Screw The Limit / The Daily Reckoning

verfasst von - Elli -, 05.06.2003, 21:01

-->Screw The Limit

The Daily Reckoning

Baltimore, Maryland

Thursday, 5 June 2003

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

*** An Echo Bubble in America...Dow over 9,000...

*** Gold off $2.70...record house sales...

*** Will bonds rise more? You CAN time the market after
all...and more!

"Greenspan suggests U.S. Economy Poised to Accelerate,"
says a Bloomberg headline.

Elsewhere, other cheerful news stories describe what has
become a kind of Echo Bubble:

The Dow is back above the 9,000 mark. The Dow has regained
nearly 40% of its losses, from the peak. S&P 500 stocks now
trade at a P/E of 31. If that number seems high to you, it
is because it never reached that level until 1998. After
this echo bubble pops, it may never again.

The National Association of Realtors expects 5.59 million
existing home sales this year - a new record. People are
mortgaging their houses at a record pace, too.

It is all great fun. And why worry? Mr. Greenspan tells us
we have nothing to fear, not even fear itself. What fool
would be afraid when neither deflation nor inflation poses
a threat?

And voilà, dear reader; here we are. Not so much worrying
as puzzling, trying to fit the pieces together...and
wondering how it will all end.

For while American investors celebrate on deck, down in the
engine room of the Great Boom, the boys are having trouble.
The hull has sprung a leak, and the stacks of dollars - the
high-octane fuel that drives the titanic ship forward - are
getting a little soggy.

Already, reports the Financial Times, the dollar has lost a
third of its value against the euro. Against gold, it is
down about 40%. Is this the end of it? Has the greenback
hit bottom already - without anyone noticing?

And yet, the trade imbalance is still with us...as are the
trillions of dollars' worth of dollar assets in twitchy
foreign hands. And U.S. debts and deficits are getting
worse.

"We are heading for a currency crisis as soon as this
summer," said an analyst to the Financial Times. Between
'85 and '87, the dollar lost 57% of its value against the
euro's predecessor, the German mark. That is the least we
would expect from this cycle. But we can't help but wonder:
is this downswing is cyclical...or terminal?

The wonder crossed our minds, and not for the first time,
when we read this comment from Alex Wallenwein, found on
Richard Russell's website:

"Now, that the euro (a) exists, and (b) has already
achieved a tremendous amount of penetration of the
international currency markets and even central bank
reserves to some extent, and (c) has not lost decisively in
value but has gained back all 'losses' to date, the stage
is set for a slow, gradual, but complete takeover by the
euro of the dollar's role as the international reserve
currency.

"This process will not be allowed to take place too
suddenly, because a complete and rapid 'crash' of the U.S.
economy would still hurt too many countries that are
dependent on the U.S. market for their exports. Their
export routes will have to be shifted first.

"Rather, the U.S. economy will be allowed to slowly
suffocate under its own dollar-weight, letting it go into a
gradual recession, with gradual deflationary pressures
exerting themselves at first à la Japan (now happening),
which the Fed is presently proceeding to 'fight' with
mammoth inflation, and that will eventually help bring
about hyper-inflation."

Mr. Wallenwein is only guessing, of course, just like the
rest of us. But his guesses are at least as good as those
of Mr. Greenspan. Maybe better.

And now, over to our man on Wall Street, Eric Fry:

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

Eric Fry in New York...

- U.S. stocks may be pricey, but don't bother trying to
tell that to the lumpeninvestoriat. They love buying
expensive stocks - an elevated price merely stimulates the
impulse to buy.

- Yesterday, the lumps' fast and furious stock-buying
lifted the Dow 116 points to 9,039 - the blue-chips' first
close above 9,000 since last July. The Nasdaq jumped nearly
2% higher to 1,635, its highest level in more than a year.

- So it's now official, the bear market is over...just in
time to start a new bear market! The bear market is over,
technically speaking, thanks to the fact that all three of
the major stock averages have gained at least 20% from
their recent lows.

-"Ding Dong the Bear Market's Dead," heralded a headline
from the Toronto Globe and Mail."Like the delirious
munchkins in The Wizard of Oz," the article noted,
"investors are joining hands and humming a merry tune to
celebrate the end of the wicked old bear market."

- The Nasdaq index is up by almost 45% from its lows of
last October, the Dow has gained 20%, and broader Standard
& Poor's 500 is ahead 25%.

-"This meets the technical definition of a bull market, a
rise of 20 per cent," the Globe and Mail notes."But does
it pass the smell test?"

- Good question, but the answer depends upon who is doing
the smelling. To the bulls, the recent rally exudes the
pleasant aroma of economic recovery. But to the bears, the
stock market's recent advance reeks of overvaluation and
bear-market déjà vu...Haven't we witnessed several major
rallies since the market peaked three years ago - each one
embraced by the bulls as the start of something wonderful -
- only to watch them crumble and blow away?

-"The major indexes rocketed higher after Sept. 11, 2001,"
the Globe and Mail recalls."The Dow climbed 25 per cent
between September and January of 2002, while the S&P 500
rose 20 per cent and the Nasdaq jumped 45 per cent. Was
that the start of a new bull market? Hardly. In the spring
of 2001, the major indexes jumped almost 20 per cent in the
space of a month, with the Nasdaq up 35 per cent. Did that
mark the birth of a new bull? Far from it.

-"There is little objective evidence that things are
improving dramatically in the U.S. economy, or even the
global economy, for that matter. Apart from the end of the
war and a few helpful events such as a drop in the dollar,
there is little that makes the current environment 30 per
cent or 40 per cent better than it was in October...For the
third year in a row, the market has seen a sharp run-up in
the first half of the year based on the hope of a second-
half recovery - and we know how the movie ended those first
two times. Will the third time be the charm? Will the U.S.
economy not just recover, but start to accelerate at a
healthy rate of speed? It had better - investors are
already paying for it."

- Indeed, investors would appear to be paying dearly for
some pretty dicey earnings growth prospects. Based on
generally accepted accounting principles, the S&P 500 is
selling for about 31.4 times trailing 12-month earnings, up
from 27.5 at the end of March. Before 1998, stocks had
NEVER sold for more than 30 times trailing earnings. Why
should they this time around?

-"Just as disconcerting as how stretched valuations have
got is what's rallied most lately," CNN/Money notes.
"Merrill Lynch chief U.S. strategist Rich Bernstein points
out that, on a sector basis, the two best-performing groups
in the S&P have been techs and consumer cyclical stocks.
But both groups continue to struggle with the excesses
built up during the late 1990s, and are operating far below
their potential capacity. Meanwhile, areas of the economy
that are running closer to full capacity, like utilities
and energy companies, aren't getting much attention paid to
them by investors."...Something would seem to be amiss.

-"People are paying Bentley prices for Volkswagens and
Volkswagen prices for Bentleys," said Bernstein."As in the
bubble, people ignore the fundamentals."

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

Bill Bonner, back in Baltimore...

*** Our old friend Mark Hulbert brings encouraging news for
those us who are trying to figure out whether stocks will
go up or down: it is not impossible!

"Surprising news about timing...A new academic study has
found that a not-insignificant number of investment
newsletters are able to successfully time the stock market.

"This is startling not because of its conclusion, but
because of its source. For several decades, it was
orthodoxy in the Ivory Tower (i.e. Universities and
Colleges) that successful market timing was impossible. No
doctoral candidate dreaming of getting tenure would ever
think otherwise - much less utter such a sacrilegious
notion in public. While this orthodoxy has relaxed somewhat
in recent years, believing in market timing remains the
minority position.

"Nevertheless, Alok Kumar and Vicente Pons, doctoral
students in economics and finance at Cornell and Yale
universities, respectively, were willing to buck this still
prevailing skepticism. The pair conducted their research
using the Hulbert Financial Digest's database of market-
timing signals issued by newsletters between June 30, 1980,
and November 30, 2001 - a period covering more than 21
years. The study as yet is unpublished, and is instead
circulating in academic circles as a working paper:

"Behavior and Performance of Investment Newsletter
Analysts."

***"The best investment decision I ever made was to invest
in government bonds," writes another old friend, Martin
Spring.

"I started moving into them six years ago, in the face of
notable lack of enthusiasm by financial advisers. Those
were the final years of the global bull market in equities.
Bonds weren't on the radar screen of individual investors,
or their advisers. If I insisted on buying them, I was
told, I should prefer shorter-dated to longer-dated,
corporates to governments. Later, I was told that stocks
should be bought for recovery, as they were higher-return
investments long-term, and/or that bonds were too
expensive.

"All this advice was completely wrong. Fortunately I
disregarded it.

[Ed note: For Martin's full comments, take a look at his
article on the Daily Reckoning website:

Bonds - An"Unbeatable Investment"
http://www.dailyreckoning.com/body_headline.cfm?id=3229 ]

*** Has America changed? Another friend, an American of
swarthy mien, sends this memoir:

"We just returned to the U.S. from a trip to Spain and the
Netherlands. It was our first visit to Spain. We spent time
in Madrid, Valencia, Granada and Seville. The weather was
breathtaking, the people friendly and helpful, and the
prices very reasonable, even with a strong euro. While
touring Spain, I could not help but compare the atmosphere
in the country once dominated by a dictatorship to the
U.S., a country once considered the freest society in our
lifetime. Don't get me wrong, I still like the U.S. and
plan on living here for a long time. But, I could not help
but notice the transformation over the past two years.

"I remember coming home from the USSR in 1982. As soon as
we landed on U.S. soil, many of the people in my group
kissed the ground. They had good reason. While in the
Soviet Union, we were surrounded by the state security
apparatus. At the airports, we waited for hours while our
luggage was hand-searched, not for bombs, but for
contraband. Things like rubles, icons, lacquer boxes could
not be taken out of the country unless officially
sanctioned. While in major cities, we were monitored by the
state apparatchik. Our every move was captured by a diarist
in the dark. No one smiled, everyone was paranoid about
what they said. Any bad mouthing of the state had to be
uttered in the darkest of corners. Never in a hotel room -
no, that was the KGB's bugging ground.

"On every street corner, defenders of the homeland were in
full view. Anyone exercising the freedom of anything was
quickly whisked away. There were still a lot of bread
trucks in Moscow - curiously, there was not much bread. Our
movement from city to city was monitored and regulated by
special visas.

"We were interviewed by the national TV station about a
book that four of us authored - it appeared the next
evening. Fully censored, of course.

"Back to Spain. I have not felt such freedom as I did over
the past couple of weeks. The day after I left Valencia,
the Basque Separatists detonated a bomb - it was the week
of the Municipal Elections in Spain. I took a sleeper from
Valencia to Granada. On the way, I helped a middle aged
woman and her 9-year-old daughter with their luggage. Come
to think of it, there were a lot of children, well dressed
as is the Spanish custom, running around the old town
streets in all the cities - unsupervised, I might add. No
one asked to inspect my luggage, there were no ID checkers
with wands patting down grandmas or scared 4-year olds.
There was a scary moment, though, when someone lit up a
cigarette in the non-smoking section of the waiting area.
It was the man who worked at the stations"client services"
desk taking a break.

"When was the last time you saw anything resembling client
services that actually was manned and operated with a
smile?

"By the way, smoking is legal in Spain - everywhere but on
airplanes. Oh, did I mention the cockpit door was open for
the whole flight between Madrid and Valencia. This in a
country with strong Islamic ties.

"It was about 10:30 pm on a Thursday night. We were just
getting seated for dinner in a restaurant overlooking the
Guadalquivir in Seville. The city was hopping. After the
meal, which consisted of two whole fish, perfectly fried,
with gazpacho, drinks, flan and arroz con leche for desert,
we headed back to our hotel for a late evening coffee. It
was close to 1 am before we reached the Hotel, after a
leisurely stroll over the Triana Bridge. The streets were
hardly empty, well, there were no policemen.

"We sat down. Our waiter speaking perfect Spanish,
approached our table immediately. Two decafinados con
leche, por favor. Throngs of tourists and locals walked
past our outdoor café. Sitting at a table across the way
was a single lady. We could tell she was companionless
because there was no other place setting at her table. She
was dressed to the nines, beautiful 18-carat jewelry, shoes
and a purse that perfectly matched her outfit. Spain must
have the highest number of shoe and purse stores per
capita. She had just finished dinner and was sipping some
coffee. Some loudmouths approached the tables, dressed very
down-market.

"Were we about to get our first taste of Spanish
hooliganism?

"No. It was a leftover group of drunk British soccer fans -
there was a big match in Seville the weekend before. They
muttered something with a strong cockney accent that nobody
could decipher. Then as they passed the woman, they yelled
porfavorgracias and laughed. The woman calmly finished her
dessert, paid her check and strolled down the avenue,
presumably to her home. She was at least 70 years old.

"We left on Sunday afternoon, just a few hours before the
bullfight at Seville's Plaza de Toros. How uncivilized of
us. Our flight for Madrid left at 3pm. We were advised to
be at the airport by 2pm at the earliest. We went through
security, I kept my shoes and belt on, and exited the other
side. Not so fast. The scanner guy looked over to us. He
was about 40, pudgy, with a very tired look about him.
After all, it was almost 3pm in Spain. If you don't know,
3pm is the beginning of the daily siesta when almost all
Spaniards drop what they are doing and take a two-hour
break to rest or recreate. How did the country ever make
First World status? He asked us if a plastic bag that was
at the end of the conveyor was ours. It wasn't, we said.

"We thought about dropping to the floor as hundreds of SWAT
team members would most definitely be on the scene very
soon. Would they use tear gas, how many explosives experts
would show up, what about those mean-looking, bomb-sniffing
dogs - Is Miranda a Spanish name? He leaned over...it was
too much to ask for him to actually stand up. He opened the
bag and said 'miel'.

"Oh, it was just a couple of jars of honey. But, who did it
belong to? Would they shut down the terminal until the perp
was found? Would the airport be shutdown? We knew it would
happen, after all, we're from America. He took the top off
one of the jars and stuck his finger in, pulled it out,
tasted it, and said that he would take it home if no one
claimed it.

"What drama!

"After a brief stop in Madrid, we were off for a day in
Amsterdam before hopping on our United flight back home. Oh
Amsterdam! What's new in the city of filth and freedom.
Well, red is still the favorite color. Immigrants still
wander back alleys getting high with the locals. Sexually
suppressed Britons still dominate the tourist population.
Oh, here's one for you: the Dutch parliament are
considering a proposal that would lower the age of consent
to twelve! The gay population is protesting that this would
be unfair for the younger boys. At least the hotel was
nice. The greenback does not go very far here.

"At Schiphol, we went through the Dutch version of passport
control.

"'Passport please. Thank you.'

"Then came a little piece of home in Amsterdam. Before we
could board our U.S.-flagged carrier, it was time for 20
questions, a second baggage security screening and the
infamous random wanding of the deaf, blind, aged and those
under 5. The questions were really complex and meant to
trip us up. 'Do you have any explosives in your bag?' 'Are
you members of any subversive groups or the ACLU?' 'Is
voting important to you?' 'Is Al-Qaeda spelled with a u?'
The last question was really tricky. There is no u.

"After an eight-hour flight with a group of geriatrics, and
passengers, we landed. Between getting off the plane, still
in a secured area, and transferring to our next plane,
still in a secured area, we had to go through four separate
security checks. And just in case we really were not who we
said we were at passport control, we were asked for IDs one
more time at the gate. We were home.

"Damn those terrorists - they've succeeded!"

Oh là là!

What has happened to the land of our forefathers? For a
glimpse of where we've been...who we are...and what we're
becoming, see below...

The Daily Reckoning PRESENTS: A Golden Oldie...in which
Bill Bonner contemplates 'the long term.' This DR Classique
was originally aired on 15 August 1999.


SCREW THE LIMIT
by Bill Bonner

The investment world is full of more empty promises. One of
them is the promise of"Long-Term Investing." Over the long
term, it is widely believed, you will make money."Time
defeats risk," in other words.

But time did not defeat risk for John Maynard Keynes, for
whom the long run arrived before I was born. He died. We
will all die sooner or later. If not, the hope of heaven,
of which Father Jean Louis spoke this morning, will have to
be revisited in a dramatically new way. No death, no
heaven. No heaven, no hell. No hell...?

Then Blaise Pascal can stop worrying and go back to
enjoying himself. There is a Far Side cartoon that sums up
the moral consequences of this attitude. A pair of
fishermen look behind them and see the familiar post-WWII
mushroom cloud. One turns to the other and says,"You know
what this means...Screw the limit!"

Likewise, if time defeats risk...investors can enjoy
themselves, confident that they just have to live long
enough to reap the rewards.

The human life span brings a certain time limit and sense
of purpose to investment decisions. We are told that we
should invest prudently in our old age - in utilities,
bonds and other income-producing instruments. But when we
are young, we should invest more recklessly. Time will beat
risk, Wall Street analysts repeat. A young man has time to
recover from his mistakes. An old one does not.

An investment life span should probably be about 30 to 40
years. That is the time the average person might be making
investment decisions - from the time he has accumulated
investable resources to the time he shuffles off this
mortal coil.

There is an interesting account of one such period, written
by Robert Lovett, and recited by James Grant in his book,
The Problem with Prosperity:

"If an investor had purchased 100 shares of each of the
twenty most popular dividend-paying stocks on December 31,
1901, and held them through 1936, adding, in the meantime,
all the melons in the form of stock dividends, and all the
plums in the form of stock split-ups, and had exercised all
the valuable rights to subscribe to additional stock, the
aggregate market value of his total holdings at December
31, 1936, would have shown a shrinkage of 39%."

If you added bonds into the mix, by the way, the loss
during this investment life span - which was one of the
most economically robust in history - was only 25%...with
one out of every four companies and bonds going into
bankruptcy.

Over this 36-year investment life span, in other words,
neither stocks nor bonds defeated risk. And in any similar
period, the contest might go in either direction.
Obviously, the average investment life span is not long
enough to guarantee financial success.

Perhaps we need to think more long-term. Maybe an
investment in RCA would have made sense, if you had bought
it in the '20s and held through the acquisition by GE and
the subsequent bull market. Thus, from 1929 to 1999, maybe
you could have defeated the financial risk, even if the
mortal risk had triumphed.

But if you can look seriously at an investment term that
exceeds the human life expectancy, why stop at seven
decades? Why not 10 decades...or 100? If investing for the
long term really does pay off, where are the long-term
investments that have done so superbly well? The biggest
stock in the U.S., after all, has only been on the market
for 13 years. And of the major companies on the US market
at the turn of the century...only one, that self-same buyer
of RCA - GE - is still in business.

Time does not defeat risks...it multiplies them. I thought
of this as I was driving back from Notre Dame de Plaisance.
Passing a moated, fortified house from the 14th century, it
occurred to me that there were at least one or two ancient
châteaux in the region that were still in the hands of the
same families that owned them almost 1,000 years ago. The
Château de Bourg Archambault, for example. Built of stone,
with a slate roof...its owners have beaten pestilence, bear
markets, inflation, devaluations, busts, war, revolutions,
MTV and rap music. But it is a huge white elephant.
Expensive to maintain, cold and uncomfortable as a well
digger's derrière. It is probably worth less today than it
was when it was built.


Bill Bonner

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• Screw The Limit / The Daily Reckoning - - Elli -, 05.06.2003, 21:01