United Airlines Dot Com / The Daily Reckoning

verfasst von - Elli -, 24.03.2003, 16:48

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The Daily Reckoning

Paris, France

Monday, 24 March 2003

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

*** Stocks up...gold down...

*** Debt up too, did anyone notice?

*** Battle of public opinion...after the war?...Shock and
awe in the bond market...and more!

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

For the last few days, the world has watched its television
screens and placed its bets.

"This is amazing," said colleague Dan Denning, watching
simultaneously the Dow and CNN."Every time a major strike
against Baghdad is shown on TV, the Dow rises."

Stock buyers may get lucky - prices may rise from here to
eternity. Then again, they may not. Last week pushed the
Dow into positive territory for the year. The price of
gold, meanwhile, fell $6.90. For the moment at least, we
are in a bull market in all things American: its military
power...its stocks...and its dollar.

But we cannot predict the future. We've tried many times
and just never seemed to get the knack of it. While it
seems possible that war fever may raise the temperature of
stocks for a while, perhaps even a long while, it is also
possible that the real malady afflicting the U.S. stock
market - and the American economy - may be aggravated by
the war.

Debt levels grew in the last quarter at their fastest pace
in at least 15 years. Household borrowing shot up at 10.7%
- something that hasn't happened since 1987.

Altogether, excluding financial debt, the U.S. total debt
rose to $20.7 trillion, of which $6.05 trillion is mortgage
debt. Householders mortgaged their homes at a rate 4 times
faster, in the last quarter, than that of 5 years ago -
adding $3.37 trillion in new debt over the 5-year period.

Meanwhile, the federal government's budget deficit shot up
to $96.3 billion in February, bringing the total for the
first 5 months of fiscal 2003 to $193.3 billion, up 50%
from last year.

Consumers, though cheered by the good news from the Iraqi
front, still have to pay their bills. Unlike their
government, they have no printing presses that can produce
$100 bills when they need them. In fact, with jobs scarce,
extra money is becoming harder to get.

Even state governments lack the necessary machinery for
dollar creation. The weekend news tells us that the great
state of Missouri, its back to the wall, had to ask
Washington for spare change to help it meet its
unemployment compensation promises.

Everybody seems to need money. Where will it come from?
'From the taxpayers', is the responsible answer. Citizens
will just have to accept a lower standard of living as they
pay down their debts...and pay the costs of war.

'Out of thin air', is a more realistic reply.

'Out of the sands of Iraq', is sure to come up sooner or
later. Perhaps George W. Bush and the other oilmen in the
administration have already thought of it. More below...

-----------

Eric Fry, on the scene in Manhattan...

- To judge from the stock market's dazzling performance
last week, the bombing of Baghdad is the most bullish event
for U.S. equities in more than 20 years. The Dow soared 661
points, or 8.4%, to reach 8,521, the largest one-week gain
for the blue chips since October 1982. The Nasdaq jumped 6%
to 1,421.

- The same investors who feared buying stocks three weeks
ago, now fear NOT buying them."The term 'buying panic' was
in heavy circulation Friday," writes Barron's Michael
Santoli,"when traders goosed the market 2% higher in the
televised glow of Baghdad burning. As [last] week
progressed, investors priced in greater optimism for a
quick military victory in Iraq...The current surge has
tacked on 997 points, or 13.2%, since March 11, and puts
the blue-chip benchmark up 2% on the year...The leap in
stocks last week was accompanied by collapsing prices in
Treasury bonds, oil and gold, the asset-class trinity to
which money fleeing war risk previously flocked."

- If we here at the Daily Reckoning were inclined to pat
ourselves on the back, we might remind readers that on
March 10th, one day before the recent stock market rally
began, we predicted,"Notwithstanding the worrisome
'fuchsia alert' signaled by the Paris office of the Daily
Reckoning, the New York office continues to expect the Dow
to head north of 8,100, before resuming its epic bear
market...At least, that is our guess." But since self-
deprecation is the rule at the Daily Reckoning, we won't
make hay out of this lucky guess, provided that no one
gives us any grief next time we make an unlucky one.

- Ironically, last week's stupendous rally coincides with
the three-year anniversary of the bubble-market peak. On
March 24, 2000 the S&P 500 topped out at 1,527. About the
same time, the Nasdaq reached its most absurd extreme of
5,048...But then the bubble burst, and the stock market has
served up a steady diet of toil and trouble ever since.
From their bubble market peaks, the S&P 500 and the Nasdaq
have tumbled 41% and 71% respectively.

- Despite the epic losses, the major indices still sell for
about 30 times honest-to-goodness GAAP earnings...And we
doubt that earnings will jump higher any time soon. That
said, we would not be the least bit surprised if a
relatively swift victory in Iraq were to trigger a mini
economic boomlet.

- If all goes as planned, and Baghdad comes a-tumblin' down
like the walls of Jericho, we should expect to see a wave
of"relief-spending" by both consumers and corporations.
And we should not be surprised if this abundant feel-good
spending produces robust GDP growth in the second quarter.
But SUSTAINABLE growth is still another matter. Our economy
still labors under the strain of too much debt, too much
capacity and too little demand - all of which impede the
path to sustainable economic growth...

-"Shock and awe" aptly describes the response of most
investors to the scenes of devastation they witnessed day
after day on their TV screens last week. We are referring
of course to the devastating collapse of bond prices. In a
mirror image of the stock-market rally, Treasury bonds
suffered their worst one-week setback in nearly a year and
a half. And over the last two weeks, the yield on the 10-
year Treasury note has vaulted more than half a percentage
point to 4.10%.

-"The bond and equity markets appear to be rerunning the
violent moves of last October," says Barron's,"when stocks
bounced sharply and the 10-year Treasury yield soared 70
basis points in just eight trading sessions." If indeed we
are witnessing a re-run, stocks will soon resume their bear
market and bonds will resume their bull market.

- The continuing bear market in stocks seems like a better-
than-even possibility. But maybe, just maybe, bonds won't
be bouncing back this time. That's because, however well
our ground war against Iraq is progressing, our campaign to
win over public opinion is facing stiff resistance.
Importantly, many of the same foreign nations that oppose
our war with Iraq also buy our government bonds. (And we
need to raise about $500 billion per year to keep the
lights on at America Inc.)

- If we start to lose the battle of public opinion, some
foreign investors might boycott our two most successful
exports - dollars and T-bonds. And that would mean a
falling dollar and rising interest rates...which would make
it much more expensive to wage our next war.

-----------

Back in Paris...

***"I hope they get it over with quickly," said Col.
Aubray after church on Sunday. Col. Aubray, now retired,
was most-recently attached to U.N. peacekeeping forces in
Bosnia.

"The longer it goes on, the worse it gets. The public will
support a short, clean war...but not a long dirty one."

*** Idle family news: The apartment was quiet this weekend.
Edward went with his class on a trip to Brittany. Jules
went with a group of American students to the Normandy
beaches. Henry went to Germany with his class for a week of
total immersion language training. Maria had a modeling
gig. And Elizabeth did a horse competition.

That left your editor to go to the country on his own,
where he entertained the local choir mistress at tea-time.
We sat outside on the most beautiful day so far this year.
The sun shone brightly. Birds chirped and cooed. Bugs
attached themselves to one another...either procreating or
recreating, we couldn't tell.

"What's this war all about," asked Cecile."I don't have a
television and don't keep up with these things."

Cecile has been left behind by modern technology. She is
postmistress as well as choir mistress. She delivers the
mail for a living; for fun, she tries to teach sung masses
to people who are tone deaf.

People do not often think (here, we pick up a theme from
last week)...usually, they merely pick up the lame ideas
that recently infected their nitwit neighbors. TV, the
principal means of mass communication in a modern society,
is also the principle means of mass-contagion. So when a
group of malcontents takes over a nation's government by
coup or revolution, if they have any brains, they head
right for the TV station. There, they begin informing
people how lucky they are to have a regime change and what
a good idea it would be to come out and wave a flag in
celebration.

"But it's too bad," Cecile continued."About the war, I
mean. It's such a pretty day..."

Cecile has an advantage over most people. Without a TV, she
is less well informed.


The Daily Reckoning PRESENTS: Although the war seems
indelibly linked to today's economy, it isn't the reason
the airline industry, for one, is failing. Nor is terrorism
the cause, though both are making profits harder to come
by. Perhaps, as the Fleet Street Letter's Lynn Carpenter
suggests, the culprit is instead a 'lack of capitalism'...


UNITED AIRLINES DOT COM
By Lynn Carpenter

It seems we don't have much respect for good old
capitalism. And now, with the airline industry, we have a
chance to let capitalism work (though I doubt we will).

I've changed my mind about the dot-com bubble in light of
the airline industry's woes. The bubble wasn't a mistake at
all. It was only capitalism. It was gloriously messy,
silly, energetic and lovably effective capitalism.

If American passenger airlines had been run like dot-com
startups, we would have better airlines. We might even get
a chicken salad sandwich every few hours or thousand miles.
Just consider the differences and eerie parallels between
the dot-com mess and the airline mess.

Most of the bubble Internet businesses had (1) no business
plan, (2) no profits and sometimes (3) no sales, either.
Ditto the airlines, except that they have sales. Actually,
we can credit them with two and a half out of out of three
weaknesses, because airlines are cyclic and sometimes even
the sales aren't very good.

At the height of the dot-com bubble, I wondered how anyone
could have thrown good investment money after hopeless dot-
com ideas. But I wasn't fair when counting the gains. The
tech bubble actually did a lot of good. Look at the
positives:

First, a number of fools were parted from their money, as
they should be. Fools who get too much money and keep it
too long are apt to overestimate their wisdom. Sometimes
they run for public office...like Nelson Rockefeller and
Ross Perot.

Second, more to the purpose, unfettered opportunity often
creates riches that draw more opportunists. Capitalists
multiply around new opportunities until they cheapen the
product (literally and figuratively) to the point where we
can all afford it. In an eye blink, the Internet went from
a system available only to million-dollar-budget military
users to universities to the street level. If airlines had
done the same, we'd all have commuter planes in our
backyards and they'd be teaching Flyers-Ed in high schools.

Once the opportunists drag a new idea down to the street
level, even more entrepreneurs pile on. Again, this only
happens where capitalism is free and unrestrained. It
didn't happen with radio or television because licensing
brought about the restriction of ownership.

But where the government doesn't stand in the way,
competitors eventually overpopulate. That's what happened
with the dot coms. Now, dot-com competitors have to fight
each other for survival, looking for ways to reach us and
make us their customers...and keep us that way.

Tough for them, great for us. Books-a-Million and several
others didn't make it, but they pushed Amazon to higher
standards. Amazon had to excel to keep its lead.

All across the industry, dot coms had to find things we
would want and would use. This kind of open competition
speeds innovation and practical adaptation.

Open competition encourages creative product uses - of
which the original inventors never dreamed. The Internet
began as a secure communications system, but for us, it
became the world's most convenient bookstore, forum for
public auctions, provider of online medical diagnoses,
source of music, center of postage-free e-mail, mortgage
calculator, instant stock quote ticker, instant news
deliverer, cheaper and cheaper brokerage commissioner...

When capitalism works right, greed is good. Greedy hordes
of new entrepreneurs who want to be millionaires keep up
the pressure on the first-movers. To win the contest, the
entrepreneurs have to work harder and better, offer more to
their customers, upgrade products, cut prices...

Then comes the great shootout. Supply exceeds demand, the
weaklings fail and the strong settle down to viable
business plans.

But the airlines didn't follow this path. During their
early years, government regulated them heavily. In that
time, the customs, procedures and labor practices born in a
monopoly became part of the business. Then, with
deregulation, the field opened up for a while. But the
competition was never as robust as in the dot coms. Routes
are still regulated and limited. Flying time is limited
(well, I don't mind that...since I'd prefer my pilot was
not flying double-shifts on uppers to stay awake).

Recently, I requested an aisle or window seat on a crowded
plane but couldn't get one. When I boarded, I found the
window seat in my row was given to a non-paying employee
returning home. Would a restaurateur turn away a paying
customer to feed the assistant cook at the best table in
the house - for free - on his night off? Of course not!
Paid sales always come before employee perks and freebies
in well-run businesses, unless the freebie has advertising
value. Likewise, not long ago I worked with a man who had
once been an airline desk employee. He still flies
frequently on standby for almost nothing...yet he hasn't
worked for the airline in nearly 10 years. Imagine if
McDonalds had to serve free hamburgers for life to every
kid who took a summer job with them.

Now the airlines are in trouble. But they won't go as
quickly and quietly as the dot coms. In fact, there are
rumors of some very bad ideas. Here's a big-government plan
that would turn even a socialist's stomach: nationalize the
airlines.

Who would want them in their current configuration? The
ghost of Joseph Stalin? A lunatic who escaped and
accidentally got elected to Congress? Sir Richard Branson,
founder of Virgin Airways, once told Warren Buffett that
the fastest way to become a millionaire was to start out as
a billionaire and buy an airline.

I have one suggestion for the airlines: let 'em go.

You probably think that would disrupt the economy. Bingo!
Of course it would disrupt the economy. Absolutely. That's
the plan. It's called capitalism. Stand out of the way, and
let supply and demand do the work. Not allowing airlines to
'hurt the economy' in the short run will seriously harm it
in the long run.

We will never be so lucky, though. Government's bound to do
something. We taxpayers will either fund more bailouts or
inherit a cancer-ridden business, complete with the
continuing wondrous management of the industry experts who
pumped their businesses full of carcinogens in the first
place.

And now we are at war. Airlines are crying foul again.
Don't let them fool you: the war and terrorism only
accelerated what was already happening. The airlines are in
this condition because, in the past, too much governmental
support, regulation and monopoly allowed them to grow fat
and lazy. They never developed the muscles they needed for
more difficult times.

The federal budget deficit grows every day. The war adds to
the cost. I, for one, certainly don't want to put an
airline bailout on the shopping list.


Best regards,

Lynn Carpenter,
for the Daily Reckoning

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• United Airlines Dot Com / The Daily Reckoning - - Elli -, 24.03.2003, 16:48