Thinking Small / The Daily Reckoning

verfasst von - Elli -, 24.04.2003, 18:47

-->Thinking Small

The Daily Reckoning

Paris, France

Thursday, 24 April 2003

*** End of the housing boom? Nah...

*** Dow up with the daffodils...but the bloom is not likely
to last...

*** Dreamcatchers...gold...vacation bargain...and more!


"No takers for homes," says a Denver paper.

"Single family permits at 7-year low," comes the news from
Southern California.

"Hot housing market could be cooling," says USA Today.

The housing market has been cooking for so long you'd think
the thing would be done by now. And maybe it is.

"The boom is over," says Celia Chen, at Economist.com.

We've reported rumors of the end of the housing boom on
more than one occasion in this space. We're not going to
embarrass ourselves by reporting another one. Month after
month, for as long as we can remember, the whole world
economy has been sustained by American consumer spending.
And for the last couple of years, American consumers have
been sustained by credit - by mortgage credit, to be
specific.

Without it, even more people would be standing in
unemployment lines - everywhere from Baltimore to Bombay.
Thanks to lower rates and higher house prices, consumers
were able to"take out equity" from their own homes. This
cute little phrase perfumed the event like patchouli oil on
a sweaty mortgage broker. But sooner or later, we keep
saying, the whole thing is going to start to stink.

The housing sector cannot continue to rise 3 to 4 times
faster than the rest of the economy forever. Sooner or
later, it has to cool off. Personal income rose only 1.7%
last year - according to the Bureau of Economic Analysis -
the first time since 1958 that the figure has been less
than 2%. People whose incomes rise less than 2% cannot
afford a 10% increase in housing costs, year after year,
for very long.

Sales figures for houses in the San Francisco bay area were
down 15% from a year ago. In Southern California, they were
down 7.5%.

In the Rockies, the figures are worse - with Denver sales
off 18%. Even in Richmond, sales fell 5% from a year ago.
And in Massachusetts, housing sales for the first quarter
fell 15%.

Could be the war in Iraq, of course. Could be a fluke.
Nothing to worry about. Nah...no reason for concern. Forget
about it.

Eric...? Your news, please...

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

Eric Fry in New York...

- A herky-jerky session on Wall Street yesterday jerked the
Dow Jones Industrial Average higher by 31 points to 8,516
and yanked the Nasdaq Composite up 1% to 1,466 - a three-
month high for the high-tech index. The dollar fell
slightly against the euro...to $1.10. And bonds drifted
lower for the third straight day, as the yield on the
benchmark 10-year Treasury inched up to 3.99% from 3.96%.

- Now that stocks are approaching their highest levels of
the year, stock market bulls are popping up like so many
crocuses and daffodils. But we suspect the bulls will fade
away as quickly as these delightful spring flowers. The
recent mini-rally on Wall Street should not be confused
with the beginnings of a new bull market.

- We've all heard how splendidly stocks perform over the
long run. But how long might that"long run" be when the
starting point is 30 times earnings? To be sure, long-term
investing covers a multitude of short-term sins, like
paying 30 times earnings for S&P 500 stocks. But why sin in
the first place?

-"Over the long term, stocks have returned about 10% a
year and have always rewarded the patient portfolio,"
observes Barron's Michael Santoli."But like the Bible
verse promising a life span of three score and 10 years,
it's a rough guideline describing a broad pattern, not a
rule applicable to every time and place. And,
unfortunately, unlike human life expectancy, the expected
returns from stocks are likely to be lower in the years to
come.

-"From 1926 through 2000," Santoli continues,"the
Standard & Poor's 500 and its predecessor indexes generated
annualized profits of 10.7%...[However,] according to
recent work by Ibbotson Associates, 4.6 percentage points
of the 10.7% return through 2000 came from dividends.
Another 3.1% of equity market gains can be attributed to
inflation...Together, then, dividends and the salutary
effect of inflation on earnings delivered more than 70
cents of every dollar of wealth produced by stocks in the
75 years through 2000...The best 20-year period for stocks
over bonds came in 1941-61, during which equities returned
16.9% a year."

- Not coincidentally, stocks yielded 7% in 1941 and sold
for less than 9 times earnings. Little wonder that stocks
rewarded investors handsomely over the subsequent 20
years...And the only thing an investor had to do to reap
such ample rewards was to buy U.S. stocks immediately after
the attack on Pearl Harbor and continue holding them
throughout the second World War, Korean War and Cold
War...nuthin' to it!

- Typically, the stock market rewards those who buy when
the masses are eager to sell and valuations are depressed,
and punishes those who do the opposite. When the
lumpeninvestoriat are still eagerly buying and stocks still
are pricey and Mary Meeker is still gainfully employed on
Wall Street, the stock market is unlikely to bestow ample
rewards over the ensuing 20 years.

-"Perhaps the most dramatic hindrance to those betting on
a recurrence of historical equity returns is stocks' vastly
elevated valuation," Santoli winds up."The multiple of the
previous year's earnings...averaged about 15 for the 75-
year span. Today, the market sits at 31 times 2002
results."

- But perhaps corporate earnings will accelerate rapidly,
thereby lowering P/E ratios to attractive levels. Dream on,
says Morgan Stanley's Stephen Roach."The dream merchants
are hard at work peddling the tale of another economic
revival," scoffs Roach."The magic of postwar relief is
widely billed as the catalyst...Just as America led the
charge to Baghdad, the U.S. economy is now presumed to lead
the way to global recovery...To me, this is a leap of faith
of Herculean proportions...global imbalances have now
reached the point where another burst of U.S.-led growth
would be inherently destabilizing.

-"Reflecting a U.S. economy that accounted for fully 64%
of the cumulative increase in world GDP over the 1995 to
2001 interval, the U.S. current-account deficit hit a
record $548 billion in the final period of 2002, or 5.2%
of GDP. If the world stays the path of its U.S.-centric
growth dynamic and if America's federal budget goes deeper
into deficit, as certainly seems likely, the U.S. current-
account deficit could easily surge toward 7% of GDP...For
those of us who choose to remain cold, calculating, and
unemotional, the world still looks like a very treacherous
place. Call me a dreamcatcher."

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

Bill Bonner, back in Paris...

*** Gold fell $2.90 yesterday. No comment.

*** Meanwhile, nature's weapon of mass destruction, the
SARS epidemic, seems to be getting worse. The death rate
has climbed to 5.9%. Contrarians take note: this may be the
perfect time for a vacation in Hong Kong; the restaurants,
hotels and airlines are nearly empty.

***"The world probably is a safer place, since the
Americans took out Saddam," said our friend, Michel, after
lunch yesterday."The other governments in the area are
running scared. The last thing they want to do is to give
the U.S. an excuse to attack."

Whatever else may be said of this New World Order... it is
different. More tomorrow...


The Daily Reckoning PRESENTS: Investing secrets derived
from the wisdom of the ages...


THINKING SMALL
By C. Alexander Green

The world's greatest investment book was written in 327
B.C.

Nothing by Warren Buffett or George Soros or Peter Lynch
has ever surpassed it. And though it was published a couple
of millennia before the founding of the London Stock
Exchange or the Chicago Mercantile, it contains the
essential key to making a fortune in today's financial
markets.

The book I'm referring to is that dusty classic from your
sophomore year, Plato's Apology. Socrates, as you may
recall, was on trial for corrupting the youth of Athens.
During his defense, he explains how he tried to disprove
the oracle at Delphi, who proclaimed that no man in Athens
was wiser than Socrates.

Baffled at this revelation, Socrates confessed that - with
his meager understanding - he could not possibly be the
wisest in the land. And so he set out to visit a local
sage, one of the greatest scholars in Athens:

"When I began to talk with him, I could not help thinking
that he was not really wise, although he was thought wise
by many, and wiser still by himself; and I went and tried
to explain to him that he thought himself wise but was not
really so; and the consequence was that he hated me, and
his enmity was shared by several who were present and heard
me.

"So I left him, saying to myself as I went away: I am
better off than he is - for he knows nothing, and thinks
that he knows. I neither know nor think that I know. In
this particular, then, I seem to have slightly the
advantage of him. Then I went to another, who had still
higher philosophical pretensions, and my conclusion was
exactly the same. I made another enemy of him, and of many
others besides him."

In the end, Socrates discovers he is indeed the wisest man
in Athens...simply because he realizes the limits of his
own knowledge. In short, knowing what you don't know is the
very foundation of investment wisdom.

It took me years to truly absorb this lesson. Although I
retired at 42, I spent 16 years on Wall Street as a
research analyst, investment advisor and portfolio manager.
During that time, I learned a lot about what works in the
financial markets...and a lot too about what doesn't.

As a result, I can now say with complete confidence...

I don't know whether the economy will double-dip or triple-
dip.

I don't know whether jobless claims will rise or fall.

I don't know whether the Fed will raise or lower interest
rates.

I don't know whether the U.S. dollar will rise or fall.

I don't know whether annual GDP will expand or contract.

I don't know whether debt-laden consumers will sink or
swim.

I don't know whether commodity prices will head north or
south.

And as for the near-term direction of the stock market,
don't ask.

But here's one thing I'm certain of. Nobody else knows
these answers either. There are plenty of folks on Wall
Street and in the media, however, who are making a very
good living by pretending to know.

And so they do.

However, there is one question that you must answer. And
that is this: Given that the future is always uncertain and
knowledge always provisional, what is the shortest route to
financial independence...or at least to a comfortable
retirement?

After all, bond yields hover near 44-year lows. Americans
currently hold over $2 trillion in money market funds that
pay less than 1%. And the stock market has plunged roughly
40% in the last three years.

So how do you reach your financial goals? The answer is,
you give up trying to predict the unpredictable, and
embrace the magic of thinking small.

Think about it. Does a successful business owner lie awake
at night calculating the size of the federal deficit? No,
he thinks about what he can do to increase sales. Does he
fret about this year's total GDP growth? No, he imagines
how he can further improve his products and services. Does
he agonize over when foreigners will begin to repatriate
their U.S. assets? No, he thinks up new ways to cut
costs...how he can better emulate his most successful
competitors...where he can find more qualified
employees...and how he can find the cheapest capital to
expand.

Successful businesses grow - and their owners become
wealthy - by finding a niche and then exploiting the
"bejesus" out of it...day...after day...after day.

I call it the magic of thinking small. And it's exactly
what you should be doing as an investor. Forget about
forecasting interest rates, the economy or the short-term
direction of the market. And instead, look to invest in
that select group of companies that have the same
characteristics NOW that the highest-returning stocks of
the last 50 years had BEFORE they made their spectacular
moves up.

What are those characteristics? Here are a handful of the
most important ones...

* Each of the last three years' earnings were up at least
25%.

* Return on equity (earnings divided by book value), a good
measure of management efficiency, was 17% or higher.

* Recent quarterly sales and earnings were up 25% or more.

* Heavy insider ownership of the stock.

* Heavy institutional sponsorship (buying by pensions and
mutual funds, for instance) in recent months.

* After-tax profit margins were improving and near their
peak.

* The companies had recently introduced new products or
services.

* The companies were buying back their own shares.

* And they weren't penny stocks. These companies generally
were trading at $12 a share or higher BEFORE they made
their big moves up.

Okay, so these characteristics may sound fine in theory,
you may say. But how do they work in practice?

Beautifully. Let me give you an example. As Investment
Director of The Oxford Club, I recently recommended early
this year that members purchase shares of Netflix (Nasdaq:
NFLX), the Internet-based DVD-rental service.

Netflix allows customers to rent unlimited DVDs (three at a
time) over the Internet for $19.95 a month. There are no
due dates, late fees or shipping charges. You can watch
them whenever you like, return them whenever you like, and
the longest trip you'll ever take is to your mailbox. (As
you can see, I'm a satisfied customer myself.)

Furthermore, the company's financials are exceptional.
Netflix reported blockbuster first-quarter revenue of $56
million, up 82% over the same quarter last year. In fact,
sales were 23% higher than last quarter!

What does this mean in terms of investment performance?

Netflix is up 122% so far this year. In fact, although
there are over 8,000 publicly traded companies in the U.S.,
Investor's Business Daily reported last week that -
excluding penny stocks - Netflix is the single-best-
performing stock in the U.S. market this year.

Chalk it up to the magic of thinking small. That's what
we're doing in the Momentum Alert, a special trading
service I run targeting a handful of companies that are
doing virtually everything right. Using this system during
the bear market of the last three years, we've locked in
double-digit profits in Panera Bread, Direct Focus, Emcor,
Christopher & Banks, Aftermarket Technology, Hovnanian
Enterprises, Corinthian Colleges, Agilent and a host of
others.

Currently we hold Countrywide Financial, up 148% in the
bear market of the last three years. We hold eBay, up 219%
in just over two years. And we hold generic drug maker Teva
Pharmaceutical, up 669% since the downdraft began three
years ago.

But these returns may pale compared to one of our newest
discoveries. Out of respect for due-paying subscribers to
the trading service, I'll withhold the name for the time
being, but I can tell you the company looks like a good
one. It's a $10 billion oil and gas company with operations
in the U.S., Canada, Australia, Poland and Argentina.
Earnings have been nothing short of superb. Recently, the
company announced that fourth-quarter net income surged
134% from 53 cents a share to $1.24 a share.

And the firm is growing even more rapidly through
acquisitions. In fact, it just made its biggest ever, $1.3
billion of North Sea and Gulf of Mexico assets.
Fundamentally, the company has a strong balance sheet,
rising production and operating margins of 32%. And from a
technical standpoint, the stock is very strong. I expect
the returns here to be among our best for the year.

Now I realize some folks believe the success we've had
buying companies like these comes from knowing what we
know. But, in truth, it's also from knowing what we don't.
That's the magic of thinking small.

Sincerely,


Alex Green,
for The Daily Reckoning

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gesamter Thread:

• Thinking Small / The Daily Reckoning - - Elli -, 24.04.2003, 18:47
  • wer könnte die 10 Billion $ gas and oil company sein? (owT) - Trixx, 24.04.2003, 19:57