Dow 2500

Over the last few years, no introduction of James K. Glassman would have been complete without mentioning that he co-authored a bull market best-seller:Dow 36,000.”

But we all do things from time to time that we would like to forget. Even curriculum vitae get rewritten as Wall Street fashions change. In today’s International Herald Tribune, a large article, “James K. Glassman’s World of Investing,” merely notes that the author is a “fellow at the American Enterprise Institute.” No mention is made of “Dow 36,000″…or Dow 26,000…or even Dow 16,000.

The Dow may someday hit 36,000. Adjusted for inflation, that may be more…or less…than today’s Dow. A chart of the Dow over the last 70 years shows a clear trend – the Dow has been going up. But that trendline also suggests a possible low point for this bear-market cycle: 2,500 – a long way from 36,000.

In the IHT article, Mr. Glassman turns his attention away from preternatural equity growth to the joys of diversification. He believes he has found a way to spread out your investment risk by buying a single preternatural stock – General Electric.

“If you could only buy one stock to keep for the next 20 years, what would it be?” he asks. “General Electric Co., no doubt about it.”

I have doubts. And I write today to suggest that Mr. Glassman may soon want to omit this IHT article from his resume, too.

GE is a great company, Glassman tells us. It is now the largest-capitalization stock of the world’s largest stock market – worth almost half a trillion dollars, far more than Exxon at $307 billion.

Glassman: “For the fourth straight year, GE was named Fortune’s ‘most admired company in America’ and for the third straight year was recognized by the Financial Times as the ‘world’s most respected company.’ Business Week ranked GE’s board of directors No. 1, and the company was first among Forbes’ Super 100 companies.”

GE has made investors a lot of money, no doubt about that. It has produced annual returns of 28% for the 10 years 1990-2000. $10,000 invested in GE back in 1990 would have grown to $125,000 at that rate.

GE is active in many different industries, both old and new – power systems, aircraft engines, locomotives, plastics, television, lighting and appliances. Jack Welch says the company is going to make a fortune on the Internet – largely just by cutting costs. This year alone, $1.6 billion is the projected savings from “digitizing work processes” and ordering supplies via web-based auctions. This may turn out to be correct, dear reader, but if you are given a choice between $1.6 billion and GE’s real savings from information technology this year…my advice is to take the cash.

And don’t worry about an economic slowdown, says Glassman, “it could help by weakening competitors.” (No explanation is offered…as though none were necessary…for why GE would not be weakened, too.)

But who can argue with success? As if GE needed further recognition, Internet Week gave the company its “business of the year” award.

GE has been paying dividends since 1899 and is not likely to stop soon. Value Line Investment Survey gives it an A+ rating for financial strength and a perfect score for earnings predictability. Earnings have risen 13.5% for the last five years…and Value Line predicts that they will increase at a 14% rate for the next five.

GE has not exactly been an undiscovered secret in the investment world. Au contraire, investors have flocked to it with the enthusiasm of a pederast to a playground.

Shares rose to $60 last summer – up from just $12 (adjusted for splits) in ’96. Since then, it has fallen, and trades today at $49.95. Even at this more modest price, GE has a P/E about 50% higher than the rest of the S&P 500. Does GE…with its 340,000 employees and hundreds of operations in dozens of industries worldwide…deserve to be priced 50% higher than the rest of the S&P 500…and more than 100% higher than that the S&P’s average P/E over the last 50 years? “Ask me something tougher,” Glassman challenges.

Okay. Why would anyone in his right mind buy a stock so favorably viewed for so long that every possible potential buyer already owns it? What happens to a company so widely admired that its reputation couldn’t be better? How do you make money buying what everyone else already owns? To whom will you sell your shares?

Far from being a ‘one decision’ investment success in the years ahead, GE is likely to be a singular disaster. In a slump, GE’s earnings will go down with everyone else’s. Sooner or later the magic will wear off; people will realize that GE executives eat the same breakfast cereal as the rest of us. The combination of lower earnings and lower P/E should send GE’s shares back to $12 – for a capital loss of $300 billion or so.

Your correspondent, on the train to London…

Bill Bonner
On the Eurostar, Underwater…
April 30, 2001

*** “Is the Pain Over?” asks this week’s Barron’s. The financial media seems to think so. The GDP is still thought to be increasing. Stocks are rallying. What more could you ask for?

*** Maybe the Fed’s rate cuts and aggressive money creation is paying off. The Dow rose 117 points on Friday. The Nasdaq ended the day up 40 points. Twice as many stocks hit new highs as new lows.

*** But bonds fell. Yields on 10-year notes rose to 5.31%. And the gap between the yield on a regular bond and one indexed against inflation – the TIPS – has widened to over 2%. Bond buyers are worried about inflation.

*** The bond vigilantes seem to be getting back together and saddling up. You remember the bond vigilantes? They were supposed to prevent the Fed from inflating the currency, by dumping bonds whenever Fed policies seemed too loose.

*** The Fed has been creating new money and credit at a record pace – desperately (and recklessly) trying to avoid a further sell-off on Wall Street. Until a month or so ago, bonds paid no attention. But now the spoil sports seem to be getting ready for action.

*** “S&P 500 earnings should rise 4% in 2001 and about 14% in 2002,” says a Morgan Stanley report.

*** Are they dreaming? Business Week surveyed 122 ‘bellwether’ companies and found that profits had fallen 19% in the first quarter – even though sales rose 14%.

*** Says BW: “The second quarter is likely to be just as humbling, and analysts widely predict third quarter profits will be down too.” The BW article tells us that S&P’s own economists project an 18% first quarter decline for the 500 companies the group tracks…which follows a 5% drop in the last quarter of last year. They expect another 10% decline in the second quarter.

*** The Nasdaq is still down 60% from its high of last year. Investors continue to look to the “long run” to get even. But “the long-term prospect for equity in general,” wrote Warren Buffett recently, “is far from exciting.”

*** Buffett is in the news after Berkshire Hathaway held its annual meeting in Omaha over the weekend. Berkshire shares have risen 12.5% since last March – which the NY TIMES describes as “Vindication for Buffett and ‘Value.'”

*** “There is now $540 billion in cash in circulation,”
writes John Myers, “double the outstanding cash of 1990. With monetary pumps full bore we hinge on the break between inflation and deflation. The Great Depression was so bad that America has never had another. Does that make today’s Fed smarter than the Fed of 1929? No. But they are more aggressive.”

*** Also taking place over the weekend, G-7 leaders got together. U.S. Treasury Secretary was reported to be “optimistic,” but IMF chief Horst Koehler had this comment: “I don’t think we are in a very nice world.”

*** The world may not be a very nice one, but it is the only one we have. Besides, it is very nice to central bankers – who have rarely been allowed to go hungry.

*** My invitation to the G-7 meeting must have gotten lost in the mail. So, I don’t know all that happened…but my guess is that the most intriguing question was not even asked: how long will it take for before the dollar self-destructs?

*** The dollar rose slightly on Friday. And the price of gold fell. But gold stocks continued their stealth advance.

*** What gives? How far can stocks rally in the face of rising long term interest rates and falling earnings? I don’t know, dear reader, but as Keynes put it, “The market can stay irrational longer than you can remain solvent.”

*** “[Cisco’s] 4.1 billion inventory of unsold – and, it would now appear, almost completely unsalable – routers and what-have-you,” writes Christopher Byron, “not only represents 17 percent of Cisco’s tangible net worth, it also amounts to a Mont Blanc-sized indictment of Mr. Chambers’ ability to manage his company…in little more than a year, Cisco’s stockholders have now become stuck-holders, with nearly a third of their gains having been wiped out, even as the company’s growth rate has stagnated.”

*** Also from Business Week: California “is being battered by a tech crash and an energy crisis. That’s not all. Growth is imperiled by failing schools, soaring costs, and economic troubles in Asia. Will it drag down the U.S. economy?”

*** Likewise’s Mary Levai contemplates the imperiled California economy. She writes, “California is first in the good life, first in nouvelle cuisine, first in whimsical style. And now, seizing the trend-setting reins once again, California finds itself at the head of a less- revered line: the unemployment claims line.” She continues, “Though at 12.8%, California’s total output comprises less of the nation’s GDP than it did in the early 1990s, bad news in the Golden State can only be bad news for the country at large.”