-->Die dt. Fassung habe ich leider nicht ;-(
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The River Of Losses / The Daily Reckoning
Venice, Italy
Thursday, 22 April 2004
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*** Everything breaks...
*** Still a whole lot of 'flation going on... despite what
the Fed chairman says
*** Venice... modern democracy... and more!
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Tout casse. Tout passe.
Everything breaks. Everything passes away.
The French expression came to us yesterday as we were
making our way along one of the smaller canals of Venice
yesterday. The fashion seems to be to let the plaster fall
off the exterior walls. Little by little, the brick is
exposed... and then, that too breaks up and erodes.
The effect is pleasing, rather like a beautiful woman aging
well. There is a whiff of graceful decay around every
street corner in Venice; it is part of the charm of the
place. But Venice is not just getting old, it seems to be
dying. The crowds of tourists come to gawk like poor
relations saying goodbye to a rich uncle they never knew.
We Americans tend to think everything gets better all the
time. Our houses become more valuable with each passing
day. Our stocks - if held for the long run - invariably
make us richer. Science... democracy... and modern, dynamic
capitalism take us towards a better world - where disease
and disorder will be forever vanquished. Even the
occasional slip-up is thought to a good thing. Our wars
leave us bigger and stronger. Our financial crises lead to
useful reforms. Our economic setbacks bring forth new
innovations. Every day, things just get better.
Yesterday, Alan Greenspan barely mentioned deflation. He
hardly spoke of inflation either. Thanks to productivity
and enlightened central banking, he led listeners to
believe, neither inflation nor deflation is any longer a
cause for concern.
But reports from all over the country suggest that there's
still a whole lot of 'flation going on. Cold, rolled steel
has risen 68% since December. Gasoline is hitting new highs
regularly. Home sales in the Bay Area of California are
rising at a 25% rate. In many resort and second-home areas,
prices are rising at 50% per year!
"Milk prices harder to swallow," says a Dallas headline.
But the most reliable indicator - the price of gold - is
not signaling more inflation, but less. Gold deflated
another $6.90 yesterday, bringing the price down to
$391.40. So much for our 'bottom' guess of $400.
The hot money seems to be guessing that U.S. interest rates
will go up, which would take the dollar up further. We
don't know what will happen, but we wouldn't want to be
betting on a higher dollar, nor a lower gold price, nor
higher stock prices... not when a huge correction is waiting
to happen. Maybe the world is becoming a better place.
Maybe it is not. But we warn readers: tout casse, tout
passe. The current boom in debt will have to correct
sometime; we doubt it will do so gracefully.
More news from Wall Street:
--------------
Eric Fry, on the scene in Manhattan... [By the way, don't
miss Eric on CNNfn's Market Call today and Friday, airing
at 9am EST.]
- Motorola"blew away the number" Tuesday evening, which
blew fresh life into the tech sector Wednesday morning.
Motorola reported a tripling of first-quarter net profit -
causing its shares to leap more than $3.00 to a three-year
high of $19.30, and sparking a frenzy of"sympathy-buying"
in other tech stocks. The tech-infused Nasdaq gained nearly
1% to 1,996.
- But the Motorola pick-me-up failed to inspire the Dow
Jones Industrial Average, as the big blue-chip index
continued to labor under the gloomy specter of rising
interest rates. The Dow added a mere three points to
10,317. Government bonds rebounded a trifle from their 4-
week shellacking, as the yield on the 10-year Treasury note
dipped to 4.43% from 4.46%. The dollar also gained ground -
hitting a five-month of high of $1.1835 per euro.
- Motorola's sales surged 42% in the first quarter, thanks
largely to soaring sales of cell phones. In retrospect, no
owner of a Motorola phone should have been surprised by the
report. Every time a Motorola cell phone rings on a crowded
New York City train, a dozen passengers reach into their
pockets to see if the offending phone belongs to them.
Motorola's ubiquitous"clamshell" handsets have become
"standard equipment" on regulation-issue New York yuppies,
while also becoming a de rigeur fashion accessory among the
under-20-somethings... In short, the phones are
everywhere... How could Motorola NOT make lots of money?
- Motorola's stellar earnings report was but one of several
pleasant surprises yesterday from a cadre of companies that
routinely disappoint investors. Ford Motor shocked its
long-suffering shareholders by reporting a near doubling of
earnings, while Dow-outcast Eastman Kodak presented a
pleasing picture for the quarter.
- Meanwhile, up on Capital Hill, Chairman Alan Greenspan
testified before Congress for the second straight day. The
earnest bureaucrat assured the politicians in attendance
that inflation is of little concern, then promised to fight
the inflation about which he is not concerned by raising
rates"at some point."
-"What does the prospect of rising interest rates mean for
the stock market?" Rhonda Schaffler asked your New York
editor during his appearance yesterday on CNNfn."Should
investors be worried about it?"
-"Remember 1994," he answered."Greenspan hiked rates in
the spring of that year and stocks struggled for the next
several months... Expect a repeat of sorts. The interest-
rate sensitive sectors of the market will almost certainly
struggle, at least relative to other sectors of the market.
Financial stocks and commodity stocks are struggling
already."
- Greenspan's promise to raise interest rates has cut a
path of devastation through the commodity markets
reminiscent of the scorched earth left behind by Sherman's
troops on their March to Atlanta.
- Gold fell nearly $7.00 yesterday to $391.40 an ounce,
while silver plummeted 77.5 cents to $6.17 an ounce. The
sliding precious metals prices dragged the Philadelphia
Gold and Silver Index down by 1.5 percent to its lowest
level since late August. Other casualties of the new
interest rate regime included copper, which tumbled 6.3% to
$1.227 a pound, palladium, which tumbled $21.10 to $295.25
an ounce, and platinum which fell by $31.20 to $884.50 an
ounce.
- Commodity prices needn't necessarily collapse at the
first sign of rising interest rates, but somehow they
always do. The question before the House is whether
investors ought to"back up the truck" to buy gold and
other commodities, as Doug Casey argued yesterday... or move
out of the way lest the truck run them over. The answer,
unfortunately, is unclear.
- The price of copper fell about 10% immediately after
Greenspan first started hiking rates in the spring of 1994,
but it quickly reversed course and nearly doubled by the
end of that year. Gold, on the other hand, fared less well.
The precious metal drifted lower after Greenspan's first
rate hike and never recovered, as gold stocks tumbled about
30% between March 1994 and the end of the year.
- The textbook explanation for sliding commodity prices
during a rate-hike cycle is that rising rates choke of the
inflationary pressures that contribute to rising commodity
prices, while also slowing the economy, and hence, the
demand for commodities. Will this time be different? We
wish we knew... The U.S. dollar is the principal wild card.
Rising rates may prop up the greenback for a while, but the
dollar's many structural disadvantages - like a combined $1
trillion current account and federal deficit - will
continue to weigh it down.
- The dollar may be as good as gold - or better - for a few
days or weeks or months, but we'd still bet that gold will
be better than the dollar for the next few years, despite
Greenspan's magical interest rate adjustments.
--------------
Bill Bonner, back in Venice...
*** In many ways, Venice peaked out 500 years ago. Since
then it has been living on little more than reputation,
tourism, and the accumulated wealth of its dead people.
It is an improbable city, built in an improbable place in
an improbable way. The city founders were said to have
taken refuge on these low, marshy islands when barbarian
tribes invaded Italy in the 5th century. They shored up the
ground, dug canals and drains, and drove wood pilings into
the mud to build their stone palaces. The city flourished
making luxury goods and trading with the East. But it
peaked out in the 15th or 16th century, increasingly by-
passed after vessels began using the Cape of Good Hope
route around Africa... and manufacturers in the south of
France began to offer competition.
Tourism has been an important industry in Venice for the
last 300 years. But even that has gone downhill, as the
quality of tourist has degraded. The city was once a magnet
for artists, poets, and aristocrats from all over Europe.
Wagner, Proust, Ruskin, Ezra Pound... all came to admire the
city and soak up whatever inspiration they could leech out
of her old stones. Now it is the discount tourist who
arrives, appalled by the high prices... and looking for a
funny hat at a gee-gaw vendor. They move in huge crowds
preceded by a small flag to help stragglers follow. They
walk through the Basilica San Marcos as if through
Disneyland... eating ice cream cones while gaping at the
crucifixion... wondering vaguely how a Zen chapel came to be
in a Christian church.
You can practically hear the stones sigh.
*** Reading the history of Venice is not much different
from picking up the newspaper: lies, fraud, delusions -
they are all there, just as if you were reading the
International Herald Tribune.
President Bush claims to be building a better world... but
he seems to be rehearsing the story of Doge Dandolo in the
12th century, or the Doges Michiel before him. American
voters think they are participating in the world's finest
democracy... but the government of Venice in the 13th
century was at least as democratic and just as
dysfunctional. Venetian soldiers setting out to clash with
the civilization of the East... were they not providing a
useful lesson to the Coalition of the Willing 800 years
later? (More on that tomorrow... )
*** Great institutions, like great bull markets and great
cities, have a way of degrading over time. People gradually
learn how to rig the system to their own advantage... and
usually contrary to the interests the institution was meant
to serve. Paul Jacob offers this"Common Sense" comment on
modern American democracy:
"Republicans believe in certain things and Democrats
believe in certain other things. But, once in office, they
both believe in one thing above all else: incumbency.
"A case in point is the April 27th Republican U.S. Senate
primary in Pennsylvania, between Senator Arlen Specter and
U.S. Representative Pat Toomey. Both men are Republicans,
but the similarities end right there.
"Toomey went to Congress to put Washington on a diet. His
voting record shows he has kept his word. The National
Taxpayers Union ranks him seventh best in the House on
taxation and spending issues. Anti-incumbent Toomey pledged
to serve no more than three terms in the House and he's
keeping that pledge, too.
"Specter, on the other hand, has been in the Senate for the
last 24 years. He's a Republican, but most famous for
voting against Reagan's nomination of Judge Bork for the
Supreme Court. If reelected, Specter will take over the
Judiciary Committee.
"The National Journal rates Specter nine points more
liberal than conservative on economic issues and three
points more liberal on social issues. Meanwhile, Toomey was
rated more conservative than liberal on economic issues by
47 points and on social issues by 32 points. Quite a gap.
"Not to mention that Specter is being funded by many of the
same folks, such as George Soros, who are funding the
effort to oust President Bush. Why then is President Bush
traveling to Pennsylvania to promote Specter over Toomey?
"Specter is the incumbent and, in the rulebook of
Washington, incumbency comes first."
*** Modern degenerate capitalism is as fraudulent as a
senate primary. Wall Street sells shares pretending they
will make investors rich. Ordinary people gamble money in
stocks and pretend they are investing. Public companies
sell shares pretending they are using it to make investors
money. This from colleague Porter Stansberry:
"Most of the profits made in technology stocks during the
1990s ended up in the hands of as few as 100 corporate
insiders, instead of the millions of investors who actually
owned these firms.
"Take Cisco for example - one of the largest, most
profitable and best-known technology companies of the
1990s. Between 1995 and the end of 2003, Cisco reported to
have earned $3.3 billion in profits. However, as only the
footnotes to its financial statements revealed, the firms
spent over a billion dollars in stock options on its
employees. Cisco spent $1.5 billion on employee stock
options during this seven-year period - 53.4% of all the
money it made.
"In simple terms: Cisco spent more than half of its total
profits on extra compensation to its employees. The vast
majority of these stock options went to a handful of senior
executives, like CEO John Chambers. Chambers regularly
received total pay packages in excess of $100 million per
year, with most of his pay coming in the form of stock
options that depended on the stock price staying high.
Thus, it's no surprise that as late as December of 2000,
Chambers told the financial media that he didn't see any
deterioration in Cisco's business, despite the collapse of
the"Dot.com" businesses, which had been large buyers of
Cisco's Internet routers. In 2001, only a year later, Cisco
would record a loss of nearly $3 billion dollars - about as
much money as the company had made during the previous two
years combined.
"Even for the very best and most profitable company in the
Internet sector then, the Internet boom was only a mirage,
at best. On closer inspection the boom looks like an
enormous fraud. And these are the results from the best
company in the sector. The other companies fared much, much
worse: the vast majority never made a profit at all, and in
fact lost billions when you included stock options
expenses.
"And yet, no one on Wall Street or in the mutual fund
community or in the press said anything about these abuses
until years after the fact and only when they were forced
to by congressional investigation or shareholder lawsuit."
[Ed note: In his investment advisory, Porter works hard to
uncover exactly what's going on behind the scenes of Wall
Street's darlings... and how their shenanigans affect
investors. For instance, back before 2000, Porter saw the
writing on the wall for Eastman Kodak and AT&T... two
beleaguered companies the S&P just dropped from its list of
blue chips last month.
You can follow Porter's analysis here:
http://www.agora-inc.com/reports/PSI/WPSIE303/ ]
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The Daily Reckoning PRESENTS: The trends that could
put oil at $50 per barrel this year haven't gone
away. But the risks created by the"reflation rally"
threaten EVERY asset class today. Beware you don't
get wiped out in 2004/05...
THE RIVER OF LOSSES
by Steve Sjuggerud
"I was leaning toward the view that some assets would
continue to increase in value in 2004. I am now
increasingly concerned that sometime soon 'everything'
could begin to unravel. When interest rates rise, it is
conceivable that bonds, stocks, commodities and real estate
will all decline in value at the same time."
- Marc Faber, in the Financial Times
This is the most important advice I've ever given. And,
chances are, you don't want to hear it.
In fact, after you read this essay, you might never want to
hear from me again. But it's a chance I'm willing to take.
So here it is: Very soon, you could lose a lot of money.
Right now, the way I see it, it will be extremely difficult
over the next year - at least - to make money ANYWHERE in
investing.
I think Marc Faber is right. The fact that interest rates
have been at multi-generation lows for a very long time has
caused investors to chase anything and everything higher.
The obvious result is that everything has been bid up.
Stocks and bonds were first. But now commodities and real
estate have been bid up as well.
As I'll show, I think many markets are close to their
peaks. I now see the stock market (and most investable
assets) like a river, working its way from the mountain
peak to the sea. There are occasional"flat" sections of
the river, where things appear calm and the current isn't
very strong. And then there are some wild rapids heading
down. There are even the occasional eddies along the river
banks that flow against the grain.
And while the river has all three of these states (flats,
rapids, and eddies), the inexorable flow is down. I see
investments as that river today. The inexorable flow in
investment values is down. You can see how difficult it can
be over the next year (or couple of years) to fight that
current.
Let's consider some of the major asset classes (like
stocks, real estate, and commodities), and see what may
happen in the coming months and years. And then we'll talk
about the eddies - which investments, if you're ambitious
enough to consider them, might flow against the current.
By most measures, stocks are expensive right now. But the
Fed is still accommodating investors by keeping rates low,
and the overall trend in stocks still seems to be up - for
the moment. However, the writing is on the wall... at least
right now, it appears fairly certain that the Fed will
raise rates by the end of this year. When it does, stocks
will likely take a significant hit.
At the same time, in the housing market, the fundamentals
I've written about for years are still in place. With the
extremely low mortgage rates, real estate is still
"affordable," when you compare monthly payments to family
incomes. So I still believe in the bullish case I've made
for years now.
But there is a major change. I believe an international
housing bubble is finally getting underway in the rich
countries of the world. Like all bubbles, this one started
out on a solid premise. Enjoy it while it lasts, but be
aware... know that a speculative bubble is being created, on
a pile of debt, and the end will likely be ugly.
Meanwhile, the sales promotions for commodity-related
investments pile up in my mailbox..."Why Natural Gas is
Hotter than Ever" is the cover of one."New Oil & Gas
Discovery Rewrites the Energy Story for 2004" is on the
cover of another.
I am very bullish on commodities over the rest of the
decade, as you probably know. But I'm starting to think
that the story is getting too popular. You know it's
getting overheated when CNBC is taking helicopters out to
the oil sands area in Canada. CNBC is just going where the
hype is, as usual. It is simply giving the advice you want
to hear...
Earlier this month, I touched base with my most trusted
contact in the commodities business. Simply put, nobody
trades commodities better than Canadian broker Chris Foster
of Scotia-McLeod in Toronto.
Chris eased my fears."The hype is worrisome," he told me,
about oil."But the story is simple, and real... there is
simply more demand than supply."
Chris explained that, contrary to popular opinion,"the
Saudis are maxed out" right now in their oil production.
The Saudis are already using output-enhancing techniques
just to keep their production up. Chris went through a
laundry list of oil-producing countries, and why their
production can't keep up. It sure is a motley bunch...
Venezuela, Nigeria, etc.
Making matters worse, there is apparently not enough
exploration - the source of future supply - going on. Chris
wondered aloud what price oil would have to reach to get
exploration in high gear again. Then he said,"It wouldn't
surprise me to see the market meander its way to $50 a
barrel."
In the near term, Chris is probably right. Nevertheless, if
you want to play the commodities bull, caution is in order.
There is a big story hidden in here... the story of a bubble
in the midst of bursting, that could possibly drag
commodity prices down with it: China.
The Chinese government now admits it has a credit bubble on
its hands. But China has made the mistake that Japan made
in the late 1980s, of not acting fast enough to slow the
growth of the bubble. It may already be too late.
The bust of China could lead to a bust in commodity prices
as well, for a while. To compound the probability of the
commodity boom, it appears that hedge funds have been big
buyers of commodities over the last six months or so, also.
Hedge funds can, and do, dart in and out of positions. If
hedge funds are moving out of commodities at the same time
the China bubble is bursting, it could be ugly. The moves
could be exacerbated, as hedge funds often make leveraged
bets.
Given the conditions I've outlined above, and to reiterate
what I said earlier, it will likely be extremely difficult
over the next year to make money through investing. I see
today's markets as a giant river flowing downhill, sweeping
up unwitting investors - and their money - in the process.
You might choose simply to get out of the river... then you
wouldn't go down with it. The other, more ambitious, and
more risky, approach is to try and find the little sections
of the river, right on the edges, where the river
occasionally flows in the wrong direction. There, you might
find a pocket that will rise, maybe for a brief moment,
against the current.
Admittedly, the 'eddies' I'm talking about are hard to
find. You're not likely to hear about them from your
broker. His main concern, of course, is selling you stock
and mutual funds... and taking a healthy commission.
But I don't work on commission. I don't have an interest in
whether you buy, sell, or hold. And so, unlike your broker,
I am free to tell you - this next year could be devastating
to many"traditional" investments.
If you do nothing else, I recommend you get out of the
markets right now. Cash may turn out to be the best-
performing asset of the next year.
Regards,
Steve Sjuggerud,
for The Daily Reckoning
P.S. If, however, you're more ambitious... if you don't like
to sit on the sidelines, and you want to find out about the
few opportunities that remain where your wealth will likely
be safe (and could possibly even double), I urge you to
read my latest issue of True Wealth.
If you already subscribe to True Wealth, you should have
received a copy of this issue by e-mail already. If you're
not a subscriber, you can sign up here:
Where the Smart Money's Going
http://www.agora-inc.com/reports/TRW/WTRWE472/
Editor's Note: Dr. Steve Sjuggerud has worked in the
investment world as a stockbroker, the vice president of a
$50 million global mutual fund, an international hedge fund
manager, and the director of several research departments.
An international currency and emerging markets expert, he
is also the editor of:
True Wealth
http://www.agora-inc.com/reports/TRW/WTRWE472/
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