The Age of Jordan / The Daily Reckoning

verfasst von - ELLI -, 24.01.2003, 00:22

-->The Age of Jordan

The Daily Reckoning

Paris, France

Thursday, 23 January 2003

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

*** Pension funds lose 10% of assets...Oh Deere!

*** We're turning Japanese; I really think so...

*** 110 economists can never be right...will the stimulus
plan do any stimulating?...Microsoft and Michael Jordan on
the same page...and more!

--- Endorsement ---

The World's Leading Austrian Economist:
"Almost Every American Economist Is Dead Wrong!"

"It's not what you don't know that will hurt you; it's what
you think you know that's dead wrong and that can destroy
your wealth."

Fasten your seatbelts, investor. You're in for a wild ride.
According to the mainstream,"Happy days are here again"...
the fabled"recovery" is right on track.

Wrong!

In fact, the truth is quite different - and you haven't
even begun to see the fallout of the"profit carnage" on
Wall Street. One small group of investors will be fully
prepared to protect themselves and profit...even in the
worst of times.

Click here to find out how you can protect your money
during:

The Bogus Recovery
http://www.agora-inc.com/reports/RTA/ClickHereNow/

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

Bloomberg reports that pension fund assets fell 10% in the
12 months up to Sept 30, 2002. The 1,000 funds Bloomberg
reviewed lost about half a trillion dollars. Over the last
2 years, they're down about twice as much - or about $1
trillion.

That's a trillion that will have to be made up somehow...or
a trillion less retirees will have to spend.

A trillion here...a trillion there. If that were all there
was to it, we'd pay it no mind. But along comes our own
Eric Fry, quoted by Alan Abelson in this week's Barron's
with more gloom and doom.

Eric noticed a $5.5 billion hole in the pension accounts of
Deere & Co. The hole was camouflaged by an accounting
ledgerdemain that has become common among major companies.
As Eric explained to Barron's, much of the money was called
"other post-employment benefit obligations" rather than
"plain-vanilla pension obligations".

"If you used the same accounting for the operations side
that is used on pension funds, you would be put in jail,"
Abelson quotes Ethan Era, chief actuary with Mercer HR
Consulting.

If that weren't enough, most large pension funds are still
using absurd assumptions to calculate how much money they
need. IBM, to use an example cited by Abelson, recently
reduced its expected rate of return on pension assets from
9.5% to 8.5%. Based on the returns from the last three
years, IBM should have put a minus sign before the last
figure.

Before it is all over - that is, before the end of this
slump - people will probably go to jail for accounting
fraud. But not before the poor lumpeninvestoriat have lost
a lot of money.

These pension losses and hidden costs will take a lot of
juice out of the U.S. economy in the next few years.
Companies will have to sock away much more than expected to
meet their pension obligations. The money will have to come
from somewhere. Meanwhile, the boomers are thinking about
retirement. As they give up on stocks, they're going to
have to increase savings in a major way. Already, the
savings rate rose 50% in 2002...from 2.3% of disposable
income in January to 3.5% in November. Each percentage
point equals about $70 billion.

A rise in the savings rate to 6% would take about $200
billion out of the consumer economy, probably pushing the
U.S. into recession.

In the long run, this is good news. The U.S. economy needs
real savings. But in the short run - which could be for the
next 10 years - it is disastrous. Savings take money out of
the consumer economy...thus depressing sales, employment,
and profits.

Hey...I think we're turning Japanese...I think we're
turning Japanese...I really think so...

Konnichiwa...(hello in Japanese) Eric,

----------

Eric Fry, reporting from New York...

- Now you see it, now you don't. We are referring of course
to the stock market's splendid New Year's rally. After the
first three trading days of 2003, the Dow had racked up a
sparkling 5% gain. But yesterday's losses snuffed out all
that remained of that early January advance. The Nasdaq
slipped only 4 points yesterday to 1,359. But the Dow
slumped 124 points to 8,318 - dropping the blue-chip index
into the red for 2003.

- So just like that, another bear-market rally bites the
dust. This kind of dispiriting trading action can be pretty
rough on the lumpeninvestoriat. Wall Street's finest had
assured them - and reassured them - that stocks could not
possibly fall for four straight years. But sadly, it looks
like stocks can indeed fall for four straight years...maybe
even five or six. The die is not yet cast for 2003, of
course. Stocks may recover and validate the optimism of
Wall Street's strategists. Then again, the market may
continue falling, thereby solidifying the strategists'
reputations for moronic and misguided forecasts.

- We don't know what will happen any more - or any less -
than the strategists. So we merely retreat to the
simplistic notion that bad things tend to happen to
investors who buy richly valued stocks, and good things
tend to happen to investors who bide their time, waiting to
buy inexpensively valued stocks. This sort of"tactical
ignorance" causes us to draw near to gold like a suckling
pig to a sow's teat. What else is a suckling to do? Gold,
like the sow's milk, is reliable sustenance, at least...An
investor could do worse.

- Yesterday, gold proved itself to be quite nourishing
indeed. The precious metal brushed up against the $360-mark
by gaining $2.40 to $359.90 an ounce. The XAU Index of gold
stocks jumped two and a half percent to 77.7.

- When President Bush first announced his new"stimulus
plan," we considered it no worse than any of the other tax-
and-spend proposals that the knuckleheads in Washington
dream up from time to time. But we now suspect it is a
horrible idea. The reason: 110 economists think it's a
terrific ides. The Washington Times reports:"A letter
signed by 110 economists, including three Nobel Prize
winners, urges Congress to support the main elements of
President Bush's $647 billion tax-cut plan." Can any idea
that's applauded by 110 economists NOT be a bad idea?

- The President's big-time spending plan is but one of may
deficit-spending proposals being cooked up by politicians
from Bombay to Bonn. Deficit-spending is the hottest global
macroeconomic craze. Not only is the U.S. hurtling toward a
$300 billion deficit in 2003, Germany and France are also
running big deficits. Both countries are violating the
European Union's limits on budget deficits - 3% of GDP.

- The deficit-spending craze is one of many reasons why
James Grant matter-of-factly asserts,"The fixed-rate
obligations of the United States government, and
investment-grade corporate bonds, are for losers. It's a
canard that the creditor class rules these United States.
Debtors rule...Creditors willingly sacrifice the prospect
of capital gains for security, a security that, often as
not, is illusory. They are the saps of the
world...Creditors have possibly less political standing
than smokers in millennial America."

- Grant continues:"Record-high ratios of indebtedness to
GDP, record ratios of slow loans to loans outstanding, and
1.5 million bankruptcies in the latest 12 months all point
to the same conclusion: the United States economy must
reduce its leverage, sacrificing top-line economic growth
in the process."

-"Debt repayment could be the dominant force in the
economy, not only for 2003, but also for the next several
years," bond fund manager Van R. Hoisington tells Grant.
"This deleveraging will result in the stagnation of capital
spending and moderating inflation, causing interest rates
to fall."

- The New York-based editor of the Daily Reckoning is not
persuaded that long-term interest rates will be dropping
substantially from current levels. But he has little doubt
that"deleveraging" by American corporations and consumers
will put a crimp in the sorts of consumption and capital
spending that drive our economy. American corporations and
consumers are both becoming a lot more eager to repay their
old debts than they are to rack up new ones.

- Given these trends, will the President's stimulus plan do
any stimulating? We are dubious.

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

Back in Paris...

*** An ABC/MONEY poll shows consumer confidence falling.
Only 24% of those polled think the economy is in good
shape. The drop in confidence was the sharpest in 2
decades.

*** 30-year bonds are near their highs. The bond market,
too, seems to think the economy is sinking.

*** But home construction is running at a 16-year high. Go
figure.

*** In the popular mind, Wall Street is an industry that
helps investors make money. It is nothing of the sort - it
is an industry like any other; it makes money for itself by
selling things at a profit. What does it sell: the HOPE of
making money.

That's why analysts typically recommend 49 'buys' for every
single 'sell'. It's also why Wall Street strategists almost
always expect stock prices to go up - how could they make
any money if investors thought stocks would go down?

Suppose that the Wall Street crowd really did have an
investment that would produce above-market profits. Would
the Masters of the Universe offer it to their
lumpeninvestoriat customers? Or hold it for themselves?
Wall Street professionals have access to all the capital
they want. Why would they ever fail to take up an
extraordinary investment? It follows that the investments
Wall Street sells are the ones it doesn't want for itself,
which is true of every seller.

People who buy from the financial industry think that they
are not consumers of Wall Street's products, but investors.
They imagine themselves as mini-Warren Buffets or Carl
Icahns. But they don't think like either of them. Both
Buffett and Icahn buy businesses, not stock - often by-
passing Wall Street altogether. They think like business
buyers - analyzing the real assets and real profitability
of the enterprise in order to figure out how they can make
money with it. The typical stock-buyer, by contrast, hasn't
a clue. He's just hoping the stock will go up...because he
heard someone on CNBC say it would.

Happily, they all get what's coming to them - Buffett,
Icahn, Mom & Pop. What a wonderful world we live in, dear
reader.

[Editor's note: If you've sent an e-mail to us in the past
couple of weeks and we haven't responded...don't despair!
We always like to here from you; in fact, it's one of the
more pleasing aspects of our work. But as many of you know,
we're working on a book to be published by Wiley & Sons,
and the deadline draws near. We simply haven't had time to
respond. Thanks for your understanding. Back on the job
soon!

À bientôt,

Addison Wiggin,
The Daily Reckoning]


The Daily Reckoning PRESENTS: Sooner or later, today's
giants must make way for those of tomorrow. The question
is...when? If companies are no longer investing in
themselves, James Boric contends below, it's probably time
for capital-gain investors to look elsewhere.


THE AGE OF JORDAN
by James Boric

Mark January 16, 2003 down in your calendar as a date to
remember. I believe this day in history will prove to be a
pivotal turning point for investors - a day of true
reckoning.

At 4:48 P.M. on Thursday afternoon, Microsoft announced its
first-ever dividend. I smiled when I read the announcement.
I knew this was big. But not for the reasons you might
expect.

Sure, Microsoft's stock has been in trouble for three
years. After reaching a high of $119.13 on Dec. 27, 1999,
it has tumbled down to just over $55 a share. The company
had to do something to make its stock seem attractive to
new investors.

So it decided to pay its shareholders a measly 16-cent
annual dividend (8 cents once the 2-1 stock split takes
place on Feb. 14). That's a 0.31% yield - well below the
S&P 500 average of just 1.7%. This is hardly the way to
bolster a $55 stock back up to $75, let alone $100. And
it's certainly nothing to get overly excited about - or at
least it would appear that way to most investors.

But most investors weren't able to recognize that Microsoft
was a highflier in the 1980s. And I doubt most will
recognize the importance of its Jan. 16th announcement.

By issuing a dividend, Microsoft admitted it was getting
old. It silently acknowledged it could no longer perform at
the same level it did back in the early 1990s. It was like
watching an aging Michael Jordan play for the Washington
Wizards.

In his prime, there was no better player than Jordan. He
could take a game over single-handedly. He could beat you
off the dribble. He had a deadly fade-away jumper, an
explosive move to the basket and killer instincts - that
helped him rack up six NBA titles in the 1990s.

What's more, in his prime, Jordan never seemed to labor on
the court. He had the stamina of a marathon runner and the
grace of a dancer. He was a winner.

Throughout the late 1980s and all of the 1990s, Microsoft
was the Michael Jordan of the investment world. Its stock
made investors filthy rich. Microsoft was the epitome of
all growth stocks. With a return on equity above 20%, there
was no need for Microsoft to worry about dividends in the
'90s. The company was reinvesting its profits in its
business. And who could argue with the results?

But it's not 1992 anymore. Both Jordan and Microsoft are
older. And both have had to change the wining formula that
made them great.

Jordan can no longer rely on his athleticism to overwhelm
his opponents. Instead, he has to outsmart the younger,
stronger generation of NBA players. And that doesn't always
work. Unfortunately, being smarter than your opponent
doesn't put points on the board.

Likewise, Microsoft isn't the growth company it was 15
years ago. It isn't attracting shareholder dollars like it
did in 1990, or even 1995. And it isn't investing in itself
the way it did in its prime. That's why it is offering a
dividend now. Microsoft is desperate to stay competitive in
this tough market.

I don't think either Jordan or Microsoft have much left in
them.

But that's life. Yesterday's legends are eventually
replaced by the day's up-and-coming stars. But does that
mean you have to lament the passing of an era?

No. You can look at Microsoft as a mature company - and
evaluate its promise to pay a dividend for what it's worth.
Do you want income stocks in your portfolio? Then the
world's dominant producer of operating systems might be
right for you.

On the other hand, if, like a new player making his way to
the big leagues, you're still in the market for capital
gains, you can look at Microsoft's history for a little
instruction. How so?

One way is to look at which companies are investing in
themselves the way Microsoft did back in the late '80s and
early '90s. In 1992, Microsoft invested $767 million in its
own property, plant and equipment (PP&E). To put that in
perspective, the software giant only brought in $708
million in total net income for the year. Its PP&E to net
income ratio was a robust 1.08.

As a capital-gain investor, you want to own equity in a
company when it is in the growth stage. And a company can
only grow when it invests money in its business. That's why
the PP&E number is an important one.

For fiscal year 2002, Microsoft's PP&E to net income ratio
was 0.2. The bottom line is Microsoft isn't investing the
same amount of money, relative to the size of its business,
that it was in the '90s. Why should you pay full price for
a company that is growing at a fraction of the rate it was
just 10 years ago?

The answer is, you shouldn't. And don't let anyone fool you
into believing that a 0.3% dividend yield will make up for
a lack of capital investment spending. It won't.

The next wave of highfliers are investing in their own
businesses right now. They are building plants, buying new
equipment and setting the stage for expansion. And I'm
willing to bet you won't find any of these small, up-start
companies offering a dividend. Instead, their earnings will
be used to invest in their businesses.

If you really want to make a lot of money in the next five,
ten, or even fifteen years, look for the smaller companies
(trading on the major exchanges for under $10) that have
rising sales, net incomes and PP&E.

These are your tickets to great profits. And trust me, when
the bottom finally sets in and the next bull market comes
around, I can guarantee you Microsoft won't be leading the
way. The next wave of highfliers are no-name, small-cap
stocks...busy investing in themselves...just like Microsoft
did in 1986.


Best regards,

James Boric
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Age of Jordan / The Daily Reckoning - - ELLI -, 24.01.2003, 00:22