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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
WEDNESDAY, 19 SEPTEMBER 2001 |
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Today:
The
Big Ugly
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*** Branson empire threatened in UK...real estate in
America...
*** Spending plans on hold...trading the crash...
*** "Take me off your mailing list"...and the world as
we would like it to be...I promise!
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There is always some leveling circumstance...
Richard Branson has led a charmed business life
since he launched Virgin Records more than a quarter of
a century ago.
But Forbes estimates that Branson has lost $1.1
billion - or about half his fortune - since early 2000.
Now, the worldwide airline industry crisis is hitting
him hard. His only really profitable business is Virgin
Atlantic, which has been forced to cut back drastically.
"Atlantic losses could bring Branson empire down," warns
The Times of London.
Airline stocks are crashing. But so are other
stocks. And the economy seems almost certain to fall
into the long awaited recession.
But what about real estate? "Inventories of high-
end houses are rising and some sellers are having to
trim their asking prices," reported the New York Times
news service last week, describing the real estate
market when the WTC still stood.
But rates have been cut another 50 basis points.
Will that give housing another boost? A guess: not
likely. The public mood is changing in America. "It's a
war-time economy, stupid," says Marshall Auerbach of
Prudent Bear.com.
Do people buy new houses in times of war...even
strange, new wars? Stephen Roach, writing from Paris:
"History tells us that blows like this instill a sense
of fear, caution, and retrenchment that puts all but the
most essential spending plans on hold." Consumer
sentiment - bruised and tender - is turning against big
new houses with big new mortgages.
Eric?
*****
Eric Fry in New York City:
- Stock-buying patriots made themselves scarce on Wall
Street for the second day in a row. The stock-selling
patriots held sway. Stocks managed a small bounce early
on, but slid into the red by day's end. The Dow fell 17
points to 8,903, while the Nasdaq slid another 1.5% to
1,555.
- Nasdaq 5,000 seems like a very, very long time ago.
Not much of anything gained ground yesterday. The 30-
year Treasury bond lost nearly two points. (For you
folks in the stocks-only crowd, a 2-point T-bond loss is
about as severe as a 300-point loss on the Dow). Gold
and oil also gave ground. December gold fell by $1.80 to
close at $289.70 an ounce. October crude fell $1.11 to
$27.70 a barrel.
- However seductive the idea that sheer patriotic fervor
can power financial markets higher, we are discovering
that earnings growth and underlying values are better
goads to share prices. But didn't we already know that?
- Last Saturday, New York Post columnist Bruce Bartlett
urged, "[D]on't let the terrorists win by showing that
they got under our skin, that they frightened us,
rattled our cages...I say 'buy.' Buy stocks - any stock
- the company is unimportant."
Dear Bruce,
The company IS important.
Respectfully,
Eric J. Fry.
- Patriotism is an absolutely essential national virtue.
So is investing wisely. They needn't be mutually
exclusive. But neither must they be joined at the hip.
In short, there is nothing unpatriotic about selling bad
stocks. It is safe to say that America did not create
the world's greatest economy and the world's most
powerful army by investing its financial and human
capital unwisely.
- A successful hedge fund manager e-mailed me yesterday
to say, "In my mind, selling stock to attempt to
best manage your private affairs, is not a patriotic
issue." He's got a point. Isn't selling simply one half
of the investment process?
- Of course, there is a world of difference between
profiteering and investing wisely. Concerning the
former, stories of Osama bin Laden, the terrorist-
capitalist, are now gaining credence. Bloomberg news
reports, "Trading skyrocketed in options that bet on a
drop in UAL Corp. and AMR Corp. stock during the days
before terrorist crashed hijacked United and American
airlines jets into the World Trade Center and the
Pentagon."
- Similarly, there was extremely heavy put-option buying
on the shares of Morgan Stanley Dean Witter & Co.
immediately prior to September 11th.
- Whoever purchased these various options made millions
of dollars. Authorities hope that these apparent
"insider trades" will lead them to other terrorists
affiliated with bin Laden. "I suppose from [the
terrorists'] standpoint," Columbia University law
professor John Coffee told Bloomberg News, "they're
trying to pay for future terrorist activities by
profiting from their past terrorist activities."
- Lynn Carpenter, who is not a terrorist, but who is the
editor of both the Fleet Street Letter and the
Contrarian Speculator, recommended buying put options on
Morgan Stanley about two weeks before the World Trade
Center tragedy. Those who followed her advice more than
doubled their money.
-Yet, immediately after trading resumed on September
17th, Lynn apologetically urged her readers to close the
position and to seek no additional profit from Morgan
Stanley's misfortune. Lynn says readers e-mailed to
praise her character. They're discovering what the rest
of already know... Lynn is a woman of the highest
integrity.
(For more information see: Contrarian Speculator)
http://www.agora-inc.com/reports/AGTD/BestValue/
- We investors sometimes forget that the stock market is
primal. It neither cares who suffers, nor who lives
well. As we mourn the thousands of lost lives and the
thousands more who will forever suffer the loss of loved
ones, we do not assuage our grief by investing unwisely.
- If Cisco was a sell before last Tuesday (we think it
was), it remains a sell now. Conversely, "if Consul
Energy was a buy before last Tuesday," writes John
Myers, of Outstanding Investments, "it remains a buy
now. In fact, if anything about the stock market has
changed, it is that stocks like Consul Energy might be
even stronger buys."
- War or peace, the world will need Consul Energy's coal
along with all the other tangible commodities that
enable a country to build, or to rebuild, or yes, even
to wage war.
*****
Back to Bill, now in London:
*** I must be hitting some raw nerve lately. "Take me
off of your list immediately," wrote one DR reader. "I
can't stand your doom and gloom attitude. This is a time
to spread optimism, not pessimism."
*** "I know this is a purely emotional response on my
part," admitted another, "but after reading this, I'm
actually ashamed and embarrassed to be a subscriber."
*** No doubt, it is an emotional response. But what
emotion? Perhaps it is my scornful attitude to a
"patriot rally" that triggers such disgust. Perhaps it
is the mocking tone...or the irresistible schadenfreude
of seeing the myths of the New Era finally exposed.
*** The Daily Reckoning is a free service, of course.
Free in the sense that readers do not pay to receive it.
It is also free in the sense that readers may come and
go. And free, too, in the sense that I feel I can write
what I really think. Since readers do not pay for it, I
feel no obligation to write what they want to hear.
*** Still...this is also a business and it must be bad
for business to offend customers. So, tomorrow, I will
try a different approach. I will describe the world as
we would like it to be. I promise.
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The Daily Reckoning Presents: A Guest Essay, in which
Dan Denning offers some thoughts on the post-attack
investment environment...
THE BIG UGLY
by Dan Denning
Into this neutral air
Where blind skyscrapers use
Their full height to proclaim
The Collective Strength of Man,
Each Language pours its vain
Competitive excuse
But who can live for long
In an euphoric dream;
W.H. Auden, September, 1939
Autumns sunsets in Manhattan are surreal, almost
ethereal. An old film professor of mine called it "The
Golden Hour" when the light from the setting sun would
cause the entire New York Skyline to shimmer. It made
New York look like El Dorado and the City on the Hill
all at once.
Remember that look.
It will return someday. But it could be awhile. For the
last 15 years, that look of golden resplendence was the
image of America itself. We bathed in good fortune and
prosperity. We were gleaming and unassailable, and the
future was always ahead of us.
Today, eight days after the attacks on the World Trade
Center and the Pentagon, we're beginning to find out
that our world wasn't as invulnerable as we thought. The
question now is: what's next?
My aim today is to try to decipher what's ahead in the
investment markets and, if possible, to help you figure
out what to do with your money. In future issues of The
Daily Reckoning we will no doubt have a lot to say about
America, terrorists, the war on drugs, Bill's gardener,
the bible, Alan Greenspan, and the like.
But today, let's take a few minutes to lay out what you
might expect if, in fact, the investment climate in
America has changed.
First, you can expect to see more volatility and big
swings. As I mentioned to you last Friday, the Dow was
certain to crash on Monday's opening in response to
pent-up selling pressure around the globe. The Dow's
biggest ever one-day drop on Monday is not the end of
the selling, but the beginning.
There will be mini-rallies in certain groups of stocks,
defense for example. But even before last week's
attacks, it was getting harder for investors to make
money in publicly traded U.S. stocks. At 26 times
earnings, the S&P 500, even after a horrendous year, was
still selling at a higher P/E than the peak of the great
bull markets in 1929 and 1964.
And after declining from 180% to around 120%, the ratio
between the total capitalization of stocks and GDP was
still over two times as large as its historical average.
For stocks to return to their normal value in the
economy, they'd still have to decline by another $8
trillion dollars.
And even before last week's attacks, the U.S. economy
was at the end of a long cycle of prosperity. As with
all other cycle ends, our economy had turned into
nothing more than a circus. By the end, we had spent
years overconsuming, overproducing, under-saving, and
under-investing in businesses that created real wealth.
Is the U.S. slated for a 17-year bear market like
investors saw in 1929 or 1964...or like the Japanese are
seeing now? I don't know. But I will say this - even if
this down-cycle is half that long, or even just one
quarter, you will have a very tough time making money
being long on the major U.S. stock indexes.
Don't get me wrong. All is not lost. Many investors will
remember that while there was no bull market in U.S.
stocks during the '70s, gold, precious metals, and oil
did quite well.
And even when there's no bull market in U.S. assets,
there is usually a bull market...somewhere. Latin
America and Asia in the 80s; real estate at various
times (but probably not right now); the Swiss Franc and
the D-Mark back when the dollar was not King of the
World.
"Money" seeks the highest return - no matter what's
going on in the world. Markets aren't patriotic. As an
investor, it will not pay to mix your emotions with your
money. The bull market in the U.S. is over just as
surely as the World Trade Center no longer stands.
You can wait, like the Japanese have for years, for some
mythical event to turn things around. Another rate cut,
increased government spending on military projects, the
rebuilding of New York, all of these will be trotted out
as reasons why the "bottom" is in and it's time to be
long stocks again.
Meanwhile, the primary trend of the market will remain
bearish. And if you can afford to make 1-2% on your
money over the next 20 years, then investing in the
indexes should suffice.
But if you can't afford to hold on to U.S. stocks while
they return to historic multiples of earnings and go
nowhere, you do have real options.
Readers of the DR Investment Advisory are positioned in
several gold companies, several bond funds, and a select
few U.S. stocks with stockpiles of cash. Expect to see
the investment world get much more conservative and
start rewarding unspectacular but safe investments.
We're also long on a few foreign stocks that have strong
natural resource businesses. If there is inflation in
commodity prices due to the Fed's rate cuts, we think
these businesses will do quite well, and investors will
flock to them, driving up their share prices.
As speculators, we continue to sell the dollar vs. the
euro. The dollar too, has been in a long, unsustainable
bull market. And already we've made triple digit returns
selling it short via futures options.
Prior to Tuesday's attack a correction of historic
proportions was already bearing down on the U.S. stock
market. It's possible that the time-frame has now been
accelerated. I say this not to make a grim situation
worse. I say it to point out that you have a critical
dilemma facing you as an investor.
There is much you can do to compensate for the slumber
of U.S. equities. But unless you accept that the bull
market is over, I believe you will find a very nasty
investment climate, indeed.
Until that day when we bathe in good fortune again,
Dan Denning,
for The Daily Reckoning
Daniel Denning is the editor of the Daily Reckoning
Investment Advisory. If you are not already a Blue
subscriber and are interested in the investment
recommendations referred to in this article please
click here:
http://www.agora-inc.com/reports/STRT/BestInvestment/
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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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