Regulation


“More revolutionary than the invention of the printing press,” writes Michael Murphy, “More world-shattering than the advent of space travel… And far more profitable than the rise of computers and the Internet put together… Here’s your invitation to grow up to 8 times richer this year and every year, with little-known stocks set to benefit first from today’s great Human Genome Bonanza… Right now I can name eight little- known biotech firms that are going to use the human genome project to become the richest companies on the planet.”

Exciting?

It’s not every day that you have a chance to grow ‘8 times richer this year and every year.”

Not since, perhaps, that day back in January 1999 when Henry Blodget assured the world that the Internet bubble was forever:

“Unlike with other famous bubbles … the Internet bubble is riding on rock-solid fundamentals, perhaps stronger than any the market has seen before. Underlying the crazy price increases are the foundations of what could become the early 21st century’s leading growth companies… Just because the Internet stock phenomenon looks like a bubble, it isn’t a given that the bubble will burst.”

The hot fever of Blodget’s Internet bubble has all gone out of it, of course. Yet, Murphy still suffers from the delirium of the true believer. His faith in the transforming grace of technology is unshaken.

I know what you’re thinking: I have come to bury Blodget and Murphy. Not so, I come to praise them. For Murphy, Blodget, Gilder and the rest speak their muddled minds clearly, unfettered by arriere pensees or common sense, as if afflicted by a strange Wall Street version of Tourrette’s syndrome…blurting out the most preposterous nonsense at all hours of the day and night.

I must warn you, dear reader, I have nothing important, or even interesting, to say today. No penetrating insights. No out-on-a-limb predictions. Not even a ‘darned cheap stock.’

Whatever I had worth saying, I must have said earlier this week, because I woke up this morning with almost nothing on my mind…and nothing on my desk save scraps of papers and shards of ideas I have not been able to assemble.

So, I write to you today for the pleasure of writing itself – as a man who takes a walk with no destination in mind, but just to feel his legs beneath him and the world pass before his eyes.

If you are pressed for time, and cannot afford the luxury of idle stroll, this would be a good day to sign off the Daily Reckoning and come back tomorrow.

Where will this perambulation lead? I don’t know, dear reader. But a cogitation is forming in the back of my mind which I will share with you:

It begins with the observation at the beginning of this letter.

You see, the quote from Michael Murphy has been widely read throughout the press. It was taken up by a sanctimonious hack who insists that it is evidence that financial newsletter writers – such as Murphy and your editor – should be regulated.

Of course, every industry loves regulations.

It imposes costs, but the costs are passed along to consumers. The real benefit to the regulated is that it helps prevent competition.

In England, for example, where we publish a handful of newsletters – including the Fleet Street Letter, which has been published since 1938 – we are a regulated business.

When we were just getting started, I went to visit the regulators in order to try to understand the restrictions under which we would labor.

“You are not allowed to use fear tactics to sell your publications,” explained the sniffy upper-class twit at the equivalent of the SEC in Britain.

Pushing for a definition of a prohibited ‘fear tactic,’ I posed the question:

“Do you mean, that in 1938, we would not have been allowed to send a letter voicing our prediction that the world would soon be caught up in the biggest and bloodiest war in history…and that London would soon be bombed, with thousands of casualties…and that the Jews of Europe would be rounded up and systematically exterminated…and that the war would end with the introduction of such a powerful new weapon that a single bomb could wipe an entire city off the face of the map?”

He was cornered. But not without recourse.

“Look, we expect you to conduct yourselves as gentlemen,” he countered.

He knew that he would get to decide what constituted gentlemanly conduct. But soon, businessmen come to understand what the regulators like and don’t like. They adjust their behavior, happy in the knowledge that start-up competitors will have a tough time figuring it out.

Perhaps it is because of this regulation that we have few competitors in Britain…and profit margins are higher.

So, I am grateful to the regulators. And I salute Michael Murphy’s eclat of outrageous enthusiasm for stirring them up. For business reasons, I welcome the regulation of newsletters with the same malicious delight as a dentist looks forward to Easter candy.

Americans claim to live in a free country peopled by free citizens.

The defining document, it is sometimes said, is not Jefferson’s Declaration of Independence…but Emerson’s essay on “Self Reliance.”

“Whoso would be a man must be a nonconformist,” Emerson wrote. “I hope in these days that we have heard the last of conformity and consistency. Let the words be gazetted and ridiculous henceforward. Instead of going for dinner, let us hear a whistle from the Spartan fife. Let us never bow and apologize more.”

Yet, for the last 100 years, Americans have surrendered their spirit of self-reliance with, as Emerson puts it, “the nonchalance of boys who are sure of dinner.”

“I am ashamed to think how easily we capitulate to badges and names, to large societies and dead institutions,” he added.

Since Emerson wrote, Americans have capitulated almost completely. Almost no detail of life in these United States is too insignificant to be regulated. No sentence in the constitution seems to limit the power of the regulators. Nor is there any apparent limit on the amount of involuntary servitude – as measured by tax rates – to which Americans will submit.

But why? More to come….

Bill Bonner
Baltimore, Maryland
July 13, 2001

“Wow! It’s been so long since we’d had an irrationally exuberant rally on Wall Street,” Eric reports, “I’d almost forgotten how much fun they are. For one raucous day, all the rules go out the window. Stocks without earnings skyrocket, stocks with earnings might also go up a point or two…and by the end of the day everyone is richer…right?”

Well, they all felt richer. But they have a long way to go. Lipper reports that the average tech fund is down 22.6% so far this year. The average large-cap growth fund has lost 16.36%.

Unemployment is getting worse. Even Motorola, which helped spark yesterday’s irrational exuberance, said it was laying off another 3% of its workforce. Investors didn’t seem to notice that the news didn’t seem to square with the company’s view of improving business.

S&P dividend payouts have dropped 6.6% this year, after a decline of 2.5% – the steepest drop since 1942. And savers have already earned $25 billion less in interest income this year than last – thanks to the Fed’s interest rate cuts.

“U.S. Corporate Debt Defaults Head for Record High,” says the Financial Times… But at least the clouds parted from the towers of Waltham, Massachusetts yesterday – long enough to allow a little sunshine to fall on Polaroid. It’s bankers announced that they would give the company time to dig a deeper grave for itself before itself forcing it into chapter 11.

What else, Eric?

*****

Eric Fry reports from Wall Street:

– The Nasdaq Composite surged 104 points – a spectacular 5.3% – to 2075. The Dow Jones Industrial Average surged 238 points, or about 2.3%, to 10,479.

– The proximate cause for yesterday’s giddy rally was the surprisingly “strong” earnings reported Wednesday night by one-time stock market icons, Motorola and Yahoo. Each reported some version of “earnings less bad than expected.” Then, shortly before the opening bell, General Electric whipped the already excited bulls into a stock-buying frenzy by reporting record second-quarter profits.

– Also making the news yesterday, albeit of absolutely no use to the bulls, was a grim initial jobless claims report from the Labor Department. Claims rose by 42,000 to 445,000 in the week that ended July 7 – the highest level in nine years. Maybe this news will matter to somebody…tomorrow.

– There’s other news that might grab a little attention tomorrow, or one of these tomorrows: commercial airlines revenues are in a free fall. The Air Transport Association reports that domestic airline revenues fell 12% in May – the worst decline in more than 25 years. Not surprisingly, therefore, the major U.S. carriers will likely post their first combined annual loss since 1994.

– President Bush may be handing a few sous back to us hard-working folks. But don’t expect any tax breaks from state and local governments any time soon. The Babson Staff Letter reports, “As fiscal year 2001 ended (most municipalities are on a July through June fiscal year), fourteen states acknowledged that fiscal 2001 revenues had been revised downward. Eleven states have lowered revenue projections for the 2002 fiscal year.”

– Since taking on more debt is a handy way to offset the following tax revenues, it is probably no accident that municipal bond issuance soared in the second quarter of 2001. Cities, counties and states sold a near-record $76.2 billion of new bonds – the most since the second quarter of 1998 when $76.9 billion were sold.

– “Burger King Pledges Humane Use of Animals,” reads a recent NYTimes headline. In the story that followed, a Burger King spokesman explained: “We are the caretakers of God’s creation. We have a moral obligation to treat [animals] humanely, and, when we do slaughter them, to do so in a painless manner.” Grantsinvestor.com’s Andy Kashdan tried to imagine what a similar political correctness in the financial realm would look like. “Would Merrill Lynch’s Internet analyst Henry Blodget, say, ‘When in the course of generating the investment banking fees necessary to sustain our extravagant lifestyles, we recommend stocks that cause the slaughter of client portfolios, we have a moral obligation to make this process as painless as possible.”

– And what’s this? Statistical proof that investors get – not what they expect – but what they deserve? Intrepid DR Blue Team researcher James Boric has shown that the stock market moves conversely to The University of Michigan’s consumer confidence index.

– “Since 1990,” says Boric, “there have been 33 cases where consumer sentiment rose or fell for two or more straight months. There have been both uptrends and downtrends. Once a trend is broken, the stock indexes will move in the opposite direction as the consumer sentiment trend 90% of the time – within three months.”

– Why the lag time? “Most investors and consumers are driven by a ‘safety in numbers’ mentality,” says Boric, “They are afraid to act on their own – so they wait for analysts and other investors to confirm their instincts… Consumer sentiment has risen for two straight months. We’ll see how long the trend lasts. Once it is broken, the market will move down from its position within 3 months.”

*******

Back to Bill in Baltimore…

*** With a rally like yesterdays’, is it time to buy stocks? “The Wall Street Journal dumped 16 editorial staff from its small-business watchers,” replied Lynn Carpenter. “So we’re getting closer. Much closer. But when Investors’ BD cans its Internet and Technology section, now soaking up valuable news space on pages A-5 to A-7 every day, then I’ll be ready to leap. Somebody might actually talk about investment as a business proposition instead of magic rabbit trick again. Before we can all start talking bull again, somebody’s going to have to start talking turkey first.”

*** And here’s a heart-warming story: AP reports that a Louisville neurosurgeon decided to give a malpractice lawyer a taste of his own medicine. Dr. John Guarnaschelli charged that attorney Fred Radolovich abused the legal process in suing him. According to Guarnaschelli, Radolovich had no evidence of negligence and never consulted an expert to find whether he had a case. In a deposition for the doctor, trial lawyer Larry Franklin said Radolovich did next to nothing about preparing a case and was “hoping somebody would pay him to go away.”

*** The lawyer lost the case and had to pay $72,000. Declaring that he had learned his lesson, he said he would never take another malpractice case, “unless they left the scalpel in the patient’s chest with the blade poking up through the skin.”