In the second race at Ascot I bet on a horse named Agnes World.
I liked the name. One of my favorite cousins was named Agnes. So, I chose intuition over calculated reason. The horse started well, but was soon absorbed into the pack from which she never emerged. The winner, if I recall correctly, was the number 7 horse, named Nuclear Debate. Since I had no cousin named ‘Nuclear’ I lost.
The loss, therefore, was not my fault. It was the fault of my kin. As silly as that seems, it is not much sillier than the claim made by Agnes World’s breeder against a Wall Street brokerage firm.
Today’s letter (to give you a sneek preview in case you would rather mow the lawn or watch the Sopranos) is about what comes after the bubble collapses and people suddenly wake up to the fact that they have lost money, have little hope of ever recovering it, and that someone other than themselves must be to blame for it.
Readers of a more philosophical mind will find something too – more evidence that the term ‘rational humanism’ is oxymoronic. Humans may use reason when it suits them, but they are far from rational.
The breeder listed on the Ascot racing program for the horse known as Agnes World is Calumet Farm of Kentucky. I’m afraid I have lost the details in my travels, but if I recall correctly, the owner of Calumet Farm is a very rich man from London who owned a large portfolio of stocks as well as a large stable of race horses. Nor is this man a stranger to the business and investment world. Not only does he have a lot of money, he also has a lot of experience. He is no widow, though he may once – many years ago – have been an orphan.
I should point out that his large portfolio of stocks is considerably less large today than it used to be. To make a long story, which I don’t have in front of me anyway, short – he lost money, sued the brokerage and recovered a multi- million dollar judgement. The brokerage had apparently forgotten to tell him that stocks went down as well as up.
This, I believe, is a trend in the making. One of the unlovable weaknesses of the human character is the unwillingness to take responsibility for our own mistakes. The stars are blamed…the godsparents, spouses, brokers, the devil – anyone but ourselves. Hillary Clinton famously blamed “a vast, right-wing conspiracy” for her husband’s failings. Stalin blamed “reactionary bourgeois elements” for the failure of his lunatic programs.
If a tribe of savages sacrificed a virgin to bring rain – and the drought continued – they would be more likely to question the girl’s virtue than their own cockamamie beliefs.
Poor people are convinced that their poverty is the fault of the system, or the rich, or the government. Provided the camouflage of democratic politics, they feel quite entitled to steal whatever money they can reach. Of course, the rich do the same thing – but they rationalize it differently. They receive huge subsidies for growing sugar, for example, and are convinced that it is in the national interest for America to be a sugar producer.
“More money is stolen with a pen than a gun,” says Ray De Voe. He refers to the kind of theft that has become so popular of late – cooking the books by CFOs, selling IPOs to the public as though they were investments, and hyping stocks on the Internet.
“The [NY Stock] Exchange announced” wrote Floyd Norris in the NY Times on June 30, “that Thomas Hanley, 56, formerly the lead banking analyst for UBS Securities, had been censured and fined $75,000.” Mr. Hanley had circulated a rumor about Banker’s Trust Corp. which had the salutary effect of causing the stock price to rise $13 a share.
We presume Mr. Hanley was long.
Earlier in the month, the Justice Department announced a round-up of Sopranos: “In the largest one-day securities fraud indictment ever,” wrote the WSJ majestically, “the Justice Department alleged that members of the country’s five largest organized-crime families conspired to manipulate publicly traded securities in 19 companies, bilking investors out of $50 million over five years.”
So, some of those attempting to blame others for their losses have a valid claim. But the line between just cause and legal opportunism is likely to be persuaded substantially in the direction of the tort lawyers. Goldman, Merrill, Alex Brown and other underwriters have famously deep pockets and are sure to become targets.
Christopher Byron reported on one Goldman offer:
“When Goldman, Sachs & Co. raised $100 million in an IPO for the bizarre iVillage Inc., 15 months ago, $8.4 million went to Goldman and the other underwriters before iVillage ever saw a dime. As for anyone who bought shares at the first trade in the after-market (for $95.88 each) and hung on to them since…why, those luckless souls have seen 94% of their money disappear. But you’d better believe the underwriters still have their $8.4 million.”
Tort lawyers will argue that Goldman’s imprimatur on the deal implied that it was at least suitable for sober, if not sensible, investors. In that regard, they have a point.
Your completely blameless correspondent,
Baltimore, Maryland July 13, 2000
P.S. After losses on the first few races at Ascot, we abandoned my ‘random walk’ approach to betting in favor of Elizabeth’s insider trading. Elizabeth had met a man who lived next door to a bookie. He suggested ‘Giant’s Causeway,’ which paid off 80 pounds on a twenty pound bet.
*** The summer rally finally got off the sand and found a little traction yesterday. The Dow rose 64 points.
*** Perhaps more impressive, there were 1739 stocks advancing, with only 1151 declining – reinforcing a trend that has been going for a couple of weeks. There were 100 new highs on the NYSE and only 32 new lows.
*** These numbers were enough to push the Dow above its 200 – day moving average and to trigger a “buy” signal from Lowry’s Buying Pressure gauge and Richard Russell’s PTI index – both of which have been bearish for a long time.
*** So at least we have a little drama to break up the monotony of summer trading. Will the Dow continue to rise to a new all-time high? Or is this just the ‘summer rally’ to be followed by an autumnal decline, when stocks turn brown and fall to the ground?
*** More immediately, should you rush into the market to take advantage of the bear’s vacation? Or get out of town before he comes back?
*** Stocks, alas, remain preposterously overvalued. One of the causes cited for yesterday’s rally was the latest earnings announcement from Yahoo. The company doubled sales, and earnings beat expectations by 2 cents a share. But critical analysts (I didn’t know these people still existed) noted that nearly 2/3rds of Yahoo’s advertisers were dot.coms – whose ability to continue spending money is suspect. And the company is selling at 67 times SALES!
*** Investors may be able to add and subtract, but I’m convinced that they cannot multiply. In order to get down to a generous P/Sales ratio of 2, sales would have to go up about 33 times. That’s over $30 billion in annual sales. And even then, it would have to have a profit margin of more than 10%. By selling advertising on a website?
*** “It is too dangerous and crazy to short,” said the once- great George Soros in May. “You could have shorted the market in March of ’29 and lost everything. If you cannot go long and cannot go short, the only other place to go is away.”
*** Barton Biggs, he of the make-believe plumber: “What worries me is the longer the craziness goes on, the greater the odds are that the bear market, when it eventually comes, will be secular rather than cyclical.” ‘Secular’ is a technical term from economics, meaning ‘real bad.’
*** And according to Ludwig von Mises, “there is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansions, or later as a final and total catastrophe of the currency system involved.”
*** The WSJ reported the results of its investment contest. In the period Jan 11 to June 30, the ‘experts’ produced a loss of 20%. A group of WSJ readers lost 37%. But the dart throwers did better – they lost only 7.7%. Implication – hardly anyone is making money in this market.
*** Bonds were mixed yesterday. Gold fell $1.90. Platinum, though, continued to rise, by $2.80 (October contracts). Oil went up 62 cents to close above $30 again.
*** Even Amazon rose yesterday – up almost $2.
*** “Bond investors,” replied Gary North, avoiding the President’s “f” word, “lost [money], 1940 to 1980. When gold hit $850, the FED locked in on its tight money mode, and bonds again became profitable investments, or did a year later. Gold fell. It continues to fall. Bonds continue to be good investments.”
*** “The bond traders,” he says, “are today’s surrogates for the gold standard. When their views are honored by politicians, gold falls. Bonds pay interest; gold doesn’t. The case for gold is this: when interest rate push comes to depressionary shove, bond traders will be sacrificed. Politicians will inflate. That’s when investors need gold.”
*** Uh oh. Old timers Harry Schultz and Richard Russell have come to the conclusion that the newsletter industry is dying. I don’t know about dying but it surely is changing.
*** One of the big problems in the industry is finding and keeping good people. The Labor Department may tell us that the market for workers is softening. But you’d never know it by talking to people in our business. Everyone is looking for people.
*** The same problem seems to plague law firms. From Doug Noland of Credit Bubble Bulletin: “Recently, the Financial Times ran a story, ‘Law Wars in San Francisco Dotcom Start- Ups – Law Firms Have Been Forced to Double Salaries to Stop Attorneys Quitting.’ The article began by highlighting the fortunes of a recent law school graduate who saw his starting salary increase by $30,000 to $125,000 even before graduation. His ‘unsolicited raise is part of what is now commonly known in the US legal profession as the ‘Gunderson effect.” This is a particularly interesting example, unmistakably demonstrating how wages (among other things) are an inflationary tinderbox waiting for a spark.”