The Daily Reckoning - Sell! (Porter Stansberry)

verfasst von Firmian, 13.02.2004, 21:37

-->Sell!

The Daily Reckoning

London, England

Thursday, 12 February 2004

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

*** Quagmire overseas... fiscal quicksand at home... feeding
the fantasy...

*** World-famous cartoon character sparks a
rally... frosting on the world's financial cupcake...

*** Who will pay their debts?... A fascinating quandry for
Juniper... gratuitous politics... and more! More! More!

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

Where was John Forbes Kerry?

We only ask the question to be provocative. We know the
answer. He was in Vietnam; trying to kill the locals before
they killed him. We just don't know why. More about that
below.

For the moment, we return to our regular beat - the dreary
world of finance, investment, and economics.

What brings the worlds of politics and money together -
like a gigolo who pretends to be in love with a woman who
pretends to be rich - is fraud. Both are so soaked in it,
if you ever dried them out, there would be nothing left.

"It's time to put an end to the fantasies and the deceit,"
comments Bob Hebert in the New York Times,"which have
landed America in a quagmire overseas and the equivalent of
fiscal quicksand at home."

Each day that goes by, the federal government sinks about
$1.5 billion deeper into the hole. George W. Bush never met
a boondoggle he didn't like, and has yet to see a single
pork-barrel spending bill he didn't want to sign. But
others have become so alarmed that even the democrats are
taking it up as a campaign issue.

The other source of alarm is the current account deficit.
It is mud of a different sort... still, the U.S. sinks at
about the same rate - down about $1.5 billion every day.

The great fantasy in which Americans put their faith is
that these mires are nothing to worry about."Deficits
don't matter," said Dick Cheney... speaking of the federal
kind. Most people think the other type matters even less.
By some special dispensation from God himself, they seem to
think that they never have to pay their debts.

In this detail, they may be right: Americans may never pay
their debts. Even in the present 'recovery,' the means of
repayment slip away. A nation cannot repay overseas debtors
by polishing each others' shoes. It must make something it
can sell to the foreigners. Yet, in America, the factories
close down while shoe polish flies off the shelves.
Industrial production, typically up by about 18% at this
stage of a recovery, is still down 5% from 2000. Employment
in the manufacturing sector should be booming, too.
Instead, nearly 2.5 million jobs have been lost since the
recession began in 2001.

"From its peak five years ago in 1998," explains Dr. Kurt
Richebächer,"manufacturing employment has plunged 2.1
million, or about 18.3%. This is the single greatest
percentage decline in the labor force in almost seven
decades since the Great Depression of the 1930s. What has
been happening to American manufacturing can only be
described with the word 'depression.'"

With nothing to sell, how will Americans settle their
debts? They may not pay them, but the costs of settling up
cannot be escaped.

If the bond issuers do not pay, perhaps the bond holders
will. Eventually, someone pays... and the fantasy ends.

And here we pause to thank the kindness of strangers.
Without the illusions of the Japanese... who think they can
make money by lending to people who can't pay back... the
fantasy would have ended long ago.

The division of labor in the world grows clearer. China
produces. The U.S. consumes. Japan finances. The Bank of
Japan has spent $250 billion - $2,000 per Japanese citizen
- to hold the dollar up, and U.S. interest rates down, over
the last 13 months.

When they will give up... we don't know.

But while we are waiting, here's Eric with more news:

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

Eric Fry in Manhattan...

- Alan Greenspan and Mickey Mouse led the stock market to
new highs yesterday. The world-famous cartoon character
deserves most of the credit for the rally... but Mickey
Mouse also played an important role.

- Shares of Walt Disney jumped 14% yesterday, leading the
Dow to a fresh 32-month high, after Comcast bid $66 billion
for the giant entertainment company. Meanwhile, over in
Fantasyland, Chairman Greenspan presented a soothing
assessment of our national economic condition to the House
Financial Services Committee.

-"Looking forward, the odds of sustained robust growth are
good," the Fed chairman beamed."In all likelihood,
employment will begin to grow more quickly before long as
output continues to expand."

- Concerning interest rates, the Fed chairman delighted his
listeners - and millions of investors - by declaring,"With
inflation very low and substantial slack in the economy,
the Federal Reserve can be patient in removing its current
policy accommodation." In others words, the Federal Reserve
will not be raising interest rates any time soon.

- The Chairman also reassured the congressional committee
that the plunging dollar is no problem, nor should we be
overly concerned about the nation's gaping federal and
current account deficits. Greenspan neglected to conclude
his remarks by saying,"... and they lived happily ever
after." Probably just an oversight by his speechwriter.

- Investors adored the chairman's remarks, and wasted
little time responding. The Dow jumped 124 points to 10,738
- just shy of the 10,748 intra-day high set on January 27 -
while the Nasdaq Composite Index added 14 points to 2,090,
their highest closes since June 2001. Bond traders also
responded rapturously to Greenspan's comments. Treasury
bonds rallied, driving the yield on the 10-year note to
4.02 percent from 4.10 percent.

- But alas, dollar holders were not so enthralled to hear
the chairman brush aside concerns about inflation and the
current account deficit. The dollar tumbled more than 1%
against the euro to $1.2811. Gold responded to the dollar's
steep decline by rallying $3.70 to $410.70 an ounce.

- So, on balance, everyone but dollar holders found
something to like in Greenspan's testimony... But wait a
minute... aren't U.S. stocks, Treasury bonds and gold all
priced in dollars? So if the dollar fell more than 1%
yesterday, didn't all investors actually lose money?... But
what do we know; we just try to keep our financial heads
above water by owning the one asset - gold - that is likely
to rise about as much as the dollar falls.

- While listening to Greenspan drone on and on yesterday,
the phrase"divorced from reality" came to mind. The
rallying stock and bond markets are celebrating the
"reality" that Greenspan portrays: a buoyant economy with
only the slightest of flaws.

- Perhaps his portrayal is accurate. But it seems to
downplay one very inconvenient fact: Our prosperous nation
relies heavily upon the kindness of foreigners. We enjoy a
kind of contingent prosperity, which flourishes as long as
our foreigner creditors don't neglect to stuff a bottle in
our mouths at feeding time.

- Foreigners produce, so that we may consume. Foreigners
save, so that we may borrow and spend. In effect, we
Americans get to lick the frosting off the world's
financial cupcake. How delightful it is to be an American
in February 2004!

- Borrowing and spending has been sustaining the U.S.
economy for so long that the phenomenon seems utterly
unremarkable to most investors, and not worth mentioning to
Chairman Greenspan. But our paltry national savings rate is
indeed a remarkable phenomenon.

-"In 2002 the U.S. national net saving rate (gross saving
less the nominal depreciation of the capital stock) was a
post-World War II low of 2.4%," observes Northern Trust
economist Paul Kasriel."In fact, 2002's rate was the
lowest net saving rate since the Great Depression! Though
fourth-quarter data are not yet available, it appears that
the net saving rate fell even more in 2003, averaging just
1.2% in the first three quarters of the year."

- Not to worry, foreigners are doing our saving for
us..."The Fed's flow-of-funds data show that net foreign
claims on U.S. assets already are $2.3 trillion, or about
21% of nominal GDP. That total is being added to at a
current rate of about $550 billion a year," says Kasriel.
"My suspicion is that over the next 20 years or so, the
dollar will fall a lot more, U.S. interest rates will rise
a lot... and baby boomers will be fighting each other for
the greeters' positions at Wal-Mart."

- Last week, your Paris editors remarked,"Americans cannot
save a dime... yet, they set out to save the entire world."

- Our advice: Let's try saving dimes first.

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

Bill Bonner, back in London...

*** Who will pay their debts? Not homeowners... not in
Philadelphia.

"With a record number of Philadelphia homeowners unable to
pay their mortgages," begins a report from the City of
Brotherly Love,"city officials, the sheriff and advocacy
groups are trying to convince a judge to suspend the city's
foreclosure auctions."

"This is the worst time for foreclosures basically since
the Great Depression," said John Dodds, director of the
Philadelphia Unemployment Project, the group leading the
moratorium drive.

"You can't keep letting hundreds and hundreds of people
lose their home every week.

"Philadelphia Sheriff John Green said he would participate
in a lawsuit to suspend the auctions, which this week saw a
record 1,120 homes up for bid."

*** What's this...? Addison tells me the French version of
our book suddenly leaped to #1 on Amazon's list in France
yesterday. Ahead of Harry Potter even. We don't know what
to make of it...

*** And here, colleague Porter Stansberry with more madness
in the Nasdaq:

"Out of the eight public corporations in the world whose
market capitalization exceeds $10 billion and whose shares
trade at more than 15 times earnings, Juniper Networks has
the absolute worst gross margins.

"The others are all around 90%. But Juniper sells big,
hard-to-make routers. It is, then, mostly a manufacturing
company. And its gross margins are comparatively normal:
69%.

"Like most revered high-tech stocks, Juniper's business
doesn't appear to benefit shareholders in any way. On a
cumulative basis, the company's efforts since its founding
in 1998 add up to a loss of $13 million dollars. Of course,
this GAAP accounting doesn't include Juniper's biggest
expense: stock options. Juniper's management thoughtfully
passes this cost along to shareholders directly.

"This, of course, is de rigueur for tech companies. But
Juniper's board of directors threw gas onto the fire by
agreeing to re-price all of the outstanding employee stock
options, near the bottom of the market in tech shares.
Today Juniper has 75 million stock options outstanding with
an average strike price of $10.71. With the stock doing so
well lately, these outstanding, off-balance sheet
obligations provide investors with a fascinating quandary.

"At current share prices, Juniper's employees' options have
an intrinsic value of $1.296 billion dollars. Meanwhile,
Juniper's total shareholder equity only equals $1.5
billion. Thus, at current prices, Juniper's outstanding
option grants to its employees are worth ~ 80% of its
equity.

"The more bullish investors bid up the price of this stock,
the smaller their own claims to the company's equity
becomes. This is the only time I can recall seeing a stock
actually become worth less, the more someone offered to pay
for it. I'm not quite sure what to make of it...

"Juniper's managers, however, are not so curious. They seem
quite able to chart a proper course of action: they're
selling - like there is no tomorrow. So far this year
(2004) Juniper's CEO has dumped 500,000 shares, worth more
than $14 million dollars. The company's CFO isn't far
behind: he's dumped about $6 million worth of stock.

"Like lab monkeys on cocaine, these guys see no reason to
stop hitting the feeder bar. If shareholders are going to
reward them for diluting their stock and dumping new shares
on the market, why stop with giving stock to Juniper's
employees?"

[More from Porter on the frenzy for techs below... ]

*** And now for some gratuitous politics.

"Senator John Kerry, the Democratic front-runner, received
an early discharge from military service," explains this
week's Time magazine. But unlike George Bush, who got out
early so he could go to Harvard Business School, after
spending much of his service career hustling votes in
Alabama, Kerry went home after winning"three Purple
Hearts, a Bronze Star and a Silver Star during 11 months in
Vietnam."

Yet, the war itself was - according to its primary promoter
at the time, Defense Secretary Robert McNamara - a colossal
blunder. And as we recall, almost every thinking person at
the time - except the Secretary of Defense - knew it. Which
is why we wonder about Yale graduate, John Kerry. Which is
more hideous, dear reader? Going off on a fool's errand to
kill people for no good reason... or pulling strings to
avoid it?

Neither is anything to brag about.

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

The Daily Reckoning PRESENTS: Porter Stansberry, taking
advantage of temporary insanity in the markets...


SELL!
By Porter Stansberry

John was 88 years old. He'd been active in the stock market
his entire life.

But now he thought it was time to sell.

At first glance, there was nothing unusual about his
desire. Most 88-year olds don't own too many stocks. And,
at the time John decided to sell, in January 2000, stocks
were obviously expensive and therefore risky for
conservative investors.

Selling a few stocks was only prudent. But it wasn't
prudence that motivated John. It was profit.

John believed he could make as much money on the way down
as other, more foolish investors had made on the way up. Of
course, unlike the bullish speculators, if John was right,
he'd walk away with his gains in cash instead of watching
them disappear on an electronic quote screen.

It's one thing to have an idea about where the market ought
to be heading. It's another thing altogether to bet an
entire $180 million fortune on your hypothesis. But, that's
exactly what John did, beginning in January 2000. John sold
short 84 different Nasdaq stocks, putting an even amount of
his fortune against each position - roughly $2.2 million on
each stock.

He told his brokers:"This is the only time in my 88 years
I've seen technology stocks go to 100 times earnings; or,
when there were no earnings, 20 times sales. It is insane,
and I am going to take advantage of the temporary
insanity."

By"shorting" these stocks, John borrowed shares of stock
from brokers who held large inventories of shares on behalf
of their clients. These shares were then sold in the
market. The money from each sale was put into John's margin
account. John was now on the hook for the shares that he'd
borrowed and sold. If the shares rose in price, he'd lose
money - perhaps all of his money - because he'd have to buy
the stock back at a higher price to repay the brokers from
whom he'd originally borrowed the stock. On the other hand,
if the shares fell in price... John would never have to
repay the full value of his loans, earning him a profit.

He told his brokers to sell short every new technology IPO
that came to the market in 2000 - every single one. He told
them to establish his position 11 days before the stock's
IPO lock-up expired, which was typically six months after
the IPO took place. In this way, John was selling just
before all the company's insiders were allowed to dump
their shares.

In about half of these positions, the stocks fell 95% or
more before he"covered" his short position, repaying only
about 5% of the value he'd borrowed. In other stocks, he
covered when share prices retreated to more reasonable
multiples of earnings (30 times earnings). On average, he
made over $1 million per position, increasing his fortune
by 50% in just a few months.

Even for Sir John Templeton - the"John" in our story -
this stock market operation was the trade of a lifetime. As
you probably know, Sir Templeton is one of the world's all-
time best investors. He is famous - and was knighted in
1987 - because he made fortunes for long-term holders of
his emerging market mutual funds, which profited by
investing in dirt cheap foreign growth markets, like Japan
in the 1970s and Peru in the 1980s.

Sir Templeton grew up in rural Tennessee. He attended Yale,
but was only a mediocre student until the crash of '29. The
crash wiped out his father, who could no longer pay for Sir
Templeton's education. To stay in school he had to earn a
scholarship. Only the top students were awarded such
grants... so he became the top student in his class and, in
addition to his Yale tuition, was awarded a Rhodes
scholarship to study economics at Oxford.

Today Sir John Templeton is a British citizen and lives on
Lyford Cay, in the Bahamas. He's still - even at 91 -
active in the markets. He granted an interview to Forbes
magazine earlier this year. He offered a warning to
investors, telling them it's difficult to find reasonably
priced stocks anywhere in the world."You can always find
bargains somewhere but it's difficult now. My advice is to
own government bonds." He's not recommending U.S. bonds,
but bonds from countries that don't have huge fiscal and
trade deficits - like Hong Kong, Singapore and South Korea.

I found Sir Templeton's recent remarks significant because,
for the first time since January 2000, when he began his
now famous short selling operation, you will find Nasdaq
100 stocks trading at the same kind of absurd valuations as
they did at the top of the bubble.

Personally, I think the craziness started back in September
of last year. That was the month when Prudential, which is
the only major Wall Street brokerage that doesn't also
conduct investment banking operations, altered its rating
system. Instead of having its analysts decide objectively
if a stock offered good value, Prudential instructed its
analysts to offer only"relative" valuations. In other
words, nobody was willing to tell investors that things
were getting out of hand. Instead, as long as all stocks
were getting equally overvalued, Prudential could still
find something to recommend to you. Great.

And so today The Wall Street Journal is once again
reporting on the lives of 20-something financial whiz kids
who have been mistaken for geniuses in the midst of a
raging bull market.

Featured last week was Mr. Bret Grebow, the 28-year old
manager of HMC International - a hedge fund. Bret is so
confident that he'll be able to maintain the 40% annual
gain his fund scored last year that he recently purchased a
$160,000 Lamborghini Gallardo. Bret's big winnings allow
him to keep a residence in Highland Beach, Florida and an
office in New York City. He charters a $10,000 per flight
jet for the round trip. In reference to the jet, Bret told
Wall Street Journal reporter Gregory Zuckerman,"It's
fantastic. They've got my favorite cereal, Cookie Crisp,
waiting for me, and Jack Daniels on ice."

Another hedge fund manager rented Versailles for his
wedding last summer.

And broker Grant Morgan, who says"We're comfortable the
market won't take a new downturn," was confident enough in
his future earnings to spend a week at the Breakers in Palm
Beach... after buying a $150,000 Ferrari 360 and spending
$600,000 to remodel his home.

Once, not too long ago, I was a part of the hotshot crowd,
piling into growth stocks without a care. Well, at least in
a small way. For a short time, I posted gaudy performance
numbers. My picks were up 134% in 1999. And I heard people
tell others that I was a"genius." I remember squiring my
girlfriend around New York City, staying in hotels that
cost more than a month's rent just for the night. As your
editor, Bill Bonner, wrote of me, I was living as though
God whispered in my ear.

But, having been a part of that once, I remember all too
clearly how it ends.

In November of 2000, I hosted a lavish conference for high-
tech, growth-stock investors at the Ritz-Carleton in
Montego Bay, Jamaica. In the days leading up to the
conference, my portfolio collapsed. As I hit my stops, I
sold, sometimes at a loss.

One of the speakers at the conference was a director of VA
Linux, a company that was attempting to compete directly
against Microsoft by selling desktop computers with a
version of the free Linux operating system installed on the
hard drive, instead of Microsoft's Windows. In other words,
its business plan was the Charge of the Light Brigade. On
the day of his presentation in Jamaica, VA Linux's stock
dropped 20%, reducing this director's net worth
substantially - probably by more than a million dollars. He
flew home the next day. VA Linux had become the largest
loss ever recorded in my model portfolio.

The conference attendees - my best customers - were stunned
when, in my closing presentation, I warned them about the
impact of the Fed's interest rate tightening, which had
produced an inverted yield curve, making it prohibitively
expensive for speculative companies to get additional
financing. I wrote the same message in my newsletter, to
all my subscribers: get out, it's a bear market and it's
going to last a while.

People were angry. In less than a year I'd gone from a
genius to a fool. As the market began to spiral lower, I
lost most of my subscribers, who had largely ignored their
stop losses and my warnings of an impending bear market.

I lost my bull market girlfriend, too.

But I learned a very valuable lesson: what you put at risk
in the market is far more important than what you might
gain.

Given this background, the run-up of 2003 looks
suspiciously like the party year of 1999 to me - and the
risk of stock investing in 2004 akin to investing in the
year 2000. As Templeton told Forbes, there are almost no
cheap stocks, anywhere in the world. Within the S&P 500
there are only 10 stocks that have P/E ratios below 10.
That's the lowest tally of cheap stocks ever, according to
Barron's.

What should we do when all of the signs, not least the
crumbling dollar, point to higher interest rates? What
should we do when the world's best, most experienced
investors issue public warnings about worldwide stock
market prices? What should we do when there are literally
no reasonably priced stocks trading in the entire U.S.
market? What should we do when individual investors are
wildly bullish, but insiders are selling at a record
setting pace?

It's simple. We sell the market.


Regards,

Porter Stansberry,
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Daily Reckoning - Sell! (Porter Stansberry) - Firmian, 13.02.2004, 21:37
  • Dt. Fassung vom Investor-Verlag - Firmian, 13.02.2004, 21:39
    • China produziert. Die USA konsumieren. Japan finanziert...wie lange wohl noch? - Tofir, 13.02.2004, 22:07
      • Re:...wie lange wohl noch? - Firmian, 13.02.2004, 22:14
        • Re: Das Potential ist noch nicht ausgeschöpft - zani, 13.02.2004, 22:24
      • Wird schon noch etwas dauern - politico, 14.02.2004, 14:04