AFTER THE COLLAPSE
THE DAILY RECKONING
BALTIMORE, MARYLAND
WEDNESDAY, 13 FEBRUARY 2002
* * * * * * * * * * * * * * * * * * * * * * * * *
*** What good is a recession if balance sheets aren't
repaired?...
*** Deflation in Japan...A price rise without an
interest rate hike? That would be a kind of miracle...
*** Back in Charm City...the art of feeling superior on
trains...output in Europe and America...and more!...
* * * * * * * * * * * * * * * * * * * * * * * * *
A recession is a time to"repair a company's balance
sheet," says Paul Kasriel in the Chicago Tribune.
Therein lies a tale. Because a recent survey shows that
95% of economists think the recession will end next
month. 42% think it's already over. (was für Volliodioten! Wer bezahlt die?!) How many balance
sheets got fixed up in the mildest recession in history?
Not many.
Corporate bond debt rose 125% in the period 1995-1999,
to a total of $2.59 trillion. In the following slump, it
should have gone down. Instead, it went up - to $3.39
trillion.
What good is a recession if it doesn't make the
necessary repairs? Where could it lead?
Regular Daily Reckoning sufferers know that we look to
Japan for a peek into America's future. What has been
happening in Japan?
"The quicksand of deflation pulls even stronger," says a
headline in the Financial Times.
"We are already in a deflationary spiral," the FT quotes
Takatoshi Ito, professor of economics at Hitotsubashi
University."This makes debtors' balance sheets much
more difficult to manage, so they join the ranks of non-
performing-loan companies. They lay off workers, further
depressing aggregate demand, thus creating more
deflation and so on."
Prices fell 1% in Japan last year - excluding fresh
foods. What does deflation do to companies with a lot of
debt?
"Deflation destroys cash flows and because many
companies can't pass this on through lower wages, they
eventually go operating-cash-flow negative," explains
David Atkinson, managing director of Goldman Sachs in
Tokyo. Even with interest rates at virtually zero, he
adds, this inevitably leads to default.
In Japan, as in America, the central bank responded to
the economic slump with lower interest rates. But the
Bank of Japan found that it couldn't create"money" when
it was most needed. Prices have been falling in Japan
for the last two years - despite the central bank's
vigorous inflationary efforts.
Why can't the government just"print money?" Because
money is only valuable as long as the myth behind it
remains intact. (Und jetzt stirbt der Mythos langsam) It is only useful as"money" so long as
people believe its supply is limited. At the first sign
of just"printing" money, interest rates would shoot up,
people would dump the currency...and whatever advantage
a government hoped to gain by printing money would be
overwhelmed by the disadvantage of high interest rates
and a"run" on the currency.
Central banks can and do destroy their currencies; it's
their job. But they have to do so in a measured way...so
the illusion of paper money is preserved.
Meanwhile, back in the land of sushi eaters..."If
somebody can produce a price rise, but no interest rise
hike," says Atkinson,"I would like to see them do so.
That would be a kind of miracle."
Here in the U.S. people are counting on a miracle too.
They expect higher stock prices, higher consumer prices
and higher interest rates. (Warum nicht? Dort ist ALLES möglich. Nur wir sind ja die zurückgebliebenen Primaten, die noch an ihren Wurzeln hängen) But no one believes that high
interest rates will cut off the recovery...not even in a
nation where corporations and individuals carry more
debt than ever before...and where - in the recession
that barely happened - few balance sheets were repaired. (Wenn pleite, dann repariert)
Eric was out late last night. I know, because I was out
with him for the first part of the night. Still, our
steadfast reporter on Wall Street brings us the news...
******
Eric Fry, reporting from New York:
- The battle between fear and greed continues to rage.
Yesterday, fear won again, as it has been doing so often
this year. Gold rallied and stocks fell.
- After an early morning sell-off that pushed the gold
price below $300, the metal reversed course to post a
modest 50-cent gain to $301.30. Meanwhile, the stock
market failed to hold onto its gains. The Dow dropped 21
points to 9,863, while the Nasdaq fell 12 to 1,834.
- Fear has paid very well this year. Thus far, in 2002,
gold has rallied more than 8%, while the XAU Index of
gold shares has jumped more than 22%. And numerous
individual gold stocks have fared even better. Harmony
Gold (now the world's second largest unhedged gold
miner) has climbed more than 45% in 2002. The stock has
soared a spectacular 72% since John Myers recommended
the stock in the November edition of Outstanding
Investments! (Jaja, war nett)
- By contrast, the returns on greed year-to-date have
been very disappointing. The Nasdaq Index, for example,
has tumbled about 6%. But 2002 is young, of course.
There's still plenty of time for greed to triumph over
fear and for Abby Cohen's bullish predictions to come to
pass and for James Cramer to become a celebrity again.
- There's still plenty of time for gold bugs and short
sellers to return to the investment doghouses they've
been inhabiting for most of the last two decades. Then
again, who's to say that stock market investors won't
spend a few years in the doghouse, just like their
Japanese counterparts have been doing? Financial markets
are nothing if not cyclical.
- And financial celebrity is as cyclical as the stock
market. The kinds of stock market personalities who make
the newspapers at any given time can reveal more about
the state of the financial markets than 1,000 brokerage
reports.
- During the mid-1980s, the correctly bullish Robert
Prechter enjoyed modest fame for his"Dow 3,000"
prediction. By the late 1980s, stock market bears like
Joe Granville and the short-selling Feshbach brothers
grabbed most of the headlines...for a while. (Of course,
when the Feshbachs bought a Lear jet in 1990, a stock
market rally became all but inevitable).
- As the market rallied throughout the early 1990s,
successful stock-pickers like Warren Buffett and
Fidelity's Peter Lynch became folk heroes. By the late
1990s, it seemed that everyone associated with the stock
market became a kind of celebrity - from Alan Greenspan
to Abby Joseph Cohen to Maria Bartiromo to the temporary
dot-com billionaires too numerous to mention.
- So where are we today? Who are today's financial
famous? Well...let's see...former Enron CEO Kenneth Lay
is a pretty well-known guy. And today's minor
celebrities include some of the short-sellers who have
been profiting from the bursting of the great millennial
bubble market.
- My friend Jim Chanos, while no stranger to the press,
has been garnering a lot more ink than usual lately as
"The Guy Who Called Enron."
-"When Jim Chanos and his friends go on spring break,
there is no time for golf. Or the beach. Or fun of any
kind," says Newsweek magazine."Unless your idea of a
good time is sitting in a conference room talking about
lousy investments. Each February, Chanos, a veteran Wall
Street investor, picks up the tab to bring 20 of his
professional-investor buddies to a luxury Miami hotel.
Most of the group specialize in 'short selling,' in
which they bet on stocks to fall, so most of their picks
are companies they see heading for hard times. At last
February's gathering, Chanos pitched the group on a
stock you may have heard of: a high-flying energy firm
called Enron."
- I was sitting in that room last year and I will be
meeting up with Chanos and his buddies again next week.
All those of us who attend are sworn to secrecy about
the specific investment ideas that are presented. Even
so, many of the skeptical insights gleaned from this
year's Miami meeting will certainly make their way into
upcoming editions of the Daily Reckoning...for better or
worse. Read them at your own risk!
******
Back in Baltimore...
*** I took the train back to Charm City last night. In
America, trains are full of busy people.
***"They get out their laptop computers and cell phones
and go to work almost immediately...making deals," Eric
had warned me."But the first car is an electronic free
zone. No computers or cell phones allowed."
*** On European trains, it is not hard work that makes
people feel superior, but diplomas, politics and the cut
of their clothes...Taking the train from Paris to Bonn,
for example, the snob quickly gathers up a collection of
newspapers in as many languages as possible. Reading the
Financial Times, Le Monde, Der Handelsblatt and the
Herald Tribune - all at the same time - gives a man a
certain distinction. Better yet, he picks up a copy of
the paper from Brussels - in a language no one has ever
heard of and probably no one actually reads. Just be
careful not to hold the paper upside down.
*** And do not get out a laptop computer. It marks you
as a hopeless bourgeois striver.
*** A Financial Times article puts numbers to the
observation. In Europe, GDP output per head of
population is only 67% of American levels. Why the
difference? Productivity per hour is not much different,
but in America more people work and they work longer
hours. Unemployment levels in Europe are higher than in
America...and fewer women work outside of the home. And
those who do schlep and cipher do less of it. Our office
in Paris, for example, is required to shoo employees out
the door in the evening - or risk getting fined by the
government. The 35-hour workweek is the law of the land.
Employers have to be careful to make sure workers don't
"feel" as though they should work more than that. Only
one employee regularly stays past 6 in the evening...and
he is allowed to do so only because he convinced his
supervisor that he is not really working...but just
amusing himself on the computer.
*** But in America, the rabid Wall Street dealmaker sits
on top of the social pile - proud of working 80 to 100
hours per week. Seldom does a quarter hour go by that
his cell phone does not ring or rattle. Rare is the day
that some deal is not teased along or a sale
consummated.
*** But in Europe, as in America, the art of trying to
feel superior has its irony; no matter which train you
ride, the people you are trying to feel superior to
always take you for a fool.
(Was sagt uns das? Arbeiten um zu leben oder anders herum? Besonders bitter für die Amis wird aber, daß ihre Dollars bald Klopapier werden. Vielleicht ahnen ja viele, daß das mit dem Euro auch passieren wird und reißen sich deshalb kein Bein raus?
)
Back tomorrow,
Bill Bonner
The Daily Reckoning PRESENTS: In the rubble of the Enron
collapse, Martin Weiss suggests, the public is finally
starting to see the truth - America's most powerful CEOs
lying about their corporate earnings...the world's most
prestigious accounting firms helping to cook the
books...brokers and rating agencies knowingly hiding the
truth...investors and employees getting wiped out.
AFTER THE COLLAPSE
By Martin Weiss
The twin towers of the Enron Corporation in Houston were
not struck down by hijacked airliners. Nor did they
implode in a mushroom cloud of dust and debris.
Strangely, however, ivory-tower economists still don't
get it. They seem completely oblivious that Enron is
just one of many accounting scandals that will bust wide
open in 2002. Indeed, there are 2,467 other companies
that I feel are suspect of earnings manipulations.
Now, hundreds of companies with murky or complex
accounting are going to get dumped mercilessly by angry
investors. If the company discloses the dirt, investors
will sell. If it refuses to disclose, investors will
sell even more! The most recent examples: Tyco, Williams
Companies, GE (das sind die, die die Analystenschätzungen immer auf den Cent genau treffen. So ein Zufall aber auch...), PNC Financial Services, Cendant.
What about the so-called"recovery" so many economists
are talking about? It's a mirage. A fantasy.
I believe dozens of other major companies will fail in
the coming months. Big names. One shocker after another.
Then, hundreds of companies will soon be writing off up
to $1 trillion in"goodwill". Finally, millions of
companies in the US and around the world will be struck
by debt and deflation.
The key force driving the US economy and stock market is
earnings. And right now, I count at least 8 major
corporate earnings killers that are about to crash into
Wall Street.
Even in good times, three out of four companies that
file Chapter 11 never emerge from bankruptcy.
Among the few that do come out, 30% fall right back into
bankruptcy, filing Chapter 11 a second time. Examples:
Memorex, Cherokee, and LTV. TWA filed three times in the
last 10 years!
Wall Street will try to pooh-pooh this. But if you're in
business yourself, you know exactly what happens when a
major corporate customer goes bankrupt: You lose when
they fail to pay you for goods already delivered... and
then you lose again when you stop selling to them in the
future.
It will sabotage the pricing power of tens of thousands
of companies. When deflation strikes, the simple act of
buying now and selling later becomes a treacherous
proposition. Even in the best case scenario, profit
margins are squashed, forcing companies to cut back on
research and development, slash business travel to the
bone, severely cap executive expense accounts. And, of
course, they cut jobs!
Major companies are swamped with debt to the tune of
156% of GDP. (Immer wieder erschreckend. Nur gut, daß die Schulden auch gleichzeitig"Gut"haben sind) That's 44% more than a decade ago. It's
also bigger than the debt load Japan faced before their
stock market bubble busted back in 1990.
Right now, many companies are so deeply buried in debt
that they can't even THINK about spending money on new
plants or equipment. (Macht nichts. Die Lücke versucht Bush ja mit der Armee zu füllen. Nur daß da leider kein großer Nutzen rausspringt. Egal, er verdient ja dran)
For every single dollar of stockholders' equity, Maytag
has $5.09 in debt; Xerox, $5.22; Sprint PCS, $12.09;
Nextel, $18.52; Ford, $21.00!(Großer Gott! War es nicht Ford, die vor nicht allzu langer Zeit wegen zu viel Geld eine fette Sonderdividende zahlten?)
How bad is that? Well, even just one dollar of debt per
dollar of equity is usually too much. When you start
seeing companies with more than double, five times, or
even twenty times the debt level they should have, the
drag on earnings - not to mention the danger of failure
- is literally off the charts.
"Goodwill" write-offs could hit $1 trillion, bashing
earnings even further. Goodwill is the same kind of
often-bogus, intangible asset that the savings and loans
used back in the 1970s to make weak or bankrupt
institutions look strong and healthy. By the time the
public finally caught on, thousands of S&Ls were down
the tubes and the entire industry was threatened with
extinction.
You'd think Corporate America would have learned
something from that lesson. They didn't.
How big is the problem? Monstrous! And it shows up when
companies are finally forced to write off goodwill and
other assets with so-called"one-time charges."
Back in 1989, one-time charges to earnings among the S&P
500 companies totaled around $10 billion. That was
considered pretty big in those days.
In 2001, extraordinary charges to the S&P 500 companies
reached $360 billion. Can you imagine that? That's 36
times more than 1989!(erfrischend)
And some of the largest write-offs have been the prelude
to major bankruptcies:
* In July 2001, Bethlehem Steel took a $1 billion
unusual non-cash charge against earnings to write off
the value of a deferred tax asset. Three months later,
it filed for Chapter 11.
* Excite@Home, the provider of high-speed Internet
access, took a $4.63 billion charge against earnings in
the fourth quarter of 2000. Nine months later, in
September 2001, it was in bankruptcy court.
* Ditto for Enron: The last and final warning of the
collapse came in October of last year - a $1.01 billion
charge due to investments gone sour.
By the time write-offs are announced, you should be
miles away...and if you're not, it's your last warning
to sell. Get to safety.
Martin Weiss,
for The Daily Reckoning
P.S. There are 2,467 listed companies suspected of
cooking the books...and 8 CORPORATE EARNINGS KILLERS
about to smash Wall Street. But it's not too late to
transform this disaster into a profit bonanza. Click
here for details...
Fragt sich nur immer wieder, was diesen Markt noch oben hält.
Gute Nacht
SB
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