Bad Bets / The Daily Reckoning

verfasst von - ELLI -, 05.01.2003, 21:04

-->Bad Bets

The Daily Reckoning

Paris, France

Friday, 3 January 2003

-------------------

*** 2003...so far, so good...

*** Stocks shoot up...investors still crazy after three
years of bear market...treasuries down, dollar up...

*** Purse snatching on the subway...France's ghettos...
Maria's fears... and more!

-------------------

The New Year has only been with us for 3 days...but so far
we have no complaints. We're going to like 2003, we think.
Eric has the latest market news. We give some guesses about
the year ahead, below...

Eric...

----------

Eric Fry in New York...

- Although bloodied by the savage campaigns of 2000, 2001
and 2002, bullish investors charged courageously into 2003,
dragging their battle-weary portfolios behind them.

- On the first trading day of the New Year, IN-discretion
proved to be the better part of valor, as the bulls
fearlessly paid high prices for already-expensive stocks
and pushed all the major averages to big gains. The Dow
advanced 265 points to 8,607, while the Nasdaq charged
ahead nearly 4% to 1384.

- Buttressing the courage of the investor-infantry was a
surprisingly strong manufacturing report for December. The
ISM Index of manufacturing activity rose to a fairly robust
reading of 54.7 last month from November's disappointing
tally of 49.2. When news of the ISM's report crossed the
wires, the stock market and the dollar both soared. Bonds,
however, headed in the opposite direction - surrendering a
big chunk of their recent gains.

- In the manic-depressive world of Wall Street, one
surprisingly robust economic report is sometimes enough to
throw investors into a tizzy. Clearly, our struggling
economy has not become suddenly buoyant. But don't try to
tell that to all the folks who frantically unloaded
Government bonds yesterday. The steep sell-off in the 10-
year Treasury note caused yields to soar to 4.05% from
3.81% late Tuesday.

- Gold retrenched yesterday on dollar strength, dropping
$1.70 to $346.50...oil rose $.65 to $31 a barrel. Given all
the recent publicity for gold and oil, you have to wonder -
will these prices hold? Our resource man John Myers
suspects not. While remaining bullish on both commodities
for the balance of 2003, Myers suggested yesterday he
thought the gold and oil markets are both due for"short,
but sharp corrections."

-"After taking a likely breather early in January,
commodities will resume their strong rally," Myers
predicts."This party is just getting started." [Editor's
note: Myers just balanced his successes for commodities
trades in 2002: 76% of RTA option plays saw profits.
Average gain: 47%. Among his winners, Myers took 40% on a
silver option...120% on sugar...125% in coffee and a
soybean option that brought in 304%. Good stuff. If you'd
like to learn more about trading the commodities market,
please see: Resource Trader Alert
http://www.agora-inc.com/reports/RTA/MassiveProfits/

- We're as happy as the next bear to see the manufacturing
sector showing signs of life. But we are not yet persuaded
that our narcoleptic economy has truly revived. For one
thing, the bear market in consumer confidence continues
unabated. Tuesday's disturbing report from the Conference
Board revealed that consumer confidence in December plunged
to 80.3 from 84.9 in November, just a hair above the nine-
year low of 79.6 reached in October.

-"The major factor dampening consumers' spirits has been
the rising unemployment rate and the discouraging job
outlook," said Lynn Franco, head of the Conference Board's
consumer research center...Not that any"research" is
required to determine that consumers who lack jobs might
also lack the confidence to consume.

- Does it require any research to know that our economy
runs better on the high-octane fuel of rising employment
and rising share prices than it does on the grain-alcohol
of Greenspan's interest-rate cuts? Americans simply are not
buying as many widgets from Wal-mart as they used to, and
this trend is not great news for an economy that has been
living on consumer spending alone...

----------

Back in Paris...

*** A woman suddenly screamed as we were making our way
home on the subway last night. She was going through the
turnstiles...and had stopped midway through, turned around
and was yelling at a young dark-skinned man who looked
North African. The woman was of African origin
herself....and for a moment, passers-by didn't know what to
make of the scene. But in a second or two we caught on -
the man had just stolen the woman's purse.

"Stop him...thief," people began to yell as the man walked
calmly, almost swaggeringly, away. A pale businessman tried
to grab him, but he was completely unprepared for the task.
A few moments later, they were picking him up off the
floor.

We love a good fight, and felt sure we could succeed where
the other middle-aged man had failed. We've been nursing
the illusion of superiority for so long we've actually come
to believe it. Give us a few minutes to prepare and we will
beat the champions in anything...that is, we would have
given even odds that we could beat Shaquille O'Neal at a
game of monopoly and Warren Sapp at chess.

But there we were...on the wrong side of the turnstiles...!

In a few seconds, the whole thing was over; the miscreant
had run off.

***"We have a huge problem in France," explained our New
Year's Eve guest, a political talk-show host."We have
about 10% of the population from Africa. They have a hard
time getting work - because wage rates are too high for
unskilled labor. They live in these public housing
projects...and they hate the police and all of the rest of
us."

The French government is generous in its financial support
for these people. It built whole towns outside major city
centers and provides housing, health-care, education, and
other services at great cost to taxpayers but little
expense to recipients. They are like pampered slaves...with
no work to do. And like slaves everywhere, they resent it.

These housing projects are known in France as"la zone."
They are crime-ridden areas in which firemen and medical
workers are often attacked and into which even the police
are reluctant to venture.

"Now, the crime is leaking out into the rest of the
country," Jean Louis continued."In America, you had a
similar problem in the '60s, when your ghettos exploded.
I'm afraid the same thing will happen here. But at least
you had a couple of advantages. Your economy absorbed low-
skill workers...because you have a lot of low-pay jobs. You
don't have all the social charges and protective labor
legislation that we have...and you also have a history of
taking in different people from all over the world and
making Americans out of them.

"In France, we have had waves of immigration from, say,
Germany, Poland and Russia. After a few generations, these
people came to be accepted as French. But we don't know if
we can turn Africans into Frenchmen. It just doesn't seem
possible...so what's the solution?"

We had one."Stop supporting them...and throw out your
labor laws," we offered."These people will either get jobs
and integrate themselves into French society...or they'll
leave."

"Impossible!" Jean Louis replied.

***"What's wrong with me?" Maria wanted to know.

"Am I not pretty enough?" wondered the girl who makes her
U.S. modeling debut this week in the pages of YM magazine.
"Maybe I just don't say the right thing? Or maybe I'm too
young..." she went on

"What's the matter," her father asked.

"He didn't call me..."

"Who?"

"Louis."

"Who's Louis?"

"You know, he's that young man that had been in an auto
accident and his face was all cut up. Chantal...she must be
his aunt said he was 'barge,' but he said he would call me
and he didn't. No one ever calls me..."

"What does 'barge' mean?"

"It means crazy...she said you can't believe a word he
says..."

"Isn't he the one who said he was a spy?"

"Yes that's the one."

"And didn't his father say the accident happened because he
was drunk and driving 100 mph down one of those little,
windy roads?'

"Well, yes...He was over right after Christmas with his
stepfather, the general...and I guess he is barge. He said
he would call and he didn't. And maybe he's not a spy. But
I saw him in his uniform at church during the summer...and
he looked very handsome...

"What's wrong with me...why didn't he call?"

"Don't worry, Maria," came the words of wisdom from Dad,
"be grateful he didn't call. They'll be plenty of callers
when you're a little older. Most of them will be barge
too..."

--- Advertisement ---

These 4 Overlooked Defense Stocks Could Rise 38%, 77%,
and 197% over the next 6 Months

Wall Street's complacency about the seriousness of the
situation in the Middle East means you have a chance to
scoop these 4 Overlooked Defense companies up BEFORE they
boom. If the war begins in January...it's only a matter of
time before these stocks get accumulated by tardy Wall
Street institutions. You'll want to be in ahead of that
stampede...and you'll learn how in this special report.

Strategic Investment
http://www.agora-inc.com/reports/DRI/ProfitPlot/

---------------------

The Daily Reckoning PRESENTS: Bonner attempts to peer
through the mists and preview what investors might expect
from the investment markets in the year ahead...


BAD BETS
by Bill Bonner

"God does not play dice."

Albert Einstein

Einstein upset the world with his Relativity Theory. All of
a sudden, there were no fixed positions; everything seemed
unhinged...loose.

"It's all relative," people said. Nothing was absolutely
this or that, right or wrong, here or there.

And then Heisenberg's Indeterminacy Principle came along
and even Einstein had had enough. Not only are there no
absolutes, said Heisenberg, but you couldn't know it even
if there were. Everything was in motion, he pointed out;
you could figure out where an object was...or its
speed...but not both. And the process of trying to figure
it out can't help but change the readings!

After Einstein and Heisenberg the world had begun to look
like a giant crap game. You throw the dice and hope for the
best; what else can you do?

The idea of an uncertain, unknowable universe did not
please Einstein; he spent the rest of his life trying to
prove it was not so.

But today, we hear the rattle of dice everywhere. It is the
end of one year and the beginning of another. People are
regretting what they did last year...and warming up the
dice in their right hands for another throw. What are the
odds of this...or that...they wonder, as if they could
know.

To give you a preview of our conclusions; we guess that
this is a bad time to buy stocks.

The odds of a huge meteorite destroying lower Manhattan, we
assume, are fairly low - as remote as the odds that
Congress will pass a sensible law or that Jack Grubman will
win a Nobel Prize for his investment research. Anything
could happen, but some things are more likely than others.
But, as Heisenberg warns us, as soon as we try to figure
these things out, we distort the odds.

That is the strange perversity of the marketplace. As
people come to believe that something will happen, the odds
of it coming to pass go down. Likely as not, it has already
happened. As people come to believe they can get rich by
buying stocks, for example, they disturb the universe -
they buy stocks and run up prices. Then, the higher stock
prices go, the more people believe in them...and prices go
still higher. At some point, because this cannot go on
forever, stocks reach their peaks - at almost precisely the
point when people are most sure they can get rich by buying
them.

This point was reached in the U.S. somewhere between the
fall of '99 and March of 2000 - about 3 years ago. Since
then, the Dow has fallen 37%. The Wilshire Index, a broader
measure, has lost 43%. It is has been the worst bear market
since '29, with the leading mutual funds down an average of
27% in 2002 alone. In terms of money lost, it has been the
worst bear market ever. The total loss so far has equaled
90% of GDP, compared to only 60% of GDP for the two years
following the '29 crash.

Almost all market forecasters were wrong during this
period; they overwhelmingly thought stocks would go up, not
down - especially in 2002, because stocks"almost never go
down 3 years in a row." Abby Cohen, Ed Yardeni, Louis
Rukeyser, James Glassman, Jeremy Seigel - all the big names
from the '90s - still believe that stocks will go up, if
not last year...certainly the next. They seem completely
unaware that their own bullishness has tilted the odds -
against them. Talking up the bull market year after year,
they helped convinced Mom & Pop that stocks for the long
run were an almost foolproof investment. Now, the fools are
having their way - proving that nothing fails like success.

In the last quarter of the 20th century, nothing seemed to
succeed better than American capitalism. Stocks began
rising in 1975...and continued, more or less, until March
of 2000. By then, all doubt had been removed. Americans had
become believers in the stock market.

"To believe that stocks will be rotten again...," wrote
James Glassman early last year,"is to believe that they
will buck a strong tide that has been running in the same
direction for more than 60 years."

Glassman doesn't criticize our metaphors, but we can't
resist criticizing his. Tides do not run in a single
direction forever. They ebb and flow in equal amounts and
opposite directions.

Glassman seems to believe in tides and weather, but never
looks out the window."It rains, but the sun comes out
again. Stocks fall, but they always recover to a higher
ground," he wrote. And then, he failed to mention, it rains
again! And when the sun shines long enough, people stop
noticing clouds on the horizon.

Who noticed, on those perfect days of early 2000, that odds
had changed; the stock market had become very different
from the stock market of '75...and that the few investors
who bought shares in '75 were very different from the many
Moms & Pops who put their money into stocks in 2000? Who
noticed, as Buffett put it, that these people may have
bought for the right reason in '75...but they bought for
the wrongs ones 2000?

Warren Buffett has another helpful dictum: if you're in a
card game and you can't figure out who the patsy is, you're
it. Millions of patsies had entered the stock market in the
last 25 years...lured by Buffett's example, Rukeyser's
spiel, and the appeal of getting something for nothing.
Hardly a single one of them carried an umbrella.

It is now three years since it began raining on Wall
Street. On paper, more money has been lost than ever
before. And yet, the little guys still believe. They
believe the 'reasons' why stocks are likely to rise
...because they hardly ever go down 4 years in a row! On
the little evidence available (since it so rarely happens)
after stocks have fallen 3 years in a row, the odds are
about 50/50 that they will fall again in the 4th year.

This year, the odds may be distorted - but not in the way
investors hope. Stocks rarely go down 4 years in a row
because - usually - after 36 months, they have almost
always hit bottom. But this year is different. The patsies
are so confident that they have not been willing to sell
their stocks and take their losses. At the beginning of
2003, stocks were still selling at prices more typical of a
top than a bottom. Based on 'core earnings,' S&P stocks
were priced at 40 times earnings. Or, as Barron's
calculates it, based on last year's reported earnings, they
sell at a P/E of 28. Either way they are expensive.

While earnings are subject to interpretation, dividend
yields are not; stocks yielded only 1.82% in dividends at
the end of 2002.

But maybe the patsies will get lucky in 2003. Maybe the
U.S. army will catch Osama bin Laden...and maybe stocks
will go up. Maybe it is just luck, after all.

Imagine the roar of laughter when Einstien arrived in
heaven and God explained,"I don't have any plan...I just
roll the damned dice!"

God can do what he wants, of course. But made in His image,
we will do the same. We don't presume to know God's plan or
his method. We know that history is full of myths and lies,
that the present is impossible to fully understand and that
the future is unknowable.

But so what? As the existentialists tell us, we still have
to get up in the morning and make decisions. Recognizing
that we can't know whether stocks will go up or down in the
year ahead, what do we do?

We take a guess...we make a wish...and we say a prayer.

We guess that stocks are a bad investment, for very simple
reasons:

"The place to find a safe and remunerative investment is
unusually where others aren't looking for it," writes James
Grant. Everybody is looking on Wall Street. So we will look
elsewhere.

"Buy low, sell high;" the old chestnut practically pops out
of the pan towards us. For the last 100 years or so, the
average stock has sold for less than 15 times earnings
(which used to be calculated more honestly). Almost any
measure you take puts them about twice as expensive today.

"A bear market continues until it comes to its end - with
real values," says long-time observer Richard Russell.
Stocks are real values when they sell for 8-10 times
earnings, not 28-40 times. If stocks are destined to sell
for 10 times earnings some time in the future, why would we
want to buy them today?

Of course, stocks could go up. And maybe they will. But it
is a bad bet. Not that we know the odds any better than
anyone else. What we know that many others don't is only
that we don't know them....

More to come....


Bill Bonner

P.S. Einstein and Heisenberg proved the latter's point.
Trying to describe the world - they changed it."A kind of
madness gained hold..." wrote Stefan Zweig of Germany in
the '20s. The whole nation seemed to come unhinged by the
realization that nothing was quite what they thought it
was...

Thread gesperrt

 

gesamter Thread:

• Bad Bets / The Daily Reckoning - - ELLI -, 05.01.2003, 21:04