, more importantly, I'm convinced that the
coming years will be better for us than we could
possibly imagine. Better financially. Better physically.
And vastly richer."
Much of Porter's optimism can be found in a report
published by the Cato Institute titled: "The Greatest
Century That Ever Was".
The report shows the progress we've enjoyed in the 20th
Century - largely due to advances in technology. "Life
expectancy has increased by 30 years," reads the
report's executive summary, "infant mortality rates have
fallen 10-fold; the number of cases of (and death rate
from) major diseases - such as tuberculosis, polio,
typhoid fever, whooping cough, and pneumonia - has
fallen to fewer than 50 per 100,000; air quality has
improved by 30 percent in major cities since 1977;
agricultural productivity has risen 5 to 10-fold; real
per-capita gross domestic product has risen from $4,800
to $31,500; and real wages have nearly quadrupled from
$3.45 an hour to $12.50."
The list of improvements in human life in the last 100
years is truly remarkable. In fact, if you haven't
already, I suggest you give this report a once-over:
The Greatest Century That Ever Was
http://www.cato.org/pubs/pas/pa-364es.html
"The central message of the study," writes Cato's
Stephen Moore, "is that the fruits of a free society are
prosperity, wealth, and better health. All of the
evidence [suggests] that in every material way, life in
the United States, with a population of 270 million, is
much better today than it was in 1900, when the
population was 75 million.
"Moreover, the American people are net resource
creators, not resource depleters...We have produced more
than we have consumed, leaving savings and wealth to our
children and grandchildren."
"Capitalists and entrepreneurs continue to make the
world a better place" writes Mr. Stansberry. "And for
this, they make a profit and their investors earn a
return."
As an example he provides us with a company worth
looking into - Antigenics. "The company has trended
higher this year, despite the bear market," says Porter,
"moving from $11 to over $17 today because its success
isn't tied to our economy, but instead to the
technological prowess of its scientists."
I was intrigued, so I took a look. Antigenics is
currently trading at $16, has a market cap of $438
million...but no reportable earnings. Porter himself
mentioned they have not had a saleable product since
1994. So, I wondered, how do you know if it's a good
investment?
"If I taught a class," said Warren Buffett, "on my final
exam, I would take an Internet company and ask 'How much
is this company worth?' Anyone who would answer, I would
flunk."
To my mind, you would have to dunk Antigenics into the
same litmus solution. The only way you could hope to
even get your money back from this stock would be if
somebody else wanted to own it exuberantly enough to pay
you more for it than you paid. Which might even have
worked last year.
"What a refreshing piece by Porter Stansberry," wrote a
DR reader on the website discussion board. "...amid the
continuous negative drivel that one usually reads here.
The sky is not falling. Once the bull market resumes,
what will you do?"
"You could become professional mourners," he suggests
"and appear at funerals with your doleful faces."
That might be a little too ambitious for us.
In fact, today I've set my sights a little lower. While
we're all grateful for the advances of the 20th Century -
personally I'm a big fan of the Internet - I'll resist
the temptation to explain them all and suggest only that
the Second Coming of The Bull Market is a little farther
off than one might expect...leaving the "little guy" in
a bit of a precarious situation if he's expecting to
flip stocks for a profit.
Jeremy Grantham points out that in 1929, the markets
settled into a 17-year bear market, succeeded by a 20-
year bull market...followed in 1965 by a 17-year bear
market, then an 18-year bull. "Now are we going to have
a 1-year bear market?" asks Grantham. "It doesn't sound
very symmetrical."
All the usual suspects - Fed rate cuts, the so-called
productivity 'miracle' - have been rounded up and are
standing quietly in the line waiting for their mug shots
to be taken.
"Given that the Fed has now reduced interest rates six
times this year," wrote Richard Russell on Tuesday, "the
stock market should be surging higher. Since 1971 there
have been 13 Fed rate-cutting cycles (not counting the
current one). In 10 out of the 13 cycles, the S&P was
higher six months after the first Fed cut, and this was
true of the Nasdaq as well. From 1971 through 1999 the
average gain for the S&P six months after the first Fed
cuts was 12.4% and the average gain for the Nasdaq was
16.2%."
Instead, the S&P at 1183 is 10.4% below its level at the
close of 2000, just 3 days before the first rate cut.
The Nasdaq is down 20.4% for the year this year...and
the average mutual fund down 8.65%. With the news that
$1.6 billion dollars was "yanked" out of investment
funds in July, you might expect them to decline further.
"Reckonings don't last. Redemptions follow," Porter
asserts. No doubt, this is true. But how long do you
want to wait? Can you afford to wait at all?
"Broken promises, unfulfilled expectations," writes Mark
Rostenko, editor of the Sovereign Strategist. "Rate cuts
don't work, earnings ain't getting better, the Fed is
still full of crap and propoganda, why [would anyone]
buy?"
"In 1929 the S&P 500 peaked at 21 times earnings,"
points out Mr. Grantham. "In 1965 it peaked at 21 times.
Not so long ago it peaked at 33, and is now somewhere
around 26...
"[Does anyone] really think," he continues, "we're on
the edge of the next bull market when the p/e of the S&P
is still higher than its pre-'29 crash?"
"Folks are catching on that it might not be so simple
this time around," says Rostenko. In a bear market, with
investor recrimination on the rise, one might be a
little more skeptical about companies with no
earnings...and no products. But that's up to you...
You plant a rose. You get a rose.
Until then,
Addison Wiggin,
The Daily Reckoning
Addison Wiggin is the managing editor of The Daily
Reckoning. A founding member of the DR Blue Team, Mr.
Wiggin is also the author of The DR Weekend Edition - a
weekly wrap-up of contrarian investment analysis.
DR Blue Service:
http://www.agora-inc.com/reports/STRT/BigRetur
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and sends it off by e-mail before most Americans’
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get up—not only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.
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