The Daily Reckoning - Selling The Pao Mo (Steve Sjuggerud)

verfasst von Firmian, 25.03.2004, 21:32

-->Selling The Pao Mo

The Daily Reckoning

Paris, France

Thursday, 25 March 2004


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

*** Another nothing day on Wall Street... how long will
nothing go on...?

*** Sales, refinancings up... art market starved for
inventory... but major equity markets around the world seem
to be topping out...

*** Phisters on the Internet... Modigliani's $17 million
nude... selling what everyone else is buying... and more!

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

Nothing happened again yesterday. The Dow went up... or
down, we can't remember. Gold, up on Tuesday, went down on
Wednesday. It remains at about $417 - more than $20 more
than it was 2 weeks ago.

The dollar also went up and down... with no clear trend or
calamity in sight.

Most often, that is what happens - nothing.

But we remind readers that betting on nothing is not always
a good wager. The average person is almost incapable of
imagining that anything could happen. He puts his money on
nothing - sure that what happened yesterday will happen
again tomorrow, nothing more, nothing less. Prices are
always prejudiced in favor of nothing; investors' emotional
momentum carries them only in a straight line... from
yesterday, through today and on to tomorrow... with nothing
ever happening but more of the same. At the end of a long
bear market, prices are too low... because investors expect
them to continue going down. At the end of a long bull
market, prices are too high...

But after a long period when people have come to expect
nothing but 'more of the same,' 'more of the same' becomes
overbought. People bet on it. They come to depend on it.
When interest rates go down for years, for example, they
begin to imagine that credit will always be cheap and easy
to get. When house prices seem to do nothing but go
up... they buy a bigger house than they can
afford... counting on low rates and capital gains to bail
them out.

"Stability breeds instability," said economist Hyman
Minsky. People are reluctant to lend money when the future
seems dangerous. 'Something might happen,' they say to
themselves. But when nothing happens for a long enough
time... they gain confidence. Both lenders and borrowers
figure they can 'put the money to work' and be better off.
They put additions on their houses, buy new cars, and pick
up a few tech stocks; the economy booms.

When nothing happens for a long, long time... people begin
to think nothing will ever happen. An investor who bets
that something WILL happen will be wrong almost every day.
His friends will make fun of him... and he will lose a
little money. He could have gone into tech stocks along
with everyone else. He could have bought a bigger house and
taken the equity out. He could have borrowed more, spent
more, and lived higher on the hog.

But the man will have his revenge. The odds are with him.
He will still be wrong on most days... but then, one day,
SOMETHING will happen.

Something began in January of 2000. Stocks fell. A
recession began a year later. But so great was the official
campaign to prevent something from happening - so much new
money and credit were brought into the economy to keep
people borrowing and spending as they had before - that
whatever was happening seemed to stop happening."Nothing
has changed," said investors."It's still the same," said
consumers."Party on," said Alan"Bubbles" Greenspan.

This week's news brings nothing to contradict them. Home
sales are rising. Mortgage refinancings are increasing. An
advertisement popped up on our screen telling us that"The
Refi Boom is NOT Over... Here's how to lower your payments!"

So great is the pressure to throw away money that the art
world is running out of things to sell in the galleries,
according to a report in the NY Post (more below... ).
Meanwhile, the NYTimes tells us that swindlers (called
'phisters') are working overtime on the Internet.

Nothing seems different. Still, last week... or was it the
week before... it looked as though something was starting to
happen again.

Rumor had it that Mr. Mizoguchi, Japan's leading monetary
strategist, had had enough of lending money to the U.S. He
denied the rumor... but people still wonder.

And now we see stock markets all over the world seeming to
top out.

"This morning I looked over maybe a hundred charts," wrote
Richard Russell yesterday,"and what I see is a worldwide
movement OUT of equities. Everywhere I look, I see tops -
huge tops, medium-sized tops, small tops, even smaller
tops. What these charts tell me is that U.S. and global
investors are moving out of equities." There is no great
concern in the financial press - at least not yet. No
panic. For the moment, no one seems to have noticed. But
something was bound to happen sooner or later. Now is as
good a time as any.

Here's Eric with more news:

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

Eric Fry in New York City...

- The dollar rocketed higher yesterday, but the stock
market merely muddled along. The resurgent greenback gained
1.6% against the euro yesterday to $1.2133, as rumors
swirled that the European Central bank would soon begin
lowering interest rates on the Continent.

- But the stock market - refusing to follow the dollar's
lead - wandered all day like a lost child. The Dow strayed
15 points below Tuesday's closing price to 10,048, while
the Nasdaq crept ahead 8 points to 1,909.

- If Wall Street really wants to get serious about sparking
a powerful new bull market, the solution is simple: Provide
zero-percent financing for all tech stock purchases.
Imagine the marketing slogans:

"Don't just keep up with the Joneses... Kick their
butts!"..."Load up on tech stocks with no money
down!"..."Zero percent financing for life!"

- As it is, the stock market is gliding aloft on the
thermal draft of easy money. Indeed, easy money is
billowing into every nook and cranny of this vast economy
of ours, inflating the disposable incomes of Mr. and Mrs.
Consumer... And the spendthrift couple is wasting no time
disposing of its income. Nor are these two folks hesitating
to dispose of their colossal borrowings as well.

- Disposal is not necessarily the best use of one's cash,
especially when the economy is refusing to add jobs or
increase wages. But don't tell that to consumers or lenders
or the Federal Reserve chairman. These folks all understand
that borrowing and spending is what makes America great.
Don't we Americans owe more money to more people than any
other country in the world? And don't we also possess the
world's number-one economy?... Case closed.

- Furthermore, if we consumers didn't borrow, we wouldn't
have any money to spend, and if we didn't have any money to
spend, we'd be poor, right?

- Problem is, we are not only running out of savings, we
are also running out of equity in our houses. Fortunately,
we are NOT running out of ways to borrow against the last
slivers of our - present and future - home equity. Fear
not, unconventional mortgages are riding to the rescue...

-"Lenders are coming up with increasingly creative
mortgages aimed at owners whose budgets are stretched
thin," the Wall Street Journal reports."Lenders such as
Countrywide Financial Corp. are offering mortgages that
allow some borrowers to skip up to 10 payments over the
life of the loan. The rise of these oddball mortgages comes
at a time when sky-high home prices are making it tougher
for many borrowers to afford their dream house - or any
house...

-"Already, some loans that seemed novel just a year or two
ago have become almost mainstream. One example: interest-
only mortgages, which allow borrowers to pay interest and
no principal in the early years of the loan..."

- And along comes Washington Mutual to help indebted
homeowners, like a bartender helps alcoholics. The big
mortgage lender now offers an adjustable-rate mortgage with
an interest-only feature."It calls this mortgage Option-
ARM," reports Grant's Interest Rate Observer.

-"In just one year," continues Grant's,"the percentage of
WAMU's customers selecting Option-ARMs has leapt to 40%
from 5%, according to Harry Tomlinson, senior vice
president for the Northeast region....The borrower can
elect to go interest-only and make no amortization payment.
Tomlinson explains: 'If you have a little bit of financial
challenges, you can always have the option of deferred
amortization, but you don't have to. That's a choice. What
I see is a shift in the mortgage product, going from our
product used by one's home... to a product where people can
leverage their home as a financial asset, and that's a big
shift.'"

- Indeed. But once the happy homeowner has finished
"leveraging" his"financial asset," he finds himself the
proud owner of a"financial liability"... and that's not
very much fun.

-"When the Fed lifted the funds rate in 1994," Grant's
recalls,"it caught out the hedge funds and interest-rate
speculators. When it raises the funds rate next time, it
will catch out Mr. and Mrs. America."

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

Bill Bonner, back in Paris...

*** Paintings and other art treasures are fetching record
prices. A 1917 nude by Modigliani, for example, went for
$27 million. Which reminds us of the time when the Japanese
were at the top of their bubble - spending millions for
Western works of art. The Japanese, we recall, favored the
impressionists; they figured the lightweight dabblers went
better with modern office décor. Rich Americans tend to
squander their money on more serious and less appealing
works.

But Sotheby's and Christie's sales are down. The auction
houses say they cannot get enough inventory to keep up with
demand.

A reproduction of Modigliani's famous oeuvre would be bad
enough. But at least it would be cheap. What charm the real
thing has, we cannot tell you. But perhaps it is a great
investment. Everyone knows it is a great painting - why,
someone paid $27 million for it! And everyone knows that
great works of art only go up in value.

(We attended an art auction at Drouot's the other day. We
got carried away and bought a lovely little painting of
apple trees. But we paid too much - at $350, we felt we had
been robbed.)

It must all be part of God's plan, we imagine. And what a
marvelous little machine it is: a man makes a little
money... and then, up surge a host of ways for him to get
rid of it.

He can be perfectly happy with red wine in plastic
containers, for example, finding the no-drip spigot a handy
innovation. But then, as his wealth increases, everybody
encourages him to spend more money on 'better' wine - which
he has to open with a bloody corkscrew! He resists at
first, but then come the many reasons why the 'better' wine
is richer, subtler, more nuanced... and so forth... and
pretty soon, people are congratulating him for his
sophisticated taste... and he's actually beginning to take
the whole thing seriously himself... studying the wine list
as if he knew what he were doing... and choosing a '96
rather than a '97 because he read somewhere that it was
rather cloudy in the Bordeaux region in the summer of '96
and someone told him that it took a little of the edge off
the wines from the south-sloping fields in Pomerol.

*** The newspapers are full of grand plans for democracy.
Building democracies here. Protecting democracies there.
Strengthening, perfecting, nurturing democracies everywhere
- the big thinkers, kvetchers and world-improvers can't
seem to think of anything other than how to breed and
export what they call 'democracy.'

But why? They do not explain. What is democracy? Why is it
better? In the Soviet Union people voted. They voted in
Hitler's Germany and Mussolini's Italy (at least, for a
while). They voted for WWI... and WWII... They voted for the
Vietnam war in America... and the Gulf wars... Almost
everywhere, they seem to vote for higher taxes, more
government, more weapons, more war, more debt and less
freedom - because these were the major trends of the most
'democratic' century in history.

Dan Denning sends a reflection:

"Two consecutive elections... [Spain, Taiwan]... two acts of
violence. Who says elections are won by campaigning? Maybe
we've entered the age where they're won by skillful
manipulation of the democratic masses at the voting booth,
maybe through violence, like firing a starting pistol to
get the herd headed in the direction you want.

"[Robert] Prechter asked but never answered the question
yesterday: 'Do you think the world will be more democratic
in 50 years, or less?'

"My prediction: more democratic, less free."

*** While the Japanese were still spending millions to buy
paintings of flowers... the future president of the U.S. was
sweating bankruptcy.

Here's an unsolicited email:

"At a May 1990 meeting [of Harken Oil] attended by George
W. Bush, board members discussed a stock offering they
hoped would bring in enough money to keep the company
solvent.

"Bush was named to the board's 'Fairness Committee,' which
was to measure the effects of bankruptcy on small
stockholders. By late May 1990, internal memos warned that
there was no source of immediate financing, loans were
slipping out of compliance, banks were demanding guarantees
of sufficient equity to cover loans.

"As Chairman of the audit committee actually working with
the accounting consultants called in by the board, Bush
knew exactly how grim their conclusions were. He was
warned, along with other directors, in a May 25 memo that
it would be illegal to dump his stock. In June he left the
small stockholders holding the bag. He dumped $848,560 of
the stock without disclosing the sale to the SEC.

"On Aug 22 Harken's second quarter report predicted $23
million in losses. Once the news hit the street, the stock
sank immediately from $4 to $2.57. It bottomed out at 22
cents a share.

"So Martha Stewart is on trial and George Bush is
President."

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

The Daily Reckoning PRESENTS:"You make money by buying
something when nobody else wants it... and selling when
everyone wants it." Way out in front of the crowd, Dr.
Steve Sjuggerud says now is the time to sell China's Pao
Mo*.

*"Pao Mo" ="Bubble" in Chinese


SELLING THE PAO MO
By Dr. Steve Sjuggerud

- A waiter pulls my friend Porter Stansberry aside.
"Psst... I overheard you talking about China... how can I get
in?"

- A champion professional windsurfer (and friend) tells me,
"I want to invest in China."

- Two China IPOs debut in the U.S. (Linktone and Tom
Online)... and both of them fizzle quickly.

- Shares of PetroChina soar on huge volume after having
done absolutely nothing for many years. (The only real news
was that Warren Buffett bought some.) After an enormous
rise, both share price and the activity in the shares
fizzle.

- Friend and journalist Andy Carpenter makes the cover of
the Wall Street Journal section on investing for the
successful launch of his"China Club," focusing primarily
on small, China-related stocks. Andy honestly tells the WSJ
reporter he hasn't been to China and has little China
experience."Don't look for me to give you a grand insight
into China... My opinion is as good as anyone else's."

.. They say they don't ring a bell at the top of the market
to let you know when to get out. No, they don't. Yet to me,
all five of these things above are the proverbial bell -
very real indications that the boom in China-related stocks
has peaked.

You know we're at the peak when the waiters and windsurfers
want in and"China Clubs" pop up. And you know it's running
out of gas when you see the January peak in PetroChina and
the two failed China IPOs.

I expect China-related shares to fall dramatically. Here's
a piece of advice for you: if you own any China-related
stocks, sell them now.

Don't get me wrong. I see what's happening in China. Of
course I know that the economy is growing. And of course I
know that China has completely changed the landscape in
commodities, as its demand for raw materials seems
insatiable.

So let me be clear - I am not"voting" against China. I am
simply voting against China stocks. They've simply run too
far, too fast. Everyone, including waiters and windsurfers,
want in.

To me, that means it's time to sell.

Yet a huge pile of"hot" money has been flying into China.
Which reminds me of something John Train wrote in one of
his Money Masters books. It went something like,"You
should ask yourself: Where is my money needed so badly that
I can really get paid for sharing it if I can stand some
risk and discomfort?"

I have remembered this phrase, and I've invested
successfully based on it. Nobody, for instance, was
investing in Iceland when I first wrote about it a few
years ago. Nobody was buying Ecuador when I first wrote
about it in 2000 (I wrote a few cover stories for the
Oxford Club newsletter on buying Ecuador back then), and
the Ecuador stock market rose by triple-digits in dollar
terms in 2000 and 2001.

Let me share a fact with you. At the end of January, the
governments of China and Hong Kong together held a total of
over $200 billion U.S. dollars in cash and U.S. Treasuries.
Now, since China is directed by its government, let me ask
you: Is your money needed badly in China right now?

Absolutely not. So the chance for you to really get paid in
China right now is very low.

Just take a look at what has happened in previous"China
manias." We don't have a decent history of stocks in China
to draw from, but the next best thing is Hong Kong. Over
the last 20 years, every time the P/E ratio of the Hang
Seng Index (Hong Kong's version of the Dow) reached 20,
Hong Kong stocks lost between a third and half of their
value.

It happened in late 1987, and the index fell from around
4,000 to around 2,000 - a 50% fall.

It happened in January of 1994, and the index fell from
around 12,000 to around 8,000 - a 33% fall.

It happened during the dot-com boom in 2000, and the market
fell from around 16,000 to around 9,000, nearly a 50% fall.

Can you believe that it's happened again already? Yes, last
month, the P/E of the Hong Kong stock market rose above 20.
Time to sell.

China in 2004 really is like the Nasdaq in 1999. The
waiters and the windsurfers are expecting astronomical
returns. But they - and most investors - don't have a clue
about what it is they're buying... and they'll likely end up
disappointed.

You may have lost money in the Nasdaq bust of 2000. Don't
get burned a second time.


Regards,

Steve Sjugerrud,
for the Daily Reckoning

P.S. You don't make money buying what everyone wants. You
make money by buying something when nobody else wants
it... and selling when everyone wants it. I call it"Hold
your nose and buy" investing... quite often, the more
"stinky" an investment sounds, the greater its potential
for profit.

Consider this... the list below is all the countries whose
stock markets have risen by more than 100% total in U.S.
dollar terms over the last five years. There are only six
markets, and they're all in"stinky" places...

1. Russia
2. Pakistan
3. Czech Republic
4. Venezuela
5. Hungary
6. Indonesia

Meanwhile, if you had invested in the"safe" countries,
you'd have lost money - for the last five years! Only a few
markets in the world are down by 20% or more over the last
5 years... and many of them are in"pleasant-smelling"
places:

The Nasdaq (down 20%)
England (down 20%)
Japan (down 23%)

In my experience, what appears most desirable is often the
riskiest place for your money... and what appears risky is
often an extraordinary opportunity.

Everyone wants to get in on China right now. That's why I
think it's time to get out.

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gesamter Thread:

• The Daily Reckoning - Selling The Pao Mo (Steve Sjuggerud) - Firmian, 25.03.2004, 21:32
  • Dt. Fassung - Firmian, 26.03.2004, 20:57