A New Class of Leadership (Marc Faber) / The Daily Reckoning

verfasst von - ELLI -, 02.03.2003, 16:56

-->A New Class of Leadership

The Daily Reckoning

Baltimore, Maryland

Friday, 28 February 2003

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

*** Big drop in price of gold - not a GUDD day...but a good
one

*** Russia moves from dollar to euro...Automakers push cars
uphill...

***"The worse for wear"...End of History...how the world
REALLY works...and more!

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

Gold fell almost $8 yesterday. And the Dow rose. Our Trade
of the Decade lost money. But the decade has a long way to
go...and this gives us an opportunity to get in on the
trade on more favorable terms; now we get more metal for
our money.

Over on the Rue Vivienne, where we buy our gold coins, we
have not yet spotted Alan Greenspan...Wim Duisenberg...or
Masuru Hayami. But we thought we saw Sergey Ignatiev. The
Wall Street Journal reports that the Central Bank of
Russia, of which Mr. Ignatiev is chairman, is shifting some
of its reserves out of dollars and into euros. Every day,
U.S. consumers spend nearly $1.5 billion more on foreign
goods than their own industries sell abroad. And every day,
the U.S. federal government runs more than $1 billion in
debt. How much longer or further this will go is anyone's
guess, but individual investors and overseas central
bankers alike are looking for ways to protect themselves
from Bernanke's printing presses. Gold is probably on Mr.
Ignatiev's mind as well as on our own.

Also on our mind is the curious news coming out of the U.S.
economy. Jobless claims shot up last week. And oil is at a
12-year high. Both make life treacherous for consumers.

Meanwhile,"New Home Sales Plunge by Most in Nine Years,"
reports Bloomberg. People who are worried about their
jobs...and whose pocket-books are pinched by higher energy
costs...do not buy new homes. What they do instead is
refinance the homes in order to try to improve their cash
flow. As expected, the refinancing business is booming.

Desperate to boost sales, automakers are extending
financing over 6 years - despite evidence that default
rates double from a 5-year loan to a 6-year one. GM is also
offering to finance its SUVs at zero-percent interest.

But these thoughts barely crossed our mind during our
recent vacation in Nicaragua. Estranged from the
Information Age by distance and predilection, we were
forced to think about how the world works. This was no idle
past-time; always at work on your behalf, dear reader, your
editor was composing the introduction to his new book. (To
be published by John Wiley, September 2003.) Readers with
time on their hands and masochistic tendencies are invited
to read more, below...

But first, here's Eric with more news from the street of
schemes...

-----------

Eric Fry, reporting from New York...

- The Department of Homeland Security lowered its terror-
alert warning from"orange" to"yellow" yesterday, giving
investors the green light to buy stocks and dump gold. The
Dow bounced 77 points to 7,884 and the Nasdaq jumped 20 to
1,324. Meanwhile, gold took its lumps, acting anything but
precious by tumbling $7.90 to $346.20 an ounce...

- A funny thing happened recently in the New York offices
of Apogee Research. First up, on January 10th, Apogee (to
which your co-editor contributes) issued a negative report
on Cintas Corp., a supplier of work uniforms. Apogee urged
subscribers to sell short the common stock above $46.00,
stating,"Cintas' financial fundamentals are deteriorating
[and it] will be challenged to meet its aggressive fiscal
2003 earnings forecast." Specifically, Apogee cited Cintas'
tumbling net margins and return on assets.

- Next, on January 21st, your co-editor received a phone
call from Robert Kohlhepp, the CEO of Cintas, requesting a
private meeting with the gang at Apogee Research."I've had
a chance to read your report entitled, 'The Worse for
Wear,'" Kohlhepp politely explained,"and I think there may
be some things that you all are overlooking."

- He insisted that he bore no malice whatsoever toward
Apogee for its report. (Kohlhepp's a better man than I. The
stock has fallen about 14 points since the original report
- costing him about $50 million in"paper losses", based on
the 3.6 million beneficial shares that he holds! Your co-
editor might have harbored a tinge of malice after losing
only $5 million or $10 million. In which case, dropping the
Apogee Research team from an airplane might have seemed
like a better idea than boarding an airplane to meet with
them.)

- Kohlhepp explained that he wished to share with us some
facts about the company that might assist us in evaluating
the stock's prospects. We were dubious, of course, but we
eagerly accepted the offer. As your co-editor explained to
Kohlhepp,"Apogee is an independent research firm. So we
are interested first and foremost in the truth, especially
the truth that helps our subscribers make a buck in the
stock market. So if you've got insights you'd like to share
with us, we'd love to hear them."

- One week later, Kohlhepp and Karen Carnahan, Cintas'
treasurer, boarded one of the company's private jets and
flew out to New York to visit with us. They were as cordial
as promised. In fact, they were downright charming.

- Kohlhepp launched into an impressive presentation. With
an evangelist's fervor, he described Cintas' competitive
advantages and its exciting growth strategy. Neither he nor
Carnahan ever argued against Apogee's grim assessment of
Cintas' stock. They did, however,"reaffirm guidance" for
2003. In other words, they both reiterated the company's
prior per-share earnings forecast of $1.55 to $1.62 for the
year.

- Kohlhepp and Carnahan concluded the face-to-face meeting
by presenting us with some splendid gifts - baseball caps,
sport shirts and floor mats, all emblazoned with the Apogee
Research logo! We were delighted to receive the thoughtful
trinkets and told them so. Still, we couldn't shake out
bearish disposition toward the stock...and we told them
that also.

- After the meeting, the Apogee team convened a pow-wow to
determine what each of us thought about what we had just
heard. We all agreed that, despite Kohlhepp's impressive
performance, the stock was still a short. Apogee said as
much to subscribers in a February 4th report,"Cintas
Revisited," reiterating its negative call on the stock and
urging subscribers to maintain their short positions.

- Then on February 18th, only three weeks after the meeting
with Kohlhepp and Carnahan, the company surprised investors
- most investors, anyway - by cutting it fiscal 2003
revenue and earnings guidance. The company would not earn
the $1.55 to $1.62 that Kohlhepp had reaffirmed just three
weeks prior. Instead, it would earn $1.45 to $1.50.

- The company's reduced forecast confirmed Apogee's
skepticism."In scaling back its forecast," Apogee observed
last week,"CTAS cited (1) lower employment levels by its
customers; (2) higher energy costs, higher employee benefit
expense and unanticipated costs related to a labor dispute;
and (3) pricing pressure for rental uniforms. Although we
never discussed higher energy and benefit costs, our report
did point out that reduced employment levels and corporate
cost-cutting initiatives in a mature market would
invariably lead to pricing pressure. We also observed that,
in order to meet earnings guidance, CTAS would need to grow
revenues and expand margins at the same time, an impossible
feat, we thought, given the mature market for corporate
uniforms and the sluggish economy."

- Even on Wall Street, substance sometimes triumphs over
style. Happy stories are nice, but the truth is more
profitable.

- [Editor's note: For more information on how to benefit
from Apogee Research's independent analysis, see:

Apogee Research
http://www.agora-inc.com/reports/APG/WealthBoost/ ]

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

Back in Paris...with lingering thoughts from Nicaragua...

*** It all seemed so logical, so obvious, and so agreeable
back in the last half of the last decade of the 20th
century. Stocks went up year after year. The Cold War had
been won. There was a new 'information age' that was making
everything and everybody so much smarter...and richer too.

The world was a happy place, and Americans were its
happiest people. American consumer capitalism was the envy
of the entire species, whose peace and freedom were
guaranteed - if not by Americans' goodness, intelligence
and foresight, at least by their military arsenal...which
could blow any adversary to kingdom come. Francis Fukuyama,
a bit ahead of his time and perhaps overly impressed,
announced that the 'End of History' had arrived, for it
scarcely seemed that any major improvement was possible.
Fukuyama was, of course, not the first to believe that
perfection had been achieved. Hegel had proclaimed the End
of History nearly 200 years before, after Napoleon
Bonaparte imposed the benefits of French republicanism on a
reluctant Europe.

But"it's a funny old world", as Maggie Thatcher once
remarked. Ms. Thatcher might have meant 'funny' in the
sense that it is amusing; she probably meant that it is
peculiar. In both senses, she was right. What makes the
world funny is that it doesn't cooperate; it doesn't do
what people want it to do, nor what they expect it to. In
fact, it often does the exact opposite.

Nor do people do what they 'should'. Other people don't
seem to act 'rationally', especially those who don't agree
with us. And even we do not always follow a logical and
reasonable course of action. Instead, we are all swayed by
tides of emotion...and occasionally swamped by them.

The world is funnier than you think. And the more you think
about it, the funnier it gets. Close inspection reveals the
ironies, contradictions, and confusions that make life
interesting - but also make it frustrating. Men of action
despise thinking - and rightly so, because the more they
think, the more their actions are beset by doubts and
arrière pensées. The more a man thinks, the more modest he
becomes, because he sees more clearly the limitations of
his own plans. Exploring the possibilities, he sees more
and more potential outcomes and problems...and he
recognizes more and more how little he actually knows. If
he keeps thinking long enough and hard enough, he becomes
practically paralyzed...a man of action no more.

Will the stock market rise?

"I don't know," replies the thinking fund manager.

Can we win the war?

"It depends on what you mean by 'win'," answers the
thoughtful general.

Here at the Daily Reckoning we write in the spirit of
runaway modesty. The more we think, the less we think we
know for certain. If we keep at it, we will soon know
nothing at all. (There are those, of course, who think we
know less than nothing already.)

We are, frankly, far too much in awe of the world...and too
deeply entertained by it...to think we can really
understand it today or foretell tomorrow. Like its most
attractive components, love and money, life is far too
complex for reliable soothsaying. Still, we cannot resist a
guess.

Our approach at the Daily Reckoning is, in case you hadn't
noticed, is a little different from the typical investment
advisory. Instead of econometrics or stock analysis, it is
an exercise in what is known, derisively, as"literary
economics". While you will find statistics and facts, it is
the metaphors that are important. Facts have a way of
yielding to nuance like a Texas jury to a trial lawyer.
Under the right influence, they will go along with
anything. But the metaphors remain, however imperfect,
ready to turn almost any set of 'facts' into the shape they
want. People understand the world and its workings by
metaphor, not by facts. As Norman Mailer put it in the New
York Times last week,"there's much more truth in a
metaphor than in a fact."

We cannot know how the world works, but we are immodest
enough to think we can know how it doesn't work. It is not,
for example, a simple machine, like an ATM into which you
can merely tap in the right numbers and get cash out when
you need it.

Nor does the world ever work the way people think it does.
This is not to say that every particular idea - or metaphor
- about how the world works is wrong, but that any
particular idea will prove to be wrong if it is commonly
held.

The trouble with metaphors is that no matter how true they
may be when they are fresh and clever, when they get picked
up by the multitudes, they almost immediately become worn
out and false. The whole truth is always complex to the
point of being unknowable, even to the world's greatest
geniuses. Only simple ideas can be held by large groups of
people - so the commonly held ideas are almost always
dumbed down to the point where they are practically
lies...and often dangerous ones. And once vast numbers of
people come to believe the lie, they adjust their own
behavior to put themselves in sync with it - and thereby
change the world itself. Soon, it is no longer the same
world which gave rise to the original insight in the first
place, and a crisis develops. People who have been guided
by a lie suffer the consequences. They get, not what they
expect, as we say, but what they've got coming. Then, they
look for a new metaphor.

Thus, we cannot help but notice a pernicious and
entertaining dynamic...a dialectic of the human heart,
where greed and fear, confidence and desperation constantly
confront each other like women mud-wrestlers: an insight
about how the world works gets taken up by the masses and
simplified...leading them to misdirect their efforts and
ultimately getting them into trouble. A crisis then
develops, which brings them to a new and different
insight...one which is, ultimately, just as disappointing.

In the financial markets, this pattern is well known and
often described.

After reaching absurd levels in the late '90s, investors
came to believe that stocks always go up. Many were the
reasons given why they should, but the main reason was
simple: that was just the way the world worked. But after
they had moved their money into stocks - to take advantage
of the insight - there were few buyers left...and prices
had risen so high that there were no longer enough profits
or growth to support them.

Investors were deeply disappointed in the early '00s when
stocks fell 3 years in a row. How could this be, they asked
themselves? What is going on, they wanted to know?

Mainstream economists have no answer. Paul Samuelson,
popularizer of the economic profession for NEWSWEEK
magazine, admitted that he and his colleagues didn't even
have words to describe this"baffling economy".

Nor has Alan Greenspan been much help. In the late summer
of 2002, the most celebrated economist in the world
addressed an audience in Jackson Hole, Wyoming. He
explained that he didn't know what had gone wrong. He
wouldn't know a bubble if it blew up right in front of him.
He'd have to wait, he told his fellow economists, and check
the mirror for bruise markets - for only after the fact
could a bubble be detected.

And what difference would it make, anyway? America's
favorite bureaucrat explained that it made none; even if he
had known, he said, he couldn't have done anything about
it.

After enjoying the unqualified reverence of nearly the
entire literate world, Mr. Greenspan suddenly found himself
a laughingstock. He had stood by Hilary Clinton at her
husband's State of the Union address...and helped his re-
election with an easy-money policy. He was the key man,
along with Robert Rubin and Larry Summers, of TIME
magazine's 'Committee to Save the World." He was even
awarded France's highest honor - the 'Cravate' of the
Legion of Honor...and later be-knighted by the Queen of
England.

And now, the poor schmuck is treated in the press like a
fool. He should have known, they say. He should have done
something. At the very least, he should not have praised
the boom and pretended that it was permanent.

But we do not write to carp or complain. Instead, we offer
it in the spirit of constructive criticism...or at least in
the spirit of benign mischief. We do not know any better
than Alan Greenspan what the future holds. We only guess
that we are at one of history's crisis points - where the
metaphors of yesterday no longer seem to describe the way
the world works today. The financial markets are not the
congenial ATM machines of investors' fantasies, after all.
Nor is the political world as safe and as comfortable as
people have come to believe.

Life is always complicated, often perverse, and
occasionally absurd. But that doesn't mean that events are
completely random; though unexpected, life's surprises may
not always be undeserved.

Bill Bonner

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

The Daily Reckoning PRESENTS: Gold and commodities have
performed extremely well since the bursting of the tech
bubble...but lately, they seem to have lost a bit of steam.
Should gold bugs be worried? Below, Marc Faber takes a
close look at the bull market in hard assets.


A NEW CLASS OF LEADERSHIP
By Marc Faber

It may come as a surprise to readers of The Daily
Reckoning, but the outlook on U.S. equities as overvalued
and the heralding of a coming bull market in gold are not
universally shared views. Robert Prechter, author of
"Conquer the Crash," for example, thinks that while the
stock market is indeed overvalued, the CRB Index and the
gold price are about to tumble again.

After its sharp run-up since late 2001, the CRB Index and
the gold price could indeed, in the near term, be
vulnerable to some further profit taking. But I very much
doubt that we shall see new lows for commodity prices,
since demand in Asia, and especially in China, is at
present rising rapidly.

Moreover, the economic policies in the United States -
which seem to be designed to worsen the existing external
imbalances, weaken the U.S. dollar, and increase the budget
deficit for as far as the eye can see - are more likely to
lead to inflationary pressures than to outright deflation,
as Robert Prechter maintains.

In this scenario, the price level in the United States will
be deflated through a depreciation of the dollar, and not
through outright deflation of prices in the U.S.. The fact
that import prices have been rising recently, and in
January were up by more than 5% year on year, would seem to
support this conjecture.

But one point the gold bears make in order to foster their
case is that, while the gold price has this year exceeded
its high made in the summer of 2002, gold shares have
failed to confirm the advance, since they didn't exceed
their highs reached last summer. This non-confirmation of
rising gold prices by gold shares - and, incidentally, also
by the price of silver, which hardly moved during the
recent gold price surge - is viewed as very negative from a
technical point of view.

While I am also somewhat concerned about this non-
confirmation in the near term, there are three observations
worth making. Although the oil price has continued to
increase, oil and oil servicing shares have performed
miserably and have not followed the oil price surge on the
upside at all. Therefore, in the case of oil (a sector that
we like), we have an even starker non-confirmation.

In this respect, investors must understand that it is not
uncommon, following an extended bear market, for assets
that have entered the first stage of a major advance to
experience serious price setbacks and even to re-test their
lows. This is because, at the beginning of a new secular
bull market (in our case, for commodities), which follows a
bear market lasting more than 20 years, there are always
tremendous cross-currents at play.

But investors still tend to play by the 'old' rules of the
investment game (buy the S&P 500, the NASDAQ, and the TMT
sector) and are unaware that 'new' rules have been
introduced. After the bursting of a bubble, these 'new'
rules lead to a massive shift in leadership.

Historically, however, the new leadership does not emerge
smoothly. Following gold's initial rise in the early 1970s,
for example, its price corrected by almost 50% between 1974
and 1976 before soaring again until January 1980.
Similarly, bonds rose sharply between 1981 and 1983, but
almost re-tested their 1981 lows in 1984.

As a result, investors who have a longer-time horizon
should not be overly concerned about the recent bout of
selling in the gold market. A further decline is not a
forecast, but merely a possibility which investors should
consider.

Gold has risen by more than 40% since its low in April 2001
of around $255, and even a decline to around $280 would not
alter its long-term significant upside potential.



Regards,

Marc Faber,
For the Daily Reckoning

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• A New Class of Leadership (Marc Faber) / The Daily Reckoning - - ELLI -, 02.03.2003, 16:56