The Sunny Side Of Life

“There’s a dark and a troubled side of life

But there’s a bright and sunny side too…

Keep on the sunny side, always on the sunny side,

Keep on the sunny side of life.”

The Sunny Side of Life

Pere Marchand took up another interesting Bible passage on Sunday. Again, I listened carefully.

James and John had come to Jesus to ask for a favor. They wanted to sit at his right and left hand – positions of power, authority and prestige.

Naturally, the other disciples caught wind of the discussion and were annoyed with James and John.

Jesus turned to them all and said, in effect:

Politicians, lords and rulers set themselves up one over another, “but so shall it not be among you…for whosoever of you will be the chiefest shall be the servant of all.”

Jesus understood the difference between politics and the market. In politics, people tell others what to do. They threaten and murder…and in modern mobocracy, invoke the first person plural, we, to cloak tax rates and regulations that the Sun King would have envied. Grand larceny is okay, as long as the majority approve of it.

But in the rest of life things don’t work that way. You only get ahead by serving others, rather than ordering them around. In marriage as in mass-marketing, it is service that brings rewards, not bullying.

Mankind is sufficiently diverse and complicated that service can take many different forms. Mother Teresa might have been ‘chiefest’ for her service to the poor. Bill Gates is ‘chiefest’ for serving more people with software than any person who ever lived. Ray Kroc may not get to sit at the right hand of Jesus, but you might imagine that he’d at least get invited to the dinner table. No one ever served more burgers to more people than the man who built Golden Arches all over the world.

This distinction between politics and the rest of life is one of the things that made America different from Europe. In every European country, for example, politics and religion were intertwined. The Queen of England is still the head of the Church of England. In France, the church is officially separate, but there are a number of ambiguous connections. My children, for example, go to Catholic schools, but the schools are supported and controlled by the state. They get the same brainwashing as all public school students, with Papism thrown in at little extra cost. If they are lucky enough or quick- witted enough to get into a “good” school – such as Henry’s St. Jean de Passy, they are encouraged to believe that serving God and serving the French state are as compatible as whiskey and branch water.

The things that are most admirable and charming about America are the things that reflect the simpleminded optimism and the quirky spirit of adventure of its people. Americans will try almost anything. They are as free from shame and embarrassment as a poodle. They aim to ‘stay on the sunny side’ and ignore life’s dark and troubled side.

Anyone can imitate the European building styles…or affect Parisian manners. But it takes real chutzpah to build a mobile home out of rolled aluminum or to serve fried chicken wrapped so thickly in batter that even Colonel Sanders himself remarked contemptuously that “it’s not but a damned fried dough-ball.”

Even evangelical Christianity probably has its roots somewhere in the Anabaptists or other European schismatics. But the sects flourished and bloomed nowhere as in America. Today, the evangelical churches – mainly in the South and West – are overflowing. Some have thousands of members. And all offer a very simple message of pure optimism – everything will be all right if you remember your ABC’s, reject the devil and follow Christ. ‘Keep on the sunny side, always on the sunny side.’

You may be wondering, dear reader, what this possibly has to do with investment. That answer: little. Still, it is a part of our attempt to understand collective thinking and how it affects investment markets.

I am leading up to something that I think is important: what to do in a world of ignorance, and what to do with your money now. Pardon me for taking such an indirect root…but the scenery on the back roads is so much more interesting.

Evangelical Christians do not share the European idea of the unified church and state. They believe that they should be free men, answering only to God – and guided by simple principles, such as the Bill of Rights and the Ten Commandments. Everything else is free for experimentation.

The Eastern Liberal Establishment, now bi-coastal, has a very different idea of the way things should be. The dour Yankees were perfectly happy to go along with Jefferson’s Declaration of Independence – where he proclaimed that people have the right to decide for themselves what kind of government they would have. Getting free of England was good for New England’s business. But scarcely 4 score years later, the Yankees were imitating King George…and willing to kill hundreds of thousands of men to maintain their hold over the Southern colonies.

“In work, in game or play,

Suppress all fear and hate.

Show forth a spirit generous

True, for God and for the State.”

David Ignatius, executive editor of the Washington Post and former school chum of Al Gore at St. Albans, a “good” Episcopalian school for the sons of movers and shakers in Washington, remembers the school song. It “must sound ridiculous to modern ears,” he writes in the state media, I mean in the Washington Post, “especially the part about serving God and state.”

Even Ignatius, card carrying member of the Eastern Liberal Establishment, Gore supporter, and collective thinker, didn’t have the cajones to capitalize the ‘s’ of state.

Like the Europeans they would so love to imitate, Ignatius and Gore, see no distinction between God and the state.

“This is a man,” he writes of the Eastern Establishment’s wooden champion, “who wants to do good, to make his headmaster proud, to serve God and the state.”

Jesus knew this was rubbish. You can’t order people around while serving them at the same time.

At least George W. Bush has managed to appeal to that strain of evangelical Christendom which is so popular in Texas. Like Ronald Reagan, he espouses simple principles and a distrust of Big Government.

It is a fraud, of course. Dubya is almost as much a part of the Eastern Liberal Establishment as Gore. But at least he didn’t go St. Albans, has no desire to make his headmaster proud, and he has the good sense to recognize major league bleeps when he sees them. And he offers to help voters stay on the sunny side.

Your correspondent…trying to avoid being a sourpuss,

Bill Bonner Paris, France October 24, 2000

*** Not a very exciting day on Wall Street. Blue chip stocks rose. Techs fell. 1278 stocks advanced on the NYSE; 1574 declined. There were 50 new highs registered, 78 new lows.

*** The Dow ended the day up 45 points. Half of that gain came from acquisition target Honeywell. But the buyer, GE, saw its shares fall $2.50…below $50.

*** Sellers did better than buyers, in other words. But that is the way it works in a bear market. It is time to be a seller, not a buyer. Sell the rallies. Don’t buy the dips.

*** The Nasdaq fell 14 points. Cisco dropped $1.50. Microsoft fell $3. Amazon fell below $30 again.

*** I reported on the curious accounting practices at Cisco last week. This week’s Barron’s follows up with an article on the Cisco Kids’ habit of ‘pooling’ acquisition expenses.

*** “Just to refresh your memory,” writes Abe Briloff in Barron’s, “under the pooling method of accounting for a business combination, if Company A acquires Company B paying, say, $100 million in stock, it would show as its cost a mere $10 million, assuming that was the amount listed on Company B’s books as its shareholders’ equity.”

*** In 1999, for example, Cisco bought GeoTel for $2 billion in shares. How much did the Cisco Kids report as the acquisition cost? Just $41 million, reports Briloff.

*** When you print your own money – as Cisco did with its share certificates – you become pretty casual with the way you spend it. Thus did Cisco pay out $6.9 billion worth of shares for Cerent in June 1999. In the five previous months, Cerent had revenues of less than $10 million…and lost $2 for every $1 in sales. Hey, but with this kind of funny money, who really cares?

*** A similar acquisition of ArrowPoint cost the company $5.7 billion in shares – and showed up as only $40 million in costs on Cisco’s books.

*** The funny money is also useful for disguising labor costs. Employees get options that are not recognized as current operating costs. What would the P&L statement look like if they were forced to account for the options correctly? “If Cisco had treated the exercise of options as they should be treated – that is, as a charge to income,” concludes Briloff, “the company would have reported not the $2.1 billion in earnings it did report, but a loss of $363 million…” I don’t mean to be a sourpuss, but investors should know what they’re getting.

*** Elsewhere in Barron’s I noticed what could be a much more interesting company. Federated Dept. Stores is selling at just 7.2 times estimated forward earnings. Shares were recently at a 5-year low. Well, it’s not technology, but earnings are rising at about 30% from last year to this.

*** “Compared to other ‘value of a dollar’ retailers like Wal-Mart, Family Dollar, Target and Ames,” writes Grant’s Investor Jay Akasie “Consolidated Store’s price to equity ratio of 13.3 is the lowest of the bunch. Because discount retailers deal in a business with razor thin margins, the close-out guys have a bit of an advantage. Aided by acquisitions, Consolidated outpaces all its competitors with a five-year average gross margin of 41% and a five-year sales growth of more than 20%. If discount retailing becomes more popular with the masses, Consolidated is ready for a lead role.”

*** And yet another Darned Cheap stock: “…the absolute antithesis of so-called New Era stocks. It’s in the most beaten-down, unglamorous sector in the market,” says The Fleet Street Letter’s Ned Harper. “Its average one-year revenue growth is a gargantuan 2,042% higher than the industry average. And at about $11 per share, this stock is a steal – and priced to gain 70-100%. Despite increasing cash flow of 20% or better for six years running, it’s ridiculously undervalued: a P/E of 5.2 and a price-to-sales ratio of less than half a percent.”

*** Meanwhile, Bridgewater Associates notes that Amazon’s junk bonds are now yielding 16.5%. They are trading at about 50 cents on the dollar – implying, according to Bridgewater’s analysis – that bond investors give the company about a 54% chance of going bankrupt. Why then does the stock market put a $10 billion value on the company? Who will be right – bond investors or stock buyers? Stockholders might want to remember that in bankruptcy, the bondholders get to pick through the wreckage first. Maybe they will get to wander through Amazon’s warehouses, pulling their favorite books off the shelves.

*** “Don’t say anything bad about Amazon,” urged my friend Michel, with whom I am in the book business in France. “Amazon just made a major purchase of our books. But we don’t get paid until December.” Okay. Amazon – great company. Great future.

*** “The only bad publicity is in the obituaries,” said Sid Vicious. So, I guess the MONEY magazine mention of the Daily Reckoning wasn’t all bad. The author described himself as a ‘fan’ and described it as ‘charmingly mordant.’ But he also called me a ‘sourpuss.’ Gee, I didn’t feel like a sourpuss, until I read that.

*** George Gilder, herald of the ‘Promethean Light’ of bandwidth plenty, warns in an editorial in the WSJ that Al Gore, the father of the Internet, may turn out to be a abusive parent. Well, metaphorically speaking, of course. A billion new Internet servers are expected in 10 years, which will require “an estimated total of four thousand trillion watt-hours, or close to half of the world’s current electricity use. With the restrictions negotiated in Kyoto, a global broadband Internet cannot happen.” Gore backs the Kyoto agreement restricting the use of fossil fuels.

*** Another thing investors might want to remember: progress does not come without cost. Prometheus, who stole fire from the gods, was punished. He was chained to a rock in hell, where the crows peck at his pancreas for eternity.

*** Investor’s Business Daily reports that between them, Circuit City, Xerox, Polaroid, AT&T, Lucent, Motorola, Gap and Amazon have lost more than a half trillion dollars of value this year.

*** The NY TIMES reports that the cost of the average apartment in Manhattan has fallen in the 3rd quarter by 7.7% – from $850,000 to $780,000.

*** Gold fell to $272. Oil rose 81 cents. The euro…oh la, la…fell below 84 cents as the dollar index rose to a new high of 117.44. Rick Ackerman – who has been right about the euro since the get-go – says it will drop to 73 cents before it reverses, or disappears altogether.

*** One of the curiosities of the presidential campaign is that both candidates are promising to ‘get things done’ in Washington. Yet, this is just want Americans do not want. Jim Bianco, president of Bianco Research, explains why Americans love gridlock: “When the federal government is divided, regulatory growth grinds to a halt. Under unified government – when the executive branch and both houses of Congress are controlled by the same party – regulatory growth is 2.5 times greater than in all periods.”