The Ultimate Contrarian / The Daily Reckoning

verfasst von - Elli -, 17.04.2003, 21:17

-->The Ultimate Contrarian

The Daily Reckoning

Paris, France

Thursday, 17 April 2003

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*** Housing... how long will 2 x 4s hold up the U.S. economy?

*** Stocks fall... and dollar, too. But gold up.

*** Capitalism may not reward capitalists -- but at least it
takes care of the CEO's mistress!...Rome...SARS...and more!

We touched the raw, open nerve of the American economy
yesterday...almost by accident.

We know we slip easily into negativity here at the Daily
Reckoning. We fight against it like an Episcopalian fights sin
or a weight-watcher fights fat...that is, we give in from time
to time just so we don't take ourselves too seriously.

And so, today, we surrender to the dark forces of pessimism.
We've searched for the bright side of the housing boom; we
just can't find one.

As housing prices rise...housing costs as a percentage of
household budgets increases. Consumers pay more to live in the
same house. Worse, the lumpen homeowners believe they can
"take out equity" from their own homes as if they were
spending savings. Encouraged by Fed governors and mortgage
hustlers, they go even deeper into debt, while the economy
slumps and they risk losing their jobs.

The consumer economy depends upon the ability of consumers to
spend money. With stocks no longer rising, and jobs
disappearing (it takes the avg. white-collar job seeker 11
months to find new employment)...consumers have had to rely on
the housing market. Home prices are still rising...and each
rate cut has given them a way to 'unlock' the 'trapped equity'
in their own bedrooms and kitchens.

The latest numbers show the builders hammering up new houses
at a feverish pace -- new housing starts rose 8.3% in the
month of March.

But new home sales are lagging behind -- meaning, that the
industry will soon end up with more homes than it can sell;
prices will fall. Falling home prices will mean the end of the
housing boom, of course; it will also mean the end of the
refinancing bubble. All of a sudden householders will go to
'unlock equity' and find the safe empty!

Meanwhile, the core rate of inflation was flat for March --
for only the 2nd time in 2 decades...and the 12th time since
1953.

Fed governors must be worried. They count on refinancings to
get enough cash into the system to allow consumers to continue
spending. But what can they do? Only cut rates for a 13th
time...luring householders even deeper into debt...and
postponing the inevitable day of reckoning....

Keep watching...

Eric...?

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Mr. Fry at his post on Wall Street...

- On the eve of Passover, the angel of death did not spare the
stock market. 144 Dow points perished yesterday, as the blue
chip index fell to 8,257. But the Nasdaq emerged unscathed,
with a gain of 4 points to 1,394. Meanwhile, gold and oil both
found favor with investors, as the yellow metal added 80 cents
to $326.30 an ounce and the gooey black stuff rose 16 cents to
$29.45 a barrel.

- The crude oil market, apparently, did not receive a copy of
the"Iraq Vanquished" script. That's the riveting story about
a superpower conquering a small rogue nation with massive oil
reserves. The swift conquest sparks a sizeable drop in oil
prices - according to the script - as investors come to their
senses and realize that there are ample supplies of crude
oil...

- But the oil price is ignoring its cue, and is instead acting
out a surprising extemporaneous story-line in which oil prices
cling stubbornly to $30 a barrel. Just maybe, oil is a bit
more scarce than we thought. The Energy Department reported
that crude inventories rose only 100,000 barrels during the
week ended April 11. Total inventories now stand 15.8% below
the year-ago level.

-"President Bush may believe that the flower of democracy
will bloom across the arid deserts of the Middle East," writes
John Myers, editor of Outstanding Investments."But we think
such a hopeful outcome is highly unlikely. The problem the
United States faces is that while most Iraqis are glad to see
Saddam removed from power, they still don't like the idea of a
'puppet' American government. So right out of the gate the new
government is going to come under fire from Iraqis, who see
their government as a dupe for American imperialists...

-"Given that America may have a more difficult time keeping
the peace than waging the war, we expect the mid- to long-term
trend for oil is higher. Removing Saddam Hussein from power
doesn't change a fundamental fact: the world is drawing down
its oil reserves at a record pace. And, importantly, the
Middle East remains in control of the lion's share of the
world's oil supplies. Since most of the rest of the world is
rapidly depleting its domestic supplies of oil, the world has
become more dependant than ever on Mid East oil. The region's
political instability is likely to make supply-disruptions a
permanent feature of the oil market.

-"But that just means that it is more important than ever for
investors to continue seeking out oil companies whose
production carries the label, 'Made in U.S.A.', or at least,
'Made in North America.' In other words, the greater the
influence of the Middle East over global oil production, the
greater the imperative for investors to seek out high quality
exploration and production companies with significant domestic
oil and gas production.

[For profitable investments in the oil industry we recommend:

Outstanding Investments
http://www.agora-inc.com/reports/OST/ProfitYourGains/

- Yesterday, your Paris-based editors of the Daily Reckoning
remarked,"American capitalism no longer rewards capitalists.
Instead, they wait at the end of a long line - behind tort
lawyers, tax collectors, and employees, both current and
retired."

- The comment is true as far as it goes, but my colleague in
Paris may have left out a few folks...namely the CEO's
mistress and his wife.

-"Former Tyco CEO Dennis Kozlowski treated his wife and his
mistress as equals, stealing the same amount of money for both
of them," the New York Post reports."Papers filed [Tuesday]
by the Manhattan District Attorney's Office allege
Kozlowski... [misappropriated] $100,000 of his company's cash
for each woman."

- Hmmm..."theft" seems like an awfully harsh characterization.
How about if we call Kozlowski's appropriations a"recurring,
non-recurring restructuring charge?"...Is that so bad?

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

Bill Bonner back in Paris...

*** We came, we saw, we consumed... our family trip to Rome
was a great success. We bumped into history everywhere we
went...and wallowed its ruins...

What did we learn? That you should avoid the Trevi Fountain
and the Spanish steps; they are over-run by tourists. That you
should look for restaurants with well-dressed Romans eating in
them. That Italians have many more good wines than most people
think. That monumental ruins make a good playground for
children...

And, oh yes... Rome wasn't built in a day......nor was it
destroyed in one. The city was sacked by invading Celts in the
4th century, BC. And then, in the 2nd Punic War, Hannibal
crossed the Alps and defeated the Roman armies in several
important battles. But Rome itself was never taken during the
Punic Wars and the Republic eventually prevailed... In the 3rd
war against the doughty Carthaginians, Rome had her revenge.
Her legions took Carthage, put its inhabitants"to the sword"
and even salted the earth so that the land itself would
support no new crop of adversaries.

(This Rome might have regretted later on, when it founded a
city of its own on the ruins of the Carthaginian city.)

Time and time again, through war, revolution, slave rebellion,
civil war, plague, degradation, decadence, inflation,
bankruptcy... Rome bounced back...and continued to build new
monuments and palaces on the remains of old ones.

But, eventually, as with all great bull markets, there was a
great bear market... which saw the empire deteriorate on the
inside...and give way around the edges. In 410, Alaric, king
of the western Goths took Rome and pillaged the city. In 455,
Genseric, king of the Vandals, took the city from the
sea...and pillaged it again. And then, a quarter of a century
later, it was the Huns turn. Odoacre was proclaimed king by
German mercenaries in the service of Roma. He deposed the last
emperor, Romulus Augustus, and ended the western empire.

*** Gary North calls it"nature's weapon of mass destruction."
He is talking about SARS, a disease which has already caused a
"travel collapse" in Hong Kong...and now threatens lives and
property throughout the world.

"On Wednesday, April 9," Gary begins,"Wal-Mart announced a
new policy: its employees are no longer allowed to visit areas
that are suffering from an outbreak of SARS. The list includes
Hong Kong, Singapore, China, Vietnam, and Toronto. Wal-Mart
also announced a similar no-contact policy for any employee of
one of its many suppliers who has traveled in these areas in
the last ten days. This new policy is referred to as
temporary. This means"until SARS goes away..."

"Also on April 9, the CBS evening news show, '48 Hours', ran a
segment of what SARS is doing to Hong Kong's economy. An
American woman who has lived in Hong Kong for a decade did a
kind of walking tour with the camera crew. I have never seen
anything like it. Almost everyone on-screen had a medical face
mask. The interviewer asked the 'tour guide' if she had one.
She said she had two in her purse.

"They visited what the woman said was a popular restaurant.
Normally, she said, there was a line to get in that stretched
outside into the street. The place was deserted. It had maybe
10% of its seats filled. Then the crew was off to a local
mall. It was empty. I have never seen a mall during daytime
hours that was as empty as that one was.

"The effect on Hong Kong's retail economy is devastating.
Think of a retail outlet that pays the kind of rent that high-
density Hong Kong store owners pay. Then think of a 50% drop
in business. But the drop in traffic in the indoor businesses
visited by the camera crew indicated more than a 50% drop in
business.

"How long can this go on? For as long as SARS remains a
threat. How long is this? Medical experts are not saying. They
don't know. The source of the SARS epidemic has not been
identified yet. There is no known cure. It is killing medical
personnel."


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The Daily Reckoning PRESENTS: James Boric ruminates on what it
means to be a"contrarian" investor... and the 40.7% he's gained in
the past five weeks on a stock he recommended right here in the
Daily Reckoning.


THE ULTIMATE CONTRARIAN
By James Boric


According to The American Heritage Dictionary, a"contrarian" is an
investor who makes decisions that contradict prevailing wisdom.

If that means looking for stocks that have been beaten down and
forgotten -- but are fundamentally and technically capable of a
substantial rise, than I must be a contrarian. Does it really
matter if those stocks come from the oil industry, the tech sector,
gold or the Internet services?

A good investment opportunity is a good investment opportunity.
Period.

Yet there seems to be an assumption in the investment community
that anyone who makes money in tech stocks or, worse yet, Internet
stocks, isn't really a"contrarian." Rather, they are a part of the
leftover Wall Street herd that still believes all dot-com stocks
will someday rise again to $80 a share.

That's the most ridiculous thing I've ever heard. And it's time to
dispel that myth.

In early March, in an essay published by The Daily Reckoning, we
took a look at E-Loan Inc., an Internet stock on the rise, as a
potential investment opportunity. Talk about being a contrarian and
going against the grain. For three years Internet stocks have been
the butt of everyone's jokes.

Yet, E-Loan Inc., an online lending company, brought in over $100
million in sales last year and realized more than $10 million in
net income. At the time, it was selling for 12.8 times earnings,
1.32 times sales and its revenues were up over 50% from a year ago.

It hardly resembled the dot-bombs that blew up in 1999 and 2000.
And that was precisely my point back in March. E-Loan was making a
profit, had solid fundamentals and was growing its business.

But there was something else about E-Loan that caught my attention.

Over a 10-day span the stock fell 14%. As a trader, this intrigued
me. Why was a stock as fundamentally sound as E-Loan falling in
price so abruptly?

To answer that question I pulled up three of my most trusted
technical charts. I saw that over an eight-month span, E-Loan stock
rose 94%. And after doing a little more digging, it was obvious
this recent fall was nothing more than a bunch of investors taking
profits.

Fundamentally, E-Loan was as solid as ever. And technically, E-Loan
was oversold and ready for a rebound. This was a no-brainer. E-Loan
was almost a sure bet to rise.

If you took my advice and bought shares of E-Loan in early March,
you made 40.7% profits in the past five weeks. Not a bad return for
a little over a month's time.

As an investor or a trader, you should strive to find fundamentally
and technically sound stocks, like E-Loan, in beaten-up sectors of
the market. And as a contrarian, it's your duty to find these kinds
of stocks -- the ones everyone else forgets about or simply refuses
to look at.

That's exactly what your"gloomy" editors at The Daily Reckoning
did when they recommended you buy gold in the late 1990s when the
Wall Street heard really was stampeding. With irrational exuberance
sweeping the market by storm, it was only a matter of time before
the bubble burst.

The U.S. Dollar Index peaked at 121.29 late in 2000 (right now it's
at 100.36) and the NASDAQ, Dow and S&P 500 were all outrageously
overvalued by any historical perspective. It made perfect sense to
buy gold stocks in 1999.

But only a few brave souls had the guts to buy then. Investing in
gold in 1999 meant going against the crowd. It meant taking the
risk of looking silly in front of your peers. It meant finding the
courage to do what made sense, not what was popular. It meant you
avoided serious losses in overbought stocks - and steady gains as
gold rose from a $253 low to $325 where it sits today.

Looking back, you'd be hard-pressed to find any gold stock that
hasn't at least tripled since the late '90s. It paid to invest in
gold when no one else was. And it paid to invest in E-Loan, a hated
Internet stock, five weeks ago.

Still, many investors missed out on E-Loan simply because of its
title as a tech or Internet stock. Oh well. Too bad for them.

Last I checked it wasn't against any domestic or international law
to invest in gold and tech at the same time. And it certainly
doesn't go against the contrarian mantra of finding winning stocks
in neglected sectors of the market -- no matter what those sectors
are. In the last three weeks, I've recommended several Internet
stocks and junior gold miners to my readers.

Both have done well. Imagine that...

Maybe I don't fit the mold of a typical contrarian. I use technical
analysis in conjunction with fundamentals to find stocks on the
rise. I look to the Internet sector as easily as I do the gold
sector for great investment opportunities. My picks aren't always
popular among my peers.

But you know what? I could care less what people think about me as
long as we're making money - whatever class of investor that puts
me in.

Regards,


James Boric,
The Daily Reckoning

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• The Ultimate Contrarian / The Daily Reckoning - - Elli -, 17.04.2003, 21:17