Begging For Extermination

“There is smart money. There is dumb money. And there is money so imbecilic that it practically cries out for euthanasia.”

Bill Bonner You will recall yesterday’s comment from Henry Blodget, “King Henry” As the WSJ dubbed him, King of the Tech Touts.

Henry’s top picks have dropped an average of 79%. Admitting neither error nor incompetence, Henry blamed it on an unpredictable shift of attitude on the part of the fickle investing public:

“The market went from saying ‘we like companies that are growing quickly but are losing a lot of money’ to saying ‘We want to see earnings.’ It’s very hard to predict a 180- degree turn like that.”

Yes, dear reader, who could have imagined that the stock buying public might decide to stop buying companies that are “losing a lot of money?” Who could have foreseen that one day investors might expect the businesses they owned to make money?

Of course, anyone could. Some things are not just possible, they are inevitable.

But today I am not writing today to criticize stupidity, but to praise it. For it is upon this ineluctability of moronic behavior that nature counts to maintain her delicate balance. Mistakes are merely nature’s way of carrying out Her Own Plan.

This thought occurred to me upon wakening this morning. I looked at my right hand and found that I had 5 fingers. On my left, also, were 5 fingers. I use my right hand much more than my left, why are there the same number of fingers? I could do with another finger on my right hand, and one fewer on my left. But that is not the way Nature, in her wisdom, set things up.

Nature loves symmetry and balance. Draw a line through the center of a leaf, for example, and you will find that it is the same on both sides. And the sea level is the same in San Francisco as it is in Odessa…even though they are on opposite sides of the earth.

Charts of market manias tend to be symmetrical. Sharp upward spikes on the left hand side are mirrored by sharp downward spikes on the right. Long, gentle inclines on the left are usually followed by long, gentle declines on the right.

This tendency towards balance and symmetry is shadowed in the political world, too. The Roman Empire, which took centuries to build, also took centuries to dismantle. But the Third Reich, the subject of Bevin Alexander’s book, “How Hitler Could Have Won WWII,” was created in just a few years, and destroyed in just a few more.

People get not what they expect from their investments but what they deserve. Quick profits are lost just as quickly. Little gains, accumulated over many years, tend to remain for many years. If it were not so – everyone would always go for the quick gains. And if that were to happen, the gains would disappear – like a lush island that is suddenly over-run by herds of grazing animals.

Hitler’s military adventures brought Germany some very quick gains. But ultimately, Germany got something very different from what it expected…but something very close to what it may have deserved.

Bevin attributes this to human error.

First, Hitler failed to destroy the British Expeditionary Force at Dunkirk – when he could easily have done so.

Then, he failed to destroy the RAF – which he also could have done. The British air force was near collapse when Hitler switched the air campaign towards bombing Central London. How this decision was made was typical of Hitler’s amateurish approach to warfare. In attacking British air installations, a couple of Luftwaffe planes had gotten lost and mistakenly dropped their bombs on London. The British retaliated with a raid on Berlin. This so angered the Fuhrer that he decided to bomb London until Britain lost its will to fight. The opposite happened. While the Luftwaffe lost planes damaging London, the RAF was able to rebuild. And the bombs on London merely strengthened British resolve to fight to the end…and gave Londoners a taste for bomb alerts that they have relished ever after.

Then, says Alexander, Hitler failed to attack the British base at Malta – diverting his target to Crete, which was of little military significance.

And he failed to give Rommel the minimal support he needed to take the Suez canal, which would have sealed off the Eastern Mediterranean (and quick passage to the east) to the British fleet.

But his most monumental error was his attack on Russia. As a 19th century military historian put it, after studying Napoleon’s Russian disaster and the Swedish invasion of Russia prior to that (also a disaster), “Russia is an easy place to get into, but a hard place to get out of.”

This blunder broke every rule of military strategy. It, combined with his declaration of war on the U.S. after Pearl Harbor, put him in the position of fighting the three largest industrial powers on the planet – with his troops spread out over thousands of miles towards every point of the compass.

And if that were not bad enough, he then proceeded to carry out the campaign in Russia with such lunatic incompetence that even the Soviet Army was eventually able to perform the role that nature had given it: making sure that Hitler’s Germany got what it deserved.

Instead of setting one difficult objective, the Fuhrer set three completely unreachable ones. This was such a classic mistake – dividing his strength and stretching his supply lines – that it was as if Hitler had sent an engraved invitation to Marshal Zhukov with all his battle plans and troop disposition and this message: “Destroy Me.”

But at first, the German army performed so well, and the Soviet Army so badly, that Zhukov seemed unable to accept the invitation. It almost seemed like the ancient rules of warfare no longer applied to this new battle. The Germans attacked over dry ground against an enemy as foolish and incompetent as Hitler himself.

Still, Hitler had gotten himself into a war of attrition that could only end badly. The Soviets produced 4 tanks to every one Germany produced. The tanks rolled off the assembly line at the Dzershezinsky Tractor Plant in Stalingrad and other places and were in action in a matter of hours. Hitler’s tanks could take weeks or months to reach the front line – if they ever reached it.

Finally, the weather changed and it became clear that the campaign was doomed. Not only that, it became clear, too, that Germany was doomed. The Russians could not be stopped. And Hitler would not make peace. As his generals reported the devastating news from the front, Hitler removed them, including Heinz Guderian, the best tank commander in the army. They were “too pessimistic” he said. They were “cowards” who “lacked drive.”

What these professional soldiers really needed, said Hitler, was the “glow of National Socialist conviction.”

But the “glow of National Socialist conviction” wouldn’t stop a T-34 tank anymore than faith in a ‘new era’ would stop a bear market in the Nasdaq.

Everybody makes mistakes. But Hitler’s mistakes were so imbecilic they called out for extermination. Finally, the Red Army, taking up the task nature had given it, obliged.

Your correspondent,

Bill Bonner Paris, France March 9, 2001

*** Nature loves symmetry. The Nasdaq, which shot up so quickly, is now falling in like manner. It lost another 55 points yesterday. The Dow, though, has been building since 1982. What takes a long time to build up also takes a long time to destroy. More below…

*** The Dow rose for the 5th straight session yesterday – up 128 points, bringing the total gain for the week to more than 400 points…and leaving the index only about 10% below it’s all-time high.

*** The big losers yesterday were the Internets – led by Yahoo! A year ago, Yahoo! was a ‘must own’ New Economy company. And a share in Yahoo! would have set you back about $200. Today, you should be able to get it for $20. Investors have lost about $90 billion on this single company. How could they have been so reckless with their money? Again, more below…

*** Yahoo! left Wall Street in suspense on Wednesday, after trading was halted pending an announcement. When the announcement was finally made, investors learned that the company now expects first quarter revenues 25% below forecasts…and profits have disappeared completely. This was the news that sent the shares tumbling 16% yesterday.

*** But even at $20 a share, Yahoo! is worth more than $11 billion – which is a lot of money for a company with gross sales of only about $180 million per quarter…and headed in the wrong direction. In fact, it’s 58 times this year’s earnings. As earnings decline that P/E number will go up – making the company even more preposterously over-valued.

*** What’s a good price for Yahoo!? Who knows? But bear markets typically cut from 90% to 99% off the leading tech shares. At $2…and a P/E of 8 or so…Yahoo! could be a good deal.

*** Amazon fell 4%. TheStreet.com dropped 6%.

*** A Reuters headline: “Greenspan to Banks: Keep Credit Flowing.” The Fed chairman realizes better than perhaps anyone that you can’t have a credit bubble without credit. He’s doing his part…lowering rates with the accommodating grace of Bill Clinton issuing pardons. But whether it is the integrity of the currency or the judicial system that is being compromised, people don’t always get what they expect.

*** Recently, Japan lowered its own central bank lending rate – reducing it to 0.25%…practically giving away money, in other words. But even that failed to turn things around in Japan. The nation’s finance minister said yesterday that Japan’s finances were “near collapse,” despite years of zero interest rates and trillions of yen worth of ‘fiscal stimulus’ spent by the government.

*** But to confuse the picture, Japan’s manufacturing sector still looks strong. Output for the past year rose to $1.26 trillion – $50 billion more than that of the U.S. Who’s really gotten rich…and who’s gotten poor…over the last 10 years? More tomorrow…

*** The big winners yesterday were the gold mining companies. The price of gold shot up $3.70. Mining companies rose 7% on average. Newmont, for example, rose $1.93 to $18.85. The index of gold miners, the HUI, is up 70% since November. Flash prediction: Before the year is out, Newmont shares will trade at higher prices than those of Yahoo! or Cisco.

*** In recessions, junk bonds have historically done well… an opportunity my friend John Mauldin thinks is coming around again this year. Mauldin: “Junk bonds trade a great deal more like stocks than highly rated bonds – and therein is the current opportunity. Typically, high-yield funds pay about 4% more than treasury funds. Today, the spread is closer to 8%, so if rates come back to their average, there is the nice potential for capital gains, as well as interest income. The capital gains are what boosted the 1991-93 junk bond returns to 79%.” (One Man’s Junk Is Another Man’s Treasure )

*** The boom years for banks ended last year, too. According to the FDIC, “a 34% surge in bad commercial loans – and $2.3 billion of losses on stocks – combined to break the banking industry’s eight-year streak of record earnings [in 2000].”

*** The Daily Reckoning continues its eyewitness coverage of evolving epizootics. International Living editor, Kathleen Peddicord, reports from Waterford, Ireland (Disclosure of the purpose of this coverage will have to wait until we can think of one):

“There were two outbreaks last century, one in the 1920s and another in the ’60s. I overheard an Irish farmer the other day remembering the later outbreak, when he was a boy. ‘Authorities came and killed every animal on our property,’ he said, ‘except the dog.'”

*** My colleague Addison, who is also in Waterford this week, says you have to wipe your feet on disinfectant mats at the door of every establishment in which you set foot in Ireland.

*** I returned to Paris yesterday on the Eurostar. Arriving at the Gare du Nord I walked down the Blvd. Sebastopol to get to my office. That area has changed complexion in recent years – the population is almost entirely African, either sub-saharan or North African.

*** But as you get closer to Chatelet the faces and languages become more familiar. As I approached the rue des Lombards a neatly-dressed woman about 60 years old beckoned to me. I have no explanation, but for some reason this quartier seems to be the place for prostitutes nearing retirement age. While the women who hang out on the rue St. Denis are young, vulgar, lascivious and shockingly deshabile, these older women are charmingly bourgeois and dignified. They are a tribute to their profession.