-- Posted Friday, 6 June 2003 | Digg This Article
The Daily Reckoning
Baltimore, Maryland
Friday, 6 June 2003
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*** The hullabaloo continues...Dow still above 9000...
*** Investors, analysts are very bullish...but jobless...the dollar sinks - Panic Ahead?
*** Insiders selling...bonds in South Africa...strikes in France
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The hullabaloo continued on Wall Street yesterday.
The latest Investors' Intelligence poll tells us that bulls outnumber bears by more than 2 to 1. And the bulls are very bullish. A First Call survey reveals that analysts expect double-digit annual gains and a 25% rise in the S&P 500 in the next 18 months.
Good luck to them! Factory orders from March to April registered their biggest drop in 18 months, and unemployment claims suddenly shot up ("Jobless claims surge" is the CNN headline).
"Can stocks defy gravity?" asks Fortune Magazine. Fortune concludes, as we do, that expecting double-digit gains from the stock market is foolish. Where we part company with the magazine is with our guess as to what investors are likely to get. The magazine expects 6% to 8% annual gains. We would put a minus sign before those figures.
For while the lumpeninvestoriat eagerly opens its brokerage statements, the world's Big Money peaks at its own balance sheet with dread and horror. The U.S. dollar, in which it put so much money and faith, is giving way. It has lost a third of its value against the euro. By one tally, foreigners hold nearly $9 trillion in U.S. dollar assets. Depending on how they keep score, they've lost as much as $3 trillion. And yesterday, another big drop in the dollar hit them again.
One of the remarkable things about the last few years has been the lack of panic. American investors stood their ground as trillions were taken out of the stock market...largely because they didn't know any better. But what about foreign dollar holders? Will they hold their positions despite titanic losses? Or will they suddenly panic?
We will see....
Eric...?
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Eric Fry in New York...
- The fierce tug-of-war between "outsider buying" and "insider selling" continued yesterday. The sellers jerked the major averages decisively to the minus side yesterday morning. But the buyers held their ground, pulling stocks back to the plus side by day's end. The burly buyers tugged the Nasdaq 11 points higher to 1,646, and heave-hoed the Dow to a slim 2-point gain at 9,041.
- Meanwhile, the dollar resumed its slow-motion collapse - falling 1.5% to $1.1859 per euro. The greenback's weakness sparked a rally in the gold market, as the once-and-again monetary metal jumped $5.90 to $369.50 an ounce.
- The "outsider-buyers" of stocks don't seem to care much about the dollar. They care about stocks, and they have much to show for their efforts. The outsider-buyers can proudly point to a hefty 30% Nasdaq rally since early March. By contrast, the insider-sellers have little to show for their toil...except, of course, the billions of dollars they have been stuffing into their pockets by selling stock to the outsider-buyers.
- Insider selling jumped 150% last month to $3.3 billion, according to Thomson Financial, easily exceeding the five- year historic monthly average of $2.4 billion. By contrast, insider buying totaled a paltry $119 million, well below its 5-year historic average of $180 million.
- "The resulting rise in the sell/buy ratio could signal that the stock market's advance has run its course," CNN/Money speculates. "The insider sell-buy ratio is the highest since May 2001, a period that pre-dated a big fall in the U.S. stock market."
- What should we cautious folks deduce from the fact that the informed investor - a.k.a. the smart money - is selling the very same stocks at the very same time that the uninformed investor - a.k.a. the dumb money - is buying? Maybe we should deduce that stocks are "better sold then bought." On the other hand, maybe we should deduce that we should "back up the truck" to buy stocks, simply because there is a lot more dumb money than smart money, and if all the dumb money is buying stocks at the same time, maybe the smart money is the dumbest money of all...We suspect, however, that dumb money is, in fact, dumb money, even if it looks pretty darn smart for a while...But what do dummies like us know about money anyway?
- Yesterday's economic dispatches provided little cause for cheer, but the stock-buyers kept cheering anyway. U.S. factory orders fell 2.9% in April, their biggest drop since November 2001. Meanwhile, weekly jobless claims spiked to 442,000, the highest level in more than a month, marking the 16th week above 400,000.
- It isn't easy to identify exactly what economic facts are inspiring the feverish stock-buying. Is the buying inspired by the fact that the economy is barely growing, that jobs are rapidly disappearing, that the dollar is helplessly tumbling, or a combination of all the above?
- Maybe the buyers are buying simply because stocks are going up. After all, if stocks are going up, the economy must be improving, right? And if the economy is improving, shouldn't we be buying stocks?...For better or worse, the more stocks go up, the more stock-buyers want to buy them...until, one day, they don't want to buy them...and that, dear reader, is how bear market rallies end.
- Or maybe investors are buying because they genuinely believe that paying 35 times earnings for stocks is a good idea. Today's Lilliputian earnings growth, they tell themselves, will improve. Gulliver-sized earnings growth will break loose from recessionary restraints...during the second half of the year.
- Maybe so. But in the real world, earnings are growing only because companies are slashing costs, primarily payrolls. And it is unlikely that the road to national prosperity, not to mention Dow 10,000, is paved with pink slips.
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Back in Baltimore...
*** Your New York editor is not alone in discounting the Echo Bubble. In fact, there are those who would discount stock investing altogether...at least, à la '90s-bubble- style.
"The problem investors face now is simple," writes colleague Dan Denning. "You can't make money the old way, buying single stocks or mutual funds as if it were a bull market. Stock prices are now determined by a multiplicity of factors: balance sheets, interest rates, wars, elections, trade policies, tax laws, and global capital flows, to name a few.
"Not one single approach that worked in the bull market of the '90s is adequate to invest successfully in this new regime. It's time to rethink the way we build our portfolios..."
[Ed note: for Dan's full comments, see his recent article:
Time for Regime Change on Wall Street ]
*** "I see you guys were laughing at bond yields globally," writes our South African correspondent, Evan Pickworth. "Check out some of the S.A. yields...pretty good value to be had by foreigners, I'm sure you'll agree...
"I was looking at global yields and see emerging market debt spreads have narrowed more than 450 basis points since October last year, with Brazil yields down 700 basis points since February and Argentine yields down a massive 2,450 basis points.
"In S.A., our 10-year government bonds have only dropped 200 basis points over the past 12 months, with our benchmark 8-year R153 still high at a 9.74% yield. This shows that S.A. capital market yields are still higher than elsewhere (e.g. 5% in Australia and 5.85% in Poland, etc.).
"The newer five-year R194 reached a record low of 9.735% on May 20, and is currently at 9.67%.
"All this while the flight to commodity currencies has taken place (Aussie dollar up 16% vs U.S. dollar; Canadian dollar up 15%; Brazilian real up 20% and the rand up 11.5%).
"SA's longest-dated bond, the R186, is also at record best levels of around 9%.
"And then we're offering even higher yields on the utility's, with power utility Eskom offering an attractive 10.07% (2008) and Umgeni Water 11.10% (2005). A major success story on the stock market, newly listed Telkom is offering 11.10% (2004). Of the other corporates, it remains a fairly untapped market, but I see Standard Bank is getting most of the interest, offering 11.23% (2005).
"On the whole, the S.A. economy has officially been in an upward phase since September 1999 and in May 2003 exceeded the previous record upward phase, which lasted from September 1961 to April 1965. You'll also know that Fitch has recently upped their rating for S.A. from BBB- to BBB on the long foreign currency and to A- from BBB+ on the long term local currency."
*** "It's getting a little ugly," said our French accountant yesterday. He was referring to the strikes by government workers that have paralyzed Paris and halted many public services - including the mail. The strikers want to stop reforms that are intended to close the budget deficit in the public retirement system.
"Yes, it's a mess...a couple of buildings have been burned. I don't think there will be bloodshed. But I remember '68...and it wasn't very nice."
An email message arrived later in the day from another French friend...this one urging me to show up at 2PM on the Place de la Concorde for a "manifestation" in favor of the reforms.
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The Daily Reckoning PRESENTS: Bill Bonner, refraining from thinking...
MIA'S WEDDING
by Bill Bonner
What makes the world go 'round, dear reader?
Is it love? Or money?
We are in town for business, but attended a friend's wedding last Saturday. Mia and Beirne got married in the Catholic Basilica down the street from our office in Baltimore. The Basilica claims to be the oldest cathedral in America. It sits on a hill between a soup kitchen and a tawdry rooming house, like a bishop between two subway bums. Designed in the Byzantine cruciform by Benjamin H. Latrobe, and built of gray stone, it is more handsome inside than out. Outside, the place is severe. But inside, it is soft, but still dignified. Unlike the Cathedrals of Rome, there are no naked women painted on the ceiling. Craning our necks, we found no cherubs, no scenes of destruction or abomination, no flayed saints, no sad virgins or crucifixions, no purgatory or redemption. Instead, the walls and ceiling were painted in a light grey, highlighted with gold rosettes. The Basilica is a Catholic Cathedral that makes Episcopalians feel at home.
By the time the beautiful bride came down the aisle, the place was nearly full. It must have been the social event of the season; tout Baltimore was there.
We mention this event only because it seemed to ignite a small, philosophical candle within us. Unable to douse it immediately, the flame flickered off and on for the rest of the week. You see, dear reader, while we pretend to be hard-headed financial analysts, we have a heart too. And on certain occasions, it pumps.
The priest performed his work admirably, reminding one and all of the seriousness of the occasion, without making a nuisance of himself. Mia and Beirne were not just getting together like Simon and Garfunkel or Merrill and Lynch. They were entering into a sacred union...upon which the entire race depends. So brightly does the allure of this holy amalgamation shine, that practically everyone is drawn to the altar at one time or another...and many two or three times. Many regret it, of course...but that is a story for a different time, not a wedding day.
Tears welled up in eyes throughout the church as the ceremony reached its crescendo. The man in the pew in front of us gave his wife a hug. The woman in the next pew reached for her husband's hand. Perhaps they recalled what made them tie the knot...or gave a silent prayer of thanks that the tie that binds still bound.
At some point, a man has to stop thinking. At least, that is the thought that we pondered as we watched the finale. He has to stop because no amount of thinking can get him where he needs to go - such as, to the altar. Getting married is not a rational act, it is a desperate one. He has to feel his way to it.
"Look, it's not something you can figure out by trying to figure it out," we vaguely recall saying to a young man later in the day. "You can make money by figuring things out. But if you spend all your time figuring things out, you'll never figure out what you can't figure out by figuring."
After the wedding service, the group made its way down Charles Street to the Maryland Club. Mia and Beirne had met as employees of our publishing company, so it was natural that there would be many other employees at the wedding reception. Most of these people are young...and more than a few are contemplating marriage. They do not ask their boss for his sage advice, but when he has been drinking, he is likely to give it anyway.
"The most important decisions of your life are not made by adding up columns of figures, or by making logical deductions," he elaborated. "Only a fool would choose his work, his spouse or even his house that way."
"Everything that really matters in your life," he continued, working himself up, "happens spontaneously...almost miraculously. You meet someone...or you go somewhere...or you try something. And you like it. It changes your life. It enriches it. It makes it worth living."
["When I met my wife Maria," said a friend later in the week, "my life went from black and white to technicolor. I had never felt anything like that. That was 15 years ago. The color is still not bad."]
"Since you can't make these kinds of decisions using your brain," the advice went on, "people who tend to use their brains have a little disadvantage. They have to force themselves to stop thinking long enough to feel their way to the answer they need. Otherwise, a man will go along - rationally, logically and reasonably - to a life of complete misery. And if he thinks about his own situation long enough and hard enough...he'll soon be ready to check into a lunatic asylum or put a pistol in his mouth."
While your editor offered advice to people who didn't want it, the party revved up around him. Spotting a cousin, he decided to stop giving advice and ask for some.
"Steuart, you're a few years older than I am," he began. "You've worked like a dog. But now you've done just about everything you set out to do...I mean, you've got a lot of money and a great family. So, here's my question...what do you do now?"
It may seem like a silly question to most people. Steuart can do whatever he pleases. He has plenty of money...and time to spend it. At 60, he is still healthy and even handsome. But Steuart understood the sense of it immediately. A man reaches for something, but he is not necessarily more content when he has it in his grasp. It is the grabbing that keeps him going, not the having. (Advice to wives: stay slightly out of range).
Before an answer had come, we were distracted by passers- by. The band had started up; the dancing had begun. Your editor once paid for dance lessons which proved at least as low-yielding as his other investments. He learned a variation of the fox trot, which he uses for any kind of music on any occasion. The band may be doing merengue, bossa nova, waltz, cha cha or rock and roll...your editor fox trots.
"You dance very well," said an older woman whose left shoe bore the imprint of his right.
"You lie very well," was the response.
Still, it was fun. Drinking. Dancing. Not thinking.
An old man walked by with his young, gorgeous wife. "There's hope for us yet," whispered a friend.
"It is a cruel trick of nature," he went on. "The more we have, the less we want."
After the Maryland Club closed its doors, the party moved to a hospitality suite at the Peabody Court hotel. More rounds were poured...more advice given...and the little fire of philosophical puzzling flamed up again. We wish we could recall what was said.
We remember leaning close to a charming and beautiful young woman. We recall the cut of her cheek and the fine yellow strands of hair that fell down towards her shoulder. We recall her boyfriend, too...a fine young man with a heart as big as his ambition.
And then we recall saying something...to someone...something important.
And then, finally falling into bed just before sunrise...without thinking, your editor let out a sound. He either laughed or wept. He can't remember which.
Bill Bonner
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-- Posted Friday, 6 June 2003 | Digg This Article
