A Report to Shareholders

"Welcome to the 2nd annual company meeting," began your correspondent yesterday in Baltimore. He was speaking before a small crowd of only 150 or so. For a multi- national corporation, his company has relatively few people on the ground – or in the air, for that matter. But there they were, most of them, in the unupholstered seats of what used to be a Christian Science church and has since been turned into a company auditorium.

The mob lurches from one illusion to the next, we notice. A few years ago, capitalism – as practiced by large American corporations – was supposed to be a beacon unto the world. Now, it is in crisis, say the newspapers; its flame snuffed out by greed and unscrupulousness. The bookkeepers can’t be trusted, we are told. The CEOs still at large are being hunted down; one by one they will be brought to justice. Government must step in to make sure the patsies can once again invest with confidence.

But all over this hapless ball, honest people still make things, buy things and trade them. With the help of neither the SEC, on-the-make prosecutors, nor congressional windbags – jobs get done, profits get turned, and life goes on.

Our event was a clumsy affair, for the company has no public relations staff nor event planners. Instead, the show was thrown together at the last minute by people who had more important things to do. Still, the executives of Agora, Inc., thought it appropriate to report to employees and friends on how the business had done in the 12 months just passed. They had no obligation to do so – it is not a public company. Nor could they readily explain why they were doing so; it just seemed like the right thing to do.

Just a week or so ago, defending capitalism, C. A. Green thought he had snared your editor in a paradox…or perhaps even hypocrisy. "You tell everyone to get out of stocks," he had said at a small conference, "but, in fact, you are heavily invested in equities – your own business."

C.A. was making a good point: it may be the end of the world as we have known it…but so what? Decent businesses are still the way to make money. And the stock market gives ordinary people a way to own the best businesses in the nation.

And yet…the difference between running a small business of your own and operating a large public company is as different as a beautiful woman is to a drag queen: they are alike only in the parts that don’t really matter.

At the beginning of the Agora annual meeting, various people and groups were asked to stand to be recognized. Among them was the accounting staff. Able people, every one of them. But too few in number to do any serious cooking of the books. In a small business, one set of books may be a necessity, but two are a luxury few can afford.

Nor is there any hope of producing earnings of ‘one penny more than forecast.’ In the fantasy world of corporate America, it may be possible to re-jig the numbers often enough so they come out where the chieftains want them. Preening in front of the punters, a corporation can tart itself up with foam and paint. But in the real world of small businesses, the make-up comes off with the overalls. Petit capitalists like your editor, do not invest in their own companies….they live in them. Night after night, the guy who owns two filling stations can dream that they will be as big and profitable as Exxon some day. But when he pulls back the covers, there they are, buck naked: sometimes fetching… often sordid and pathetic.

Few enterprises can produce the earnings they want; they feel lucky if there are any earnings at all. A loss is often as likely as a gain – and nearly as unpredictable.

Our accounting office was built in the ’80s by a man to whom the company paid tribute yesterday – Fred Labyak. He came along just when we needed him – appearing at our door dressed in cut off shorts and wearing a red star on his lapel. He had been a Marxist in his youth, but by the time he began doing our books he seemed more like a tennis bum.

Trained in the classics, Fred was as fanatical about bookkeeping as he had been about politics and still was about tennis. He believed in absolute truth, to the penny. Books that didn’t balance properly were thought to be a kind of mortal sin.

Once, after midnight, not long after Fred had begun work, your editor heard someone screaming in the accounting department. As he approached to investigate, he heard Fred’s voice over the blare of heavy metal rock music…"F*&#&^…. bankers ….%%$$#@….!" Only one word in a paragraph was fit for transcription, dear reader, and you have it.

"What is the matter?" I asked.

"Those f*^#+*& ….and so on….bankers got their *&%$ statement wrong."

Checking further, I discovered that the Maryland National Bank had sinned. Its figures differed from Fred’s by 11 cents.

But it was not the 11 centimes that mattered to Fred…it was that the numbers didn’t match…the books were out of order. It was an affront to God and all that is right and just in the cosmos… as though a penny one way or the other might throw the entire universe out of kilter.

Of course, we have no way of knowing what was said when Fred met his maker last month. But when the last accounting was done, we doubt that the Final Auditor found fault with Fred’s ledger entries.

There was no hope of persuading the numbers one way or the other while Fred was still alive. But in a small business, there is not much reason to do so anyway. And even if the numbers do get warmed up a little bit in small accounting offices – it is usually to shrink them, not to puff them up. The only reward a small business gets from seeming to make more money than it actually does is a higher tax bill.

The results posted at yesterday’s meeting were not a ‘penny more than forecast.’ Results beat expectations by a full 50% in the right direction. In an economy that is growing at 1.1% per year…and one in which sales grew about the same amount…our sales rose a full 18%.

Years ago, we might have reported the number with unrestrained pride. Yesterday, we reported them with amazement. For in the preceding 3 years, we worked just as hard, but with opposite results.

What will happen next year? We have projected yet another year of growth. We are expecting more sales in France and in Britain, and even right here in Baltimore. We are even hoping that you, dear Daily Reckoning reader, will subscribe to at least one of our un-free services.

How do we know? Perhaps it is our age. Perhaps it is the result of too many bottles of red Bordeaux. But if we have one charm here at the Daily Reckoning, it is modesty.

Wall Street analysts make projections of earnings for large multi-national corporations, with thousands of employees and operations in several industries and dozens of countries. How can they know? For even here, where we know every car in the parking lot, we cannot say with much certainty whether sales are going up or down next year.

But if they go our way, we will be grateful.

Warm regards,

Bill Bonner
August 7, 2002

How to stop worrying and enjoy this bear market: "I didn’t want to do it at first; I just didn’t want to recognize the loss," said a friend at dinner last night.

"I didn’t even want to open my statements. But then, when I finally sold my stocks I felt so much better…now it’s kind of fun watching stocks go down. My money is in municipal bonds. I can always buy back the stocks. But now I’ll get a lot more of them for my money."

All over the world, people must be thinking the same thing. Stocks go up hundreds of points one day… and down the next. Maybe there will be a big rally, they say to themselves. On the other hand, they could go down another 10%…20%…even 50%.

And now all the experts are saying that you have to be more reasonable in your expectations. Maybe stocks will only rise 7% per year…or maybe only 6%. Heck, if that’s the case, the patsy says to himself, I won’t be missing much. Why risk another 6 months of losses for a measly 6% annual return?

The fund managers and other big players are still trying to ramp up stocks – maybe even with the connivance of the Plunge Protection Team and the Fed. Small investors still jump on board whenever they thing they might be missing something big.

But the thrill is gone.

The fun has moved to the sidelines, we think, where the smart money waits out the bear market. "What’s left in this market is the lazy money," said Eric Fry, who left his vacation in Vermont to have dinner with us last night in Baltimore. "People don’t know what else to do and don’t want to take the trouble to find out.’

A lot of the money left in the market, we would bet, is scared shiftless. The average loss is around 50%. Investors still can’t bring themselves to take the loss…not with another big rally coming any day. So, they sit…and suffer.

"The best thing to do is just to sell, just to get a better perspective," continued another friend. "Once you’ve sold, you can look at the whole issue less emotionally and decide when you want to get back in. It’s easy to get in…what’s hard is getting out."

And now… here’s Eric, reporting from a hotel room in Baltimore:


Eric Fry in Charm City…

– The Comeback Kid was at it again yesterday…After three straight days of triple-digit losses, the Dow Jones Industrial Average reversed course Wednesday to chalk up a large triple-digit gain. The blue chip index gained 230 points to 8,274, while the Nasdaq Composite jumped 53 points – or 4.4% — to 1,259.

– Notwithstanding yesterday’s relief rally on Wall Street, buying stocks has been a fairly depressing activity for more than two years. In fact, the stock market’s lengthy, slow-motion crash has caused a new psychosis to spread throughout the land – Bear Market Depression Syndrome, or BMDS. Yes, it’s true, what we – in ignorance – used to call simply, "feeling bad about losing money in the stock market," is in fact a psychological disorder…Who knew?

– "Some of the telltale signs include feeling more worthless than a share of Worldcom and hopeless about your financial future," CNN/Money observes. "Less fuzzy symptoms include insomnia, upset stomach, loss of concentration and a screaming urge to throw all your remaining money into bonds or CDs."

[Editor’s note: One must be careful not to confuse BMDS with CNBCWS (CNBC-Watching Syndrome) – a closely-related psychosis that also causes acute nausea. Unlike BMDS however, CNBCWS is easily treatable…Turn off the TV.]

– Dr. John W. Schott, a portfolio manager for Steinberg Global Asset Management and chairman of the Department of Psychiatry at MetroWest Hospital in Natick, Mass, tells CNN/Money that he’s seeing a lot of cases of BMDS these days.

– Presumably, millions of Americans are afflicted with BMDS and don’t even now they’re "sick." It’s so sad, because they could be receiving psychiatric treatment right now.

– Although, truth be told, BMDS is not easily treatable. The only known cure – winning a state lottery – is prohibitively expensive to administer to the population at large.

– According to Dr. Schott, BMDS sufferers berate themselves with thoughts like: "What a jerk I was to invest"…"I knew the market would collapse as soon as I started to invest"…"I’ve lost money and I’ve disappointed my family. I’m a failure"…"I’m a lousy investor. No wonder I messed up"…"This bear market will never end. I’m going to lose every single cent I have invested."

– Most of these thoughts are true of course, but the bullish Dr. Schott dismisses them as the irrational outgrowth of "fear and anxiety" that "distort [the] cognitive processes."

– Therefore, to counter the ill effects of BMDS on one’s self-image and mental health, the good doctor prescribes "rational" thinking. This all sounds well and good, except that "rational" thinking, as the doctor defines it, sounds an awful lot like merely being bullish on stocks.

– Schott’s prescription is to keep the faith by remaining invested in the stock market. For example, he says that it’s helpful to tell yourself that bear markets do end, the market is cyclical, and if you’ve picked solid companies or mutual funds to invest in, chances are good they’ll do fine in the long-run.

– In Schott’s world, selling stocks to preserve capital is "irrational." But risking whatever capital one has left by buying overpriced stocks…Now THAT’S rational!…Is it really a rational decision to stay in the stock market getting hammered every day like a two-penny nail?

– By urging BMDS sufferers to hang in there for the long haul, the bullish shrink may be sowing the seeds of an even more debilitating disorder: ACUTE BMDS. In ohwer words them may incvest meie

– Hey doc, I’ve got some news for you, investors who’ve lost money don’t need therapy, they need to get some of their money back. Urging them to continuing to do the same old thing that caused them to lose money in the first place is probably not the cure.

– How about this prescription: "Take two aspirin and buy low, sell high." And if that prescription doesn’t produce the desired results, try this: "Err on the side of caution."

– As for the doctor, here’s my prediction: Avoid market commentary. Stay out of direct limelight.



*** My old friend Rick Ackerman writes to tell me that the "Japan Scenario" is being taken more and more seriously by economists: "To see the connection [between what is happening in America and Japan’s deflation] in its simplest form is to wonder how anyone could have believed, as most observers evidently did for the past decade, that the world’s second biggest economy could get sucked into a deflationary black hole without taking the world’s biggest economy with it. With the unsettling answer slowly coming into focus, what worries most is that U.S. households lack the enormous savings that so far have helped Japanese households keep deflationary ruin at bay.

"It should be emphasized that Japan had considerable help in this task from U.S. consumers, whose insatiable demand for foreign goods has been a crucial prop for the global economy. This fact begs the question, Who will buttress the U.S. economy in its hour of most desperate need? Certainly not the consumer, whose epic borrowing spree is perforce at an end. Might 4% mortgage rates and another flurry of cash- back financing for homeowners turn the tide?

"Better think again; for, what would you do with the extra money? Blow it on a Lexus? A Jeep Wagoneer? A family trip to Disney World? I don’t think so, not this time. More likely, you’d use it to retire debt, inadvertently contributing to the macroeconomic pull of deflation. With deflation feeding on the largest pile of debt ever amassed by a nation, we should not expect the Fed’s last-ditch countertactic to produce even the slightest blip in the economy.

"This may be a foregone conclusion, since the stock market, in its relentless decline, seems to be sniffing out a truth that few economists dare to utter – that deflation has by now grown far too powerful to reverse, and that all attempts to do so can only increase the indebtedness on which deflation feeds. "

Greenspan is trapped. Like a bar-tender at a rowdy party, he has to keep stacking up the drinks….but the more the revelers drink, the more dangerous the situation becomes.

The Daily Reckoning