Contributed by Bill
Publisher of: The
Fleet Street Letter
FRIDAY, 25 MAY 2001
*** Unemployment up... cars sales, home sales down
*** It was fun while it lasted...
*** Tom Wolfe...the `blight of progress'...Paris in full
|Again, Eric Fry has watched the market for us today. Eric, |
editor of Grantsinvestor.com, will also be the guest host
on CNN-FN next week, 9:30 - 11 E.S.T. My notes and letter
follow, as usual.
*** Stocks bounced a bit yesterday, with the Dow up 17 and
the Nasdaq rising 38 points.
*** Vermont Sen. James Jeffords - the Independent trapped
in a Republican Senator's body - decided to shed his
Republican ectoderm and be his own man, whatever that is.
Now that this political side-show is all settled, the stock
market can get back to doing what it does, whatever that
*** "This period of sub-par economic growth is not yet
over, and we are not free of the risk that economic
weakness will be greater than currently anticipated,"
Greenspan warned yesterday. More interest rate cuts may be
on the way, he hinted. The Chairman's message seemed
surprisingly gloomy, given the sunny mood on Wall Street
*** Greenspan feels he can't plop down onto the porch swing
and sip iced-tea just yet. Two economic reports released
yesterday - the weekly jobless claims report and the
monthly new home sales - both reflect an economy that is
*** Jobless claims for the week ending May 19 total 407,000
- 15,000 more than the week before. The latest Manpower
Inc. employment survey reveals the US companies are in no
hurry to hire additional workers. In fact, "Companies have
become as cautious about hiring employees as they were in
1990 and 1991, when the US had its last major recession,"
the Wall Street Journal reports.
*** People without jobs make lousy homebuyers. Almost 10%
fewer homes sold in April than in March. It has been four
years since new home sales dropped so quickly in one month.
A fluke? Unlikely, given the fact that both mortgage rates
and unemployment rates are rising.
*** America's unemployed are not buying cars either.
"Moody's analysts are not enthusiastic about the near-term
prospects for motor vehicle sales," the rating agency
writes. "This is a sector that could take a sudden turn for
the worse to the potential disadvantage of the overall
economy. Despite an improved pace compared to 2001's first
four months, the production of motor vehicles in the US was
off by nearly 10% from a year earlier during May's first
*** Even as the US unemployment rate climbs, jobs are
becoming more abundant in the Old World. Last week's report
from Britain showed unemployment falling to a new low of
3.2%. Job vacancy numbers are near all-time highs. Which
leads one to wonder, "How do they accomplish such feats
without Alan Greenspan? And without America's `dynamic
labor market'...or its `information age' economy?"
*** The celebrated Manhattan steak house, Smith &
Wollensky, may be a favorite of carnivorous New Yorkers,
but its stock is no better than gristle on Wall Street. The
restaurant company's shares, which listed on the NYSE
Wednesday at $8.50 each, finished their first day of
trading at $7.77.
And a few notes from Bill:
*** "It was fun while it lasted," said a middle-aged woman
in Santa Fe. I was trying to find out how people really
felt about stocks. Are they ready to jump back in with
everything they have? Are they already fully invested? Or,
once burned, are they twice shy?
*** "I was doubling my money every month for a while
there," she continued. "I would watch CNBC...and when I
heard about a stock that sounded interesting, I called my
broker. It was easy. I had a great time. Of course, I lost
most of the money when the Nasdaq fell. Now I'm sticking
with the real companies - like Cisco and GE..."
*** "All of my friends are in about the same position,"
said a 48-year-old friend in Baltimore. "They all lost
...I'd say, about 20% to 40% of their money last year. Now
they want to make it back as quickly as possible."
*** You don't hear those sentiments at a major bottom. When
stocks hit their lowest points, people don't want to talk
about them at all; they have no interest in buying them and
no hope of getting even.
*** Sy Harding elaborates: "I may be wrong, but the recent
degree of willingness to jump back in, particularly into
the same hot stocks that caused the problems in the first
place, has been a confirming sign to me that, while I
called for a significant rally, odds remain high that it's
only a bear-market rally that will end as the market's
unfavorable seasonal period takes over." More below...
*** What's an investor to do? "Most mutual funds are well-
near incompetent at picking stocks as a monkey throwing
darts," writes my friend Lynn Carpenter. "John Bogle,
creator of another Vanguard titan-the S&P 500 Index fund-
calculated - by looking at all the funds available in 1969
and tracking them for the next 30 years - that you might as
well throw darts-over your shoulder. Blindfolded." (see:
The Pros Can't Beat The Monkeys)
*** Author Tom Wolfe was in Baltimore last week. Recently,
Wolfe made the news by describing the three giants of
American contemporary literature - Norman Mailer, John
Irving and John Updike - as "the three stooges." Speaking
at Johns Hopkins University, Wolfe explained that
contemporary literature is "narcissistically introspective
and self-obsessed." He also described what he called a
"blight of progress:"
"One reason that Jefferson, or for that matter Zola or
Balzac or any of these great figures of the 18th and 19th
centuries got so much done, so much more done than people
today, is that they didn't have any time-saving or labor-
saving devices...If Jefferson were alive today....he'd
never finish answering the email."
*** I arrived back in Paris a few minutes ago. It is warm,
beautiful and swarming with tourists. The tables at the
Paradis Caf have spilled out into the street - and they
are all full. If you're coming to Paris this summer, be
sure to make your hotel reservations as soon as possible.
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"Amazon may be a `river of no returns'. But Cisco is solid
as a rock. The dot.coms were crazy and everyone knows it.
But that doesn't mean you can't make money in the stock
market. Especially at these low prices. And with Greenspan
cutting rates. I mean, the money has to go somewhere."
The speaker was no one in particular. But he probably
expressed the views of millions of people.
They have discovered that following the heels of a greed-
obsessed mob leads nowhere they want to go. So, they've
become `value' investors - looking for the real bargains
amid the damaged goods and day-old bread of the post-bubble
There are some values on Wall Street. I have mentioned a
few `pretty darned cheap' stocks to you over the last few
days. Lynn Carpenter hunts for them every day...and finds a
But this approach requires something most investors lack -
an ability to understand what a value investment is. In
value investing, to quote Warren Buffett, value matters.
Cisco was considered a great value back at the end of 1999.
"Without Cisco," said one analyst, "there would be no
Internet." Fortune put a photo of Cisco's CEO on its cover
with this rhetorical question: "Is John Chambers the best
CEO on earth?"
In Cisco, you had a company with a lock on the Internet,
and by extension, the entire Internet Age, with fat profit
margins and run by a man who was arguably the best
corporate manager who ever lived. How could you possible
want more `value' than that?
Investors loved it. They bid the stock up 89,000% to the
point where Cisco was the most valuable company in the
world, worth $550 billion.
But last year, Cisco earned only $2.7 billion. At that rate
shareholders buying at the peak would have had to wait 237
years to earn their money back. And that supposes that the
world of technology...as well as the rest of the
world...remained unchanged for more than two centuries.
One of the marvels of human consciousness is the ability to
hold two contradictory ideas at once - believing in them
equally. Thus it was that investors were able to imagine a
world of constant technological upheaval on the one
hand...and one in which a line of routers and switches
remained as firmly and securely planted as the Cathedral of
Notre Dame on the Ile de la Cite. Revolutions may come and
go, but Cisco will still ring out the profits...they must
Cisco, the company that promised growth rates of 30% to 50%
per year as far ahead as the eye could see, turned out to
be incredibly nearsighted. As recently as last October,
Cisco said it would grow 30% this year. But 2 weeks ago,
the company admitted that sales had fallen, not risen, by
30%...and profits were down 75%. Cisco was forced to write
off $2.2 billion worth of parts, products and supplies -
which it now says it has no hope of selling. And CEO
Chambers, says he has very little "visibility" into the
What is astonishing about this story is how little
pedagogic value it has had. The mountain has rumbled...ash
has fallen...many investors have already been swept away in
the lava flows. And yet, land prices on Mt. Cisco are
rising. Cisco stock has gone up more than 40% in the last 6
Every myth about Cisco has been discredited. Its CEO may be
a visionary, but he cannot see around corners. He may be
able, but he is no match for the credit cycle. "Real time"
inventory monitoring systems did not prevent Cisco from
over-stocking its shelves. Information technology did not
prevent an economic slowdown. Productivity did not rise to
a whole new magnitude. The demand for the Internet
connections has not proven to be infinite. Economic life in
the 21st century has turned out to be much like economic
life in the last one.
Values still matter.
Your correspondent...always searching for the
essentials...the real values...
P.S. Greenspan may cut the fed funds overnight loan rate.
At 4% it is already only 7 tenths of one percent above the
Consumer Price Index. Thus, the real interest rate to
member banks is less than 1%. Two more 50 bps cuts and
bankers will be borrowing money at a negative interest
rate. The Fed will be paying them to take it.
But that alone does not make Cisco a good investment. The
real economy...and the real value of the companies listed
on Wall Street...are not so easily manipulated. Cisco is
surely a better value at $22 than it was at $60 or more.
But earnings per share have gone negative... it has a long
way to go before it is a value investment.
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.