The Daily Reckoning - At Least Don't Buy Bonds... (Porter Stansberry)

verfasst von Firmian, 23.01.2004, 19:48

-->At Least Don't Buy Bonds...

The Daily Reckoning

Paris, France

Thursday, 22 January 2004


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

*** Rising to the tasks of history... and other deliria...

*** Deficits don't matter... dollar down again.

*** Foreigners buy up U.S. assets... pessimism... and more!

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

"Americans are rising to the tasks of history," said
President Bush in his state of the union address Tuesday.

We don't know what that means, but when we think of the
real state of the American union the word 'delirious' comes
to mind.

The president imagines that the nation is at war - a war
which necessarily demands great sacrifices from the
American people. Who the nation is at war against is a
matter of great confusion. Where is the enemy? How many
divisions has he? What weapons does he have? What is his
war strategy... what are his war aims? Why has he chosen to
go to war with the U.S? How much will the war cost? What
will we get out of it?

No one seems to know. Hardly anyone bothers to ask.

Poor Paul O'Neill. The former Treasury secretary seems
genuinely surprised that the Bush administration would be
annoyed with him simply"for telling the truth."

The truth he told was that the president had barely a clue
what he was doing... and no one in the White House seemed to
have any interest in the kind of open questions from which
a clue might emerge.

But the truth is the last thing Americans seem to want.

"Reagan proved deficits don't matter," Dick Cheney
explained to him, hallucinating. And so the budget busters
in the White House geared up spending in the homeland with
the same recklessness as they have pursued their war
against terror abroad.

So far, it seems to have 'worked,' which is to say, it
lured American consumers into deeper holes of debt. One
day, they will almost certainly regret it, but that day
might come long after the next election. So, who cares?

Housing starts are at a 20-year high. Refinancings are
running as strong as ever. Real estate prices are rising.
The Dow is over 10,000. Americans owe more money to more
people than any race ever did. But, for the moment, they
can still make the monthly payments.

One of the biggest trends of our time is the entry of
millions of people into the world labor market. As recently
as a few years ago, Chinese peasants posed no threat to
Milwaukee factory hands... nor did Bengali engineers
seriously threaten Chicago information workers. Now, this
huge surge in the proletariat is lowering labor rates
everywhere.

America's middle class can't believe it is being ruined by
it. The nation's debt is higher than at any time in history
- 350% of GDP. Real incomes from work are flat or
falling... while millions of Chinese and Indians stand in
line to do their jobs at 1/10th the price. Each year, about
1% of the entire value of America passes to foreign owners.
And yet, Americans dreamily imagine that they have some
special talent... a gift from God himself perhaps... that
gives them the right to progress without saving, prosperity
without capital investment, and wages 1,000% above the
global bid.

Maybe there is no problem. A delirium doesn't last forever.
But what does? Eventually, the patient gets over it... or
dies. President Bush shows no sign yet of shaking off the
fever. Nor do voters. They all seem perfectly happy to
continue on the road to ruin until it comes to an end.

Americans are not rising to the tasks of history. Instead,
history is rising to give them a boot in the derrière.

While we're waiting... here's Eric with the news:

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

Eric Fry in New York...

- Wall Street featured"A Tale of Two Sectors" yesterday;
bank stocks rocketed while tech stocks reeled. Thus, the
Dow Jones Industrial Average delighted the
lumpeninvestoriat by gaining 95 points to 10,624, while the
Nasdaq disappointed the lumps by slipping 5 to 2,142.45.

- J.P. Morgan Chase, the bluest of the Dow's blue-chip
components, jumped $1 to $40.10, after posting fourth-
quarter earnings that"beat expectations." Citigroup shares
jumped a similar amount, as the BKX Index of bank shares
soared to a new all-time high.

- Pretty amazing, don't you think?... The BKX Index manages
to hit a new record high, even though the stock market is
still sitting well below its all-time highs, and long-term
interest rates are 1% higher than they were last June and
mortgage refinance activity is 80% below where it was last
May. Is Mr. Market"looking ahead" to another boom in the
finance sector... or is he simply losing his head?

- We don't trust the bank stock rally, but we wouldn't
dream of standing in its way. Although we possess an innate
distrust of stocks that sit atop multi-year highs, we have
learned to respect their right to establish a series of
ever-higher multi-year highs... even when they don't deserve
it.

- While the bank stocks were boiling over yesterday, the
semiconductor stocks were as frigid as the Hudson River.
(It's true; your New York editor saw vast sheets of ice
along the banks of the Hudson yesterday... After a few more
days of record-setting cold, we'll be able to WALK to New
Jersey). The Philadelphia Semiconductor Index slumped 2.6%,
after Motorola reported earnings"below expectations."

-"Yet on a positive note for chips," notes CBSMarketwatch,
"orders for chip equipment placed with North American-based
manufacturers rose sharply in December, marking the sixth
straight monthly gain, while a key ratio measuring orders
vs. shipments remained above parity for the third month in
a row."

- The dollar - like a kind of financial Fargo, North Dakota
- is the coldest of all asset classes. Yesterday, the
stone-cold greenback slumped half a percent to $1.2644 per
euro. The President's State of the Union address Tuesday
night lent no support to the dollar whatsoever. Apparently,
the world's dollar buyers did not warm to the Bush doctrine
of lavish tax cuts alongside equally lavish spending
programs.

- Mysteriously, the very real threat of large, looming
budget deficits caused nary a ripple in the Treasury
market. The benchmark 10-year Treasury note gained 6/32 at
101 23/32, dropping its yield to 4.02 percent from 4.05
percent on Tuesday.

- The stock market's robust rally over the last couple of
months has stolen the spotlight from the rallying bond
market. But make no mistake, bonds are enjoying a spiffy
rally of their own, despite - and here's the curious thing
- a plummeting dollar, a gaping current account deficit and
a widening Federal deficit.

- Should bond investors sell the rally?..."Yes," says the
"Bond Man," Bill Gross of PIMCO.

-"Bill Gross is paid more than $40 million a year to
manage the world's biggest bond mutual fund," explains
colleague Steve Sjuggerud, editor of True Wealth."Gross is
ultimately responsible for $350 billion in bonds. (That's
billion with a 'b'.) They call him 'The Bond Man' and 'The
Warren Buffett of Bonds.' For good reason... Gross has
beaten 95 percent of his peers since his PIMCO Total Return
Fund started in 1987. Funny then, that Bill has sold a
chunk of his own retirement money out of his famous bond
fund."

- Gross' recent commentary on the PIMCO Web site argues
eloquently against owning long-dated bonds. He predicts:
"Bonds (and stocks too) will be low-return asset classes
for the foreseeable future."

- We would not argue with Mr. Gross. Au contraire, the
Daily Reckoning's New York bureau considers the U.S. bond
market to be the best short sale west of the Atlantic.
Treasury bonds, in particular, are vulnerable to America's
acute reliance upon foreign creditors. Consider the
following observation from William Poole, President of the
Federal Reserve Bank of St. Louis:"Foreign-owned U.S.
assets increased by an average of $155 billion per year
during the 1980s. Since 2000, foreign ownership of U.S.
assets increased at an average rate of $833 billion per
year - more than a fivefold increase in the rate of foreign
buying. In 2000, over $1 trillion of U.S. assets were
purchased by foreign entities. And, by the end of 2002,
foreigners owned more than $9 trillion of U.S. assets;
including more than $300 billion in cash, far more cash
than is held by all U.S. citizens combined.

-"To give you an idea of how important foreign-ownership
of U.S. assets is to our economy, consider the recent sales
of U.S. government debt. In the last six quarters, the U.S.
government issued $345 billion in debt. Net foreign
holdings of U.S. debt increased by $304 billion during the
same period. Foreigners must buy all of our new debt
because our economy produces almost no net saving.

-"The willingness of foreigners to continue to invest in
U.S. assets depends, mainly, on currency management... The
dollar is the world's reserve currency because of its
perceived soundness. Rising rates of inflation in the U.S.
economy will jeopardize the dollar standard, make
foreigners increasing reluctant to hold U.S. dollar assets
and make it increasingly difficult to sell U.S. bonds at
affordable rates of interest."

- Responding to Poole's comments, Porter Stansberry writes,
"I'm reminded of what Alan Greenspan himself said this
month in Germany when asked about the growing U.S. foreign
debts: 'In the end, the restraint on the size of tolerable
U.S. imbalances in the global arena will likely be the
reluctance of foreign country residents to accumulate
additional debt and equity claims against U.S. residents.'

-"Commenting on the rise of prices across the board in
commodities," Stansberry continues,"Fed Governor Ben
Bernanke maintains that commodity price rises are not a
harbinger of future inflation, but instead a proof of
'strengthening economic activity.' He also mentioned that,
while shopping for cheap dry land in Florida, he had a
wonderful lunch with Santa Claus." (More from Mr.
Stansberry, below... ).

- To conclude: Bonds might rally more, but they don't
deserve to.

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

Bill Bonner, back in Paris...

***"A pessimist is a optimist with experience," say our
Swiss friends.

"Do you know the difference between an optimist and a
pessimist?" asks a Daily Reckoning reader.

"The optimist thinks we live in the best of all possible
worlds.

"The pessimist is afraid that the optimist is right."

***"I was interested to read your quote from George Orwell
about women and money," writes an English reader. [Orwell
had described, cynically, how much women seemed to care,
not about making money, but about spending it
ostentatiously]."Coincidentally, I read this in today's
London Times (section 2).

The relevant line:

"... economists believe that women are more receptive to
displays of wealth."

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

The Daily Reckoning PRESENTS: While Bob Prechter and Gary
North see"deflation" in the money supply, Porter
Stansberry sees inflation in commodities... for some time to
come.


AT LEAST DON'T BUY BONDS...
by Porter Stansberry

"All bondholders must consider that a new cycle could be
arriving... after 24 years, we are closer to the end of the
bond bull market than the start of it."

- Chris Weber,"Global Opportunities Report," Jan. 15 2004

Alan Greenspan was on TV, speaking to a German audience,
about the grandiose accomplishments of his American
monetary policy.

He was saying that the Fed's 13 consecutive interest-rate
cuts had saved the U.S. economy (and therefore the world).
He proclaimed that such cuts would not cause a rise in
inflation, as"there has been no systematic rise in
prices."

Simultaneously, the FOX news scroll running along the
bottom of my screen told me that soybean prices had reached
a new, 6-year high price.

And it's not just soybeans, Mr. Greenspan.

On January 13, the Commodities Research Bureau, which
tracks the futures prices on a broad basket of commodities,
reached a new ten-year high. Other new highs posted the
same week include copper and precious medals, which have
literally flown off the charts.

If you go back and look at the early 1970s, you'll see that
inflation follows a pattern: precious metals move first,
then soft commodities, and finally oil. Soybeans are the
first of the soft commodities to jump... the others soon
follow.

But the more dangerous inflation - asset inflation - is not
so easy to track or quantify. In fact, Chairman Greenspan
claims that economists cannot detect asset price inflation
(otherwise known as a stock market bubble) without the
benefit of hindsight. I disagree. I think common sense
gives plenty of warning.

Last summer there were only 12 companies trading in the
United States with both a market capitalization (a total
value) of over $1 billion and a price-to-sales ratio of 10
or greater. This $1 billion / 10-times sales hurdle is my
favorite measure of bubble valuations: it's simple and
objective. It makes sense. When a very large company is
trading at 10 times its annual sales, it's hard to imagine
how it will be able to grow fast enough to provide an
economic return to new investors.

A new investor would have to expect the equivalent of 10
years' worth of sales in retained earnings to break even on
the investment. Without a very high rate of earnings
growth, that cannot happen. And a high rate of earnings
growth in very large companies is extremely difficult to
achieve, especially in a global economy characterized by
poor pricing power and overcapacity.

Today there are 98 companies trading in the United States
that have at least $1 billion in market capitalization and
a price-to-sales ratio equal to or greater than 10.

Let's examine one to see if we can find any asset
inflation.

Veritas (NASDAQ: VRTS) is a Mountain View, California based
developer of software used in storage networks. The firm's
software works with all of the major labels - IBM, HP,
Microsoft, Sun, etc. The company undoubtedly produces fine
software. Sales have grown magnificently from $200 million
in 1998 to over $1.5 billion by 2002. Through the first
nine months of 2003, sales remained strong: $805 million.

If the test of a great business was its ability to develop
high-quality products and sell them, we would rate Veritas
a great company, if not a great investment at its current
price. Of course, the test of a great business is its
ability to develop great products and to sell them at a
PROFIT. And, turning a profit seems just beyond the grasp
of our friends in Mountain View.

According to the company's balance sheet, the company has
sustained accumulated losses in excess of $1.5 billion. I
find it hard to fathom how a software company, which has
gross margins in excess of 80%, can lose money year after
year. Yet, Veritas found a way...

In fact, the losses on Veritas' financial statements only
hint at the actual losses sustained by the company's
investors. You see, software companies are only as good as
their software engineers. The market for such employees is
incredibly competitive. Thus, Veritas pays for these
employees with stock - a form of currency that does not get
charged to the company's income statement, but is paid for
out of the pockets of the company's shareholders.

A closer inspection of the company's 2000-2003 results
paints a bleak picture for anyone in the market for Veritas
shares.

In Millions:

2002 2001 2000
Net Income (As Reported) $57 -$642 -$628
Stock-based Compensation $294 $290 $151
Adjusted Net Income -$237 -$932 -$779

As you can see, vast improvements to the company's official
bottom line have not yet overcome the rising cost of
employee stock options, which of course are paid for with
the investor's balance sheet, not the company's balance
sheet. Even the strong resurgence of the United States
economy has solved this compensation problem for Veritas
shareholders. Through the first nine months of 2003, the
company booked official profits of $168 million... but for
the same period it had to pay out an additional $238
million in stock options to its key employees.

Judging from the last six years of Veritas' operating
history, a reasonable investor should wonder why anyone
would want to own this business - at any price. It seems
unable to make an accounting profit with any regularity,
let alone a genuine profit that would result in an economic
benefit for its owners.

Certainly the people who know the company best want no part
of it: insiders have sold close to a million shares of
stock in the last six months; none have bought.

Despite all of these facts - which should be well known to
all Veritas investors - the shares of Veritas trade hands
today for $40 per share, a price which values the entire
company for an astounding $17 billion. Which is in excess
of 10 years' worth of its current sales.

There are another 97 companies I could have detailed for
you, all of which present investors with the same kind of
value you'll find in Veritas - that is to say, none.

And yet, Mr. Greenspan sees no inflation in the United
States economy. He will continue to say he sees no
inflation, too... because in fact it is his policies that
are causing the new inflation - in commodities and assets.

Brian Wesbury, one of the best young economists in the
country, explains:

"At 1%, the federal funds rate is 3.9% below the current 2-
year annualized rate of growth in GDP, the widest spread
since 1978... We are now in a period that looks like the
1960s or 1970s all over again. Both the 10-year yield and
the federal funds rate are significantly below the rate of
growth in nominal GDP. It does not matter whether
productivity is rising, or if lower tax rates are boosting
the output of goods and services.

"The Fed is focused on the wrong threat. Gold, commodity
prices, the value of the dollar, the steep yield curve, and
the relationship of nominal GDP growth with interest rates,
all point to the same conclusion. Monetary policy is
excessively accommodative, and in an unsustainable
position."

Sooner or later, rising commodity prices and the falling
exchange rate will filter into rear-looking measures like
the Consumer Price Index (CPI). When the Fed is forced to
raise interest rates to preserve the purchasing power of
the dollar, long-term interest rates will soar, causing
bond prices to plummet.

The last time (2000) an asset bubble was pricked by raising
short-term interest rates, long-term interest rates fell
because the dollar was strong and commodity prices near
all-time lows. This provided a substantial"wealth effect"
cushion for the U.S. economy. Lower interest rates sparked
a rally in homebuilding and a rise in credit-inflated real
estate prices.

When the Fed raises interest rates again, CPI inflation
will be a real and growing threat. Commodity prices will be
high and moving higher. The dollar will be weak and growing
weaker. And long-term interest rates will move higher, not
lower. The wealth effect that cushioned the stock collapse
of 2000 will work in reverse this time, savaging both home
prices and bond prices.

If you are bold enough to look beyond the headlines into
the real economy, as measured by commodity prices, exchange
rates and asset prices, you cannot miss the building of
another bubble - one that's even more dangerous than the
last.

Stocks and bonds may trend higher for the next several
months. Given the amount of inflation we're seeing - as
measured by the Fed Funds rate versus the growth rate in
our economy - it would be almost impossible for stocks and
bonds not to appreciate.

Traders may have a field day.

But we are in the twilight of a 24-year bull market in
financial assets and at the dawn of a long bull market in
commodities.

Regards,

Porter Stansberry,
for The Daily Reckoning

P.S. Don't be fooled by the size of this sucker's rally.
This stock market is not safe for any buy and hold
investor.

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - At Least Don't Buy Bonds... (Porter Stansberry) - Firmian, 23.01.2004, 19:48
  • Dt. Fassung vom Investor-Verlag - Firmian, 23.01.2004, 19:50
    • Re: Dt. Fassung - Danke und Gruss zum Wochenende (owT) - Tofir, 23.01.2004, 20:22
    • Das war wieder vom feinsten.Danke Firmian für diese Highlights - Euklid, 23.01.2004, 20:58