Market Review: Keeping The Faith

A spike in unemployment to 6% – it’s highest level in eight years – arrested this week’s bear rally on the Dow. Economists had expected 5.8%. Investors, it seems, aren’t all that impressed by the much-lauded ‘recovery theory’ of the US economy.

The Dow closed down 85 to Friday. It did, however, manage to hang on to 95 positive rally points and keep it’s head above the 10,000 mark. The Nasdaq dropped 50 for the week. The tech-heavy index has now fallen 11 of the past 13 sessions. The S&P 500 traded sideways for the week, closing at 1073.

"How many times," asks our friend John Mauldin, "have you had a stock broker quote you the Ibbotson Survey or something similar which shows the stock market growing 8% per year over long periods of time?"

The prevailing investment philosophy suggests all you have to do is just "keep the faith" and buy and hold. Au contraire, says Mauldin, quoting a study by Peter Bernstein and Bob Arnot, showing that the idea that stocks always go up over the long run is misleading. In fact, if you break it down, the numbers show you something entirely different.

"First," writes Mauldin, "the largest component of stock market return, up until 1982, was inflation. From 1802 to present, $100 would have grown to $700 million if you assumed all dividends re-invested. However, if you take out inflation, we are left with a still impressive $37 million. If you take out dividends, however, you find that your $100 is only worth $2,099!

"Here’s the kicker: in 1982, the stock portfolio would have been worth only $400. The bulk of the growth, over 80% of current value, came in the last 20 years. The conventional wisdom which says equities get most of their value from capital appreciation is false. It is based on recent experience, and bubble mentality."

Post-bubble investors should probably get used to weeks like this one; a ‘sideways’ trading stock market, with no clear trends in the economy… and a slow decline over time.


Addison Wiggin,
The Daily Reckoning
May 04-05 2002 —
Paris, France

P.S. There was no greater speculative bubble than that which surrounded optical fiber. As you may recall, following Apogee Research’s ground-breaking coverage of Corning (GLW), picked up by Barron’s, readers were treated to a 90% "short-sale" winner. Now says, Jim Grant, they’re "bulls-in-waiting" as Corning is still the undisputed king in this sector. You can read Jim’s comments in this week’s Flotsam $ Jetsam, below…

by Bill Bonner


"…I listened carefully to various representatives of the anti-capitalist crusade. Would they have a new critique of modern society…a new revolutionary theory…? Would there be a new Marx or Engels among them? Alas, not a sentence…not a word…not even a half-formed syllable that might be mistaken for an original thought wasuttered…"


"…Americans are convinced that their economy is practically invincible – bulletproof, able to magically surmount any adversity…No economic theory adequately explains how people can get richer and richer, faster and faster, forever and ever – while going deeper and deeper into debt…Here at the Daily Reckoning, we’re convinced it must bemagic…"


Guest Essay by Eric Fry

"…At the height of the New Economy, few technology stocks inspired such allegiance as Corning Inc…the company was the revered elder in a sea of brash young techno geeks. Trouble was, the "revolution" had run amok – but the faithful minions on Wall Street were too enraptured tonotice…"


"…Doing nothing is often the hardest thing to do. Not merely because it runs counter to the instinct to "do something"…but also because the moment when doing nothing is most appropriate is the very same moment when doing something seems mostrewarding…"

04/29/02 TWO ADAMS

"…Here at the Daily Reckoning we do not follow the money supply numbers as they did in the ’70s, nor the consumer confidence numbers as most economists do now. We take our method from the two Adams of our profession – Adam Smith and Adam Ferguson – who studied humans as though they were any otherspecies…"

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

FLOTSAM AND JETSAM: Jim Grant sheds some light on "glowworm" for bulls and bears alike…

– Glowworm ‘Bulls-In-Waiting’
James Grant, for Apogee Research

"…Corning Inc. observed its sesquicentennial year with massive impairment charges, 12,000 layoffs, a $5.5 billion net loss and $38 billion decline in stock market capitalization. That was 2001. ‘Clearly,’ wrote then CEO John W. Loose and chairman James R. Houghton in the just-published annual report, "these results are very disappointing to all of us.

It’s a toss-up which group of investors Corning has managed most to disappoint. Before it let down the post bust bulls, it distressed the pre-bust bears. Now the bulls are heartsick and the bears are stale. A Grant’s analysis, "Bearish on Corning," was as right as rain, though it admittedly did not prepare a reader for the subsequent near doubling of the share price. On the other hand, a subscriber whose copy was lost in the mail for about five months was presented with a unique short- selling opportunity. In those days, ‘Glowworm’ (That’s GLW on the New York Stock Exchange), and they – er, we – said it with a sneer.

Now we return as bulls-in-waiting. The news is horrific, the sentiment black, yet the technology is a as wonderful as it was at the top (more wonderful, in fact, as science doesn’t know about the bear market). At the peak, in the fourth quarter of 2000, Corning generated $2,084 million in sales; in this year’s first quarter, it produced $878 million, a drop of 57%. Peak to trough, its share price has fallen by 94%. Why are we not bulls- in-fact? The balance sheet is weakening and a debt downgrade looms. If the Bloomberg quote is close to the mark, the 6.85s of 2029 are priced to yield just 7.44%, low pay for the risk. What would the stock price do when (as we expect) the bonds sell off? Not go up. However, to reiterate, we are bulls-in-waiting…"

Editor’s note: Following Eric Fry’s ground-breaking coverage of Corning for Apogee Research (formerly Grant’s Investor), picked up by Barron’s, the stock subsequently plunged. Readers following Apogee’s sell recommendation were treated to a 90% winner. For more stocks Apogee’s not afraid to tell you to "sell"