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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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OUZILLY, FRANCE
MONDAY, 27 AUGUST 2001 |
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Today:
Planting
Trees
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*** Day trading houses? Sure, why not...
*** Stocks boom after Cisco tells investors that things
are not worse than expected...maybe...
*** Commercial rents collapsing...bankruptcies up nearly
25%...killing chickens...planting trees...and more!
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Day trading stocks didn't work for you? Try day trading
houses.
"Liquidity always heads towards a rising market," wrote
Marc Faber at the beginning of the year. Marc was guessing
that the Fed's rate cuts might find their way into the
real estate market rather than the stock market. It now
looks as though he was right.
New home sales rose 4.9% in July. But the real action is
in existing home sales. Believe it or not, back in the
late '60s, the annual number of existing home sales was
scarcely more than the number of new sales. Today,
existing homes are flipped nearly as often as hamburgers -
with about 4 times as many old homes trading hands as new
sales.
Prices rose 4.9% in the first quarter...and then 6.4% in
the second. According to the National Association of
Realtors, housing prices are going up at double digit
rates in 35 metro areas, such as Orange Co., CA, where
houses rose 15% in the month of July...Refinancing
applications are up 65% over last year...and the refi
index alone rose 3% last week.
"How smart is it to takes loans against most of the value
of your home?" asks Jane Bryant Quinn in the Washington
Post.
"As long as prices keep rising, people will feel
reasonably wealthy despite the drop in stocks. But ask
yourself how good you would feel if you borrowed to the
hilt and house prices didn't rise. With little or no home
equity, you couldn't afford to sell and pay off your loan.
"That last happened in the 1990-91 recession. High-flying
real estate markets plunged. Condominium owners, in
particular, found they couldn't afford to sell.
"Whether the slowdown technically registers as a recession
remains to be seen. But businesses are going to keep
cutting workers loose. Unemployment, which is at 4.5
percent, is likely to top 5 percent before the slowdown
ends. Fewer jobs means fewer home buyers. In many hot
markets, sales have already slowed...This is no time to be
adding to debt."
Ms. Quinn might have added that bankruptcy filings are
rising at a 24.5% annual rate. And a real estate bubble
pops just like a stock market one. Except that when stocks
go down, you don't have to continue making payments on
them.
Eric, what else is happening?
*******
Eric Fry, reporting from Manhattan...
- An accident waiting to happen usually does, although
sometimes it takes a while. The stocks of both "sub-prime"
credit card lenders and savings and loan companies have
been accidents-in-waiting for some time. Finally, last
week, some of these stocks buckled under the realization
that lenders are sailing into stormy seas.
- Even though loan delinquencies in most consumer loan
categories have been rising for several quarters, the
shares of most consumer credit companies have been
soaring. . .Stocks like Americredit, Washington Mutual,
Golden West Financial and Charter One Financial have each
posted all-time highs within the last two months.
- But Friday, the world suddenly seemed to change for
these stocks. Mr. Market roughed them up a bit, along with
everything else remotely related to consumer credit.
- Adding gasoline to the fire, Goldman Sachs analyst,
Michael Hodes, weighed in Friday morning with negative
comments about sub-prime credit card lender Providan
Financial.
- "The company continues to be challenged by the effects
of a continued weak economy, high and volatile charge-
offs," said Hodes, "and uncertainty into the 2002
macroeconomic outlook."
- But the consumer credit stocks were the exception to the
rule on Friday as the market soared.
- The Dow spiked 194 points, nearly 2%, to 10,423, while
the Nasdaq jumped 4% to 1,916. All the major indexes
finished the day near their highs for the day and the
week.
- Cisco led the charge, by announcing that it would be
rearranging the deck chairs - so to speak - within its
titanic operating structure. The networking giant
announced it would replace its three main divisions with
11 technology groups subdivided according to the equipment
they sell. Chief Executive John Chambers also said sales
are stabilizing. Although Chambers didn't really say
anything very different from what he had forecast two
weeks ago, Cisco's shares advanced 9%.
- But still, the stock market stands on the clay feet of
feeble national balance sheets. Both consumers and
corporations carry so much already that it will be
difficult for them to borrow enough money to do the
spending and investing that our economy needs.
- The latest Newsweek cover story, "Maxed Out," observes,
"As the expansion slows to a crawl, many Americans carry a
dubious legacy: too much debt. Together consumers owe $7.3
trillion, according to the Federal Reserve - double the
amount they carried into the last recession...The present
danger to everyone - debt-ridden and debt-free - isn't
that millions of Americans suddenly become deadbeats. It's
more subtle: that their big debts act like a giant
headwind, limiting the consumer spending that's helped
fend off a recession."
- "Watching so many households reshuffle their I.O.U.s is
a sobering reminder of how complex financial life has
become...As so many other families rebuild their balance
sheets amid this teetering economy, we'll all have a stake
in their decisions."
- The Wall Street Journal reports, "The decline of the
Internet economy has produced a physical legacy scattered
across the countryside - enormous warehouses, sometimes
equipped with state-of-the-art refrigeration, freezer
systems, conveyor belts and loading facilities." Now, many
of these big boxes are empty.
- "The dot-com debacle has left some large buildings in
its wake, many ranging anywhere from 100,000 to 800,000
square feet. That makes the possibility of finding one
tenant to occupy space unlikely."
- Offering up what is probably the understatement of the
year, Webvan's director of real estate, Alan Arthur,
admitted to the Wall Street Journal, "We ended up leasing
a lot more space than we ended up needing." If memory
serves, the amount of space Webvan now needs is zero.
Didn't it file for bankruptcy protection in July?
- Among the vast space no longer needed by the Webvan is a
360,000-square foot warehouse near Chicago, IL. Webvan
signed the lease in 1999, moved in in 2000 and moved out
in 2001. Such was the dot-com life-cycle. About one-third
of the now-empty space consists of "cooling, freezing and
food-production space waiting for something to chill,"
according to the Wall Street Journal.
- Reuters reports, "As U.S. technology and telecom
companies shutter operations in a lagging economy, the
office furniture that once filled their lively workspaces
is now stacked high in warehouses around the country.
Cliff Schorer, president of Bottomline Exchange in Boston,
said that never before has he bought such great quality
furniture at such dirt-cheap prices. In addition to a
packed warehouse, Schorer stores office furniture in 119
trailer trucks in two parking lots..."
- "To get an idea of how cheap furniture can get, consider
Herman Miller's Aeron brand chair - one of the most
expensive and plush office chairs around. The Aeron
models, which sell for $745 when new, are now available in
some cases at a 75% discount, for $170.
*******
Back to Bill in Ouzilly...
*** Here in Ouzilly, we're beginning a series of seminars
and conferences...so things are getting even more hectic
than usual. Our guests are coming from all over - South
Africa, Poland, Romania...and, of course, many from the
U.S.A.
*** The first event, a writer's conference, began last
night.
*** But other things continue according to the pace and
traditions of rural France. I noticed that Edward, 7, has
been getting up early and going out to the chicken yard. I
thought he was collecting eggs, feeding the ducks or
enjoying the bucolic charm of dawn.
*** "I just want to help Mr. Deshais kill the chickens,"
he explained cheerfully.
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PLANTING TREES
By Bill Bonner
"How is the garden doing?" I asked Mr. Deshais yesterday.
Our gardener has been a disappointment to me lately. He's
stopped talking to himself. I used to enjoy his comments -
spurting out of his mouth like water out of a hole in a
garden hose.
But now I have to work to have a conversation with him, as
if I were laboring on a rusty old pump handle.
"Oh, it is too dry. We need rain."
"Wasn't there a lot of rain this summer?"
"Yes, but that was earlier in the summer...It has been dry
for the last three weeks."
"I thought it rained hard a couple of nights ago."
"Ah, but that was the wrong kind of rain. Too hard. We
need a soft rain...so the water gets down to the roots."
"You're getting very picky..."
"Well, water is the key ingredient...There are only three
things that really matter," he continued. "Earth, sun, and
water...
"If I had a lot of money, I know what I would do with it -
I'd buy land. You can't own the sun. And water...some of
the best companies in France are water companies. But I
don't trust people who run big companies. I would buy
land."
"But agricultural commodities are near all-time lows..." I
protest. "It's very hard to get a decent return on
farmland."
"No, I wouldn't bother farming. Farming is finished in
Europe. All the farmers have such big, expensive
equipment..."
He pointed towards Pierre's huge new tractor.
"Sooner or later they're going to eliminate the subsidies
and the farmers are going to be out of business. No, I
would buy land and plant trees on it. Hardwoods, like oak
and walnut. Every year, the trees grow. I'd rather leave
my children land with timber on it than money.
"Children would just waste the money. Or money might waste
them! But land and trees is a good patrimony. The land
doesn't go away and the trees just keep growing. Every
year they're more valuable.
"And you know what else...," he continued, thinking big.
"When you clean up around the good trees...you cut out the
bad trees and thin out the plantation...you can use that
wood to heat your house. So, they're another line of
profit."
"In real terms," wrote Porter Stansberry recently,
"according to Julian Simon, one of the most well respected
economists of the 20th century, the typical American
worker produced about $2-$3 worth of output every hour in
1900. Today that figure is between $20-$25 - a ten-fold
increase."
Porter and many others believe there is a direct
relationship between higher productivity, higher profits,
and higher stock prices. That was, after all, the promise
of the New Era. Information technology was supposed to
increase productivity - justifying much higher stock
prices than Americans were accustomed to.
Like a man who might have enjoyed a ham and cheese
sandwich, but for the fact that he had neither bread, ham
nor cheese, American investors might have enjoyed the
benefits of a productivity-driven profit boom...except
that there was no extra productivity and even if there had
been it would not have led to greater profits.
The rate of productivity growth today is still 50% less
than it was in 1917-'29. And Jeremy Grantham of Grantham,
Mayo, Van Otterloo explains (in Barron's) why productivity
doesn't lead to profits and higher stock prices:
"People say productivity justified higher P/Es through
higher profits. But I'll give you a simple thought
experiment...Say you come out with a seed corn that is
twice as productive - that is, for every dollar of seed it
will grow twice as much corn in an acre. Give it to
everybody at the same price as the old seed. Productivity
will double. But what will happen to the price of corn and
what will happen to the profits of the farmers in the
following year? I think it is fairly obvious to everybody
that they will be drowning in red ink and there will be
corn coming out of every silo...The whole productivity
argument was interesting but it has no relevance to how
much money the system makes and how high a P/E you should
pay for it."
A report from the U.S. Agriculture Dept. tells us what
happened in the real farm economy. "Productivity growth is
a more important source of output growth in agriculture
than it is for other industries," it says. Working the
earth, in other words, has benefited more from
productivity gains than working computer terminals. Thanks
to machinery, even a Democrat, out on the plains, can
produce more wheat than thousands of farmers before the
Industrial Revolution. (Think what he might have done if
he had had access to the internet!)
Yet, a quick glance at Forbes' list of the richest
Americans reveals not a single person who has made his
fortune tilling the soil. On the contrary, farmers have
become so productive that they have shrunk as an
occupational group from 70% of the population in 1840 to
less than 5% today...and those few who are still planting
and hoeing are now almost all sustained - in America as in
Europe - by taxpayer handouts.
If rising farm productivity has not produced investment
profits...what has?
According to Jeremy Grantham, "timber is the only low-
risk, high return asset class in existence. People are not
familiar with it. What they are not familiar with they
avoid. But timber is the only commodity that has had a
steadily rising price for 200 years, 100 years, 50 years,
10 years. And a unit of wood, just the price of a piece of
wood - in real terms - beat the S&P over most of the 20th
Century, from 1910 to 2000."
Thus does Mother Nature, in her wisdom, reward patient
investors while punishing the day traders...and give the
highest profits to a business which has benefited little
from productivity enhancements. Even in this Information
Age, dear reader, it can take 50 years for a hardwood tree
to mature. But the annual return from planting trees has
been 40% higher than the S&P.
"The price of a piece of wood actually outgrew the price
of a share of the S&P, which is an unfair context, because
there is some growth embedded in the share of the S&P and
there is no growth embedded in a single cubic foot of
wood. The yield from timber averaged about 6.5%. The yield
from the S&P averaged 4.5%. The current yield on the S&P
is 1.25% and the current yield on timber is 6.5%."
Not only have trees proved to be good for good times,
they've also proven good investments for bad times. "In
each of the three great past bear markets...1929-'45 and
1965-'82, and a third one that's off everyone's radar
screen, which is post-World War I, 1917-'25 - the price of
timber went up. It is the only reliably negatively
correlated asset class when you really need it to be.
"One reason for that is that you can withhold the forest.
If you find the price of lumber is no good, you don't cut.
Not only is there no cost of storage, the tree continues
to grow and it gets more valuable."
But no investment is risk free.
"What about what happened two years ago," I remind Mr.
Deshais, "when that storm flattened forests all over
France? Nobody expected it. And the trees weren't insured.
Growers must have lost a fortune."
"Well, at least they had plenty of firewood to heat their
houses."
Until tomorrow,
Bill Bonner
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*******
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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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