Almost too Good to be True

“Jail time for Wall Street crooks,” urged Amey Stone in a recent BusinessWeek On-line article.

Wall Street crooks and lusty corporate tycoons find few friends in the press these days. As Eric notes above, even Martha Stewart’s famously perfect dinner parties may have been sullied by negative press attention. Stewart is accused of doing things just a little too well – pulling her pastries out of the fire with such exquisite timing, like Hillary Clinton’s cattle trading, it seemed almost too good to be true.

But Hillary Clinton traded cattle in a bull market. It was still “morning in America” when the First Lady and future Senator’s cattle trades made the newspapers. Alas for poor Martha, the sun also sets. Today, there is still a bull market – but only in hypocrisy, memory loss, mock-indignation, sanctimoniousness, meddling, humbug, and buncombe.

We do not doubt that many in corporate America and Wall Street did wrong during the hey-days of the boom. Nor do we doubt that many more would have done wrong too – if they had been given the chance. The wrong-doers should get what they deserve, for that is the way of the world. The bull market in greed and grasping has given way. Now envy and retribution are ascendant. One follows the other like a hangover after a boozy night. To us, it is all very entertaining – and even morally uplifting.

But what sticks in our craw is the self-righteous carping and the “I told you so” subtext. We do not recall the newspapers complaining about Kozlowski’s compensation when his stock was rising. Nor do we remember anyone in the mass media who was troubled by the way in which Tyco and other boom-era whizzes did business. Tyco – like Cisco and many others – built its business by buying other companies for more than they were worth – usually, on credit. The more they spent…the more debt they took on…the more their stock prices rose! It was almost too good to be true. But, in the press of the time, it hardly warranted a question mark.

For example, that very same Ms. Stone, who now wants Wall Street crooks sent to jail, was once a believer. On September 2, 1999, she believed that Cisco “Could Be the Safest Net Play Around.” At the time, she gave the stock a “Slim Chance of Failure,” noting that “analysts figure that there’s virtually no risk that Cisco could be unseated from its top spot in the data-networking business.” A “lull in the stock price could be an opportunity to buy on weakness,” she concluded.

Now that investors have had nearly 3 years of dips in which to do their buying – taking Cisco down to $14.89, from it’s March of 2000 peak of $82.00 – you’d think they’d be grateful. They can buy today what they lusted after almost 3 years ago…at an 82% discount.

Instead, investors, pundits, critics and kibitzers all seem to be going a bit sour. Instead of enjoying the opportunity to buy their favorites at reduced prices – Tyco was just $13.80 in yesterday’s trading – they moan and kvetch…blame their losses on someone else…and call for Reform!

Most of the reform talk is merely empty-headed political grand-standing. But some of it is really crackpot. Thus did our office in Paris get a call from a Ms. Barbara Langer, founder of something called

“Corruption in accounting and securities is destroying the US economy and our legislature (Congress) is proposing laws to make matters worse,” she begins. Then, she goes rapidly downhill.

“I am writing a draft law or bill to really fix the problem,” she continues with the earnest sincerity of someone who has completely lost her mind…and then explains that she wishes to set up a branch of the FBI to scrutinize the books and calculate income tax on all publicly-traded companies. Plus, all accounts would be run through something “equipped with an automated forensic screening tool, which will empower investors and taxpayers, to evaluate all registered securities with state-of-the-art fraud detection free of charge!” We added the exclamation point ourselves, to give the proposal the dramatic flourish it seemed to deserve.

And why not? Heck, what could be simpler – put a few more thousand bureaucratic gumshoes on the case…and give them some new software with “forensic something-or- other” in it.

And jail time for Wall Street crooks? Heck, why not.

In fact, we’ve got a proposal of our own…take Kozlowski, Lay, Komansky, Blodget, Stewart and all the rest to the corner of Broad and Wall and shoot them in prime time. Better yet, make it a new TV spectacle – Wall Street Survivor, in which viewers get to vote for which one gets spared….a little like the crowd in Jerusalem that chose Barrabas.

Then, the stock market can put all this behind it and get on with its important business – taking money from the patsies and giving it to the insiders. In no time at all, Ms. Stone and the rest of the mass media can begin exalting its heroes again…Ms. Langer can get her name in the Congressional record and go to her grave thinking she made the world a better place…and American capitalism will once again be on top of the world.

It is almost too good to be true.

Your correspondent…signing off for the week…

Bill Bonner
June 14, 2002 — London, England

“Oy Vey! Will stocks ever go up again?” Thus begins Eric’s news from Wall Street.

His report continues:


Eric Fry, reporting from New York:

– The major market averages all slipped more than 1% each yesterday. The Dow fell 114 points to 9,502, while the Nasdaq dropped 22 points to 1,496. – Stocks just can’t seem to gather any steam. Day after day, shocking scandals and lousy earnings reports roll through the stock market like so many dreary boxcars. Meanwhile, the economic recovery is starting to sputter. US retail sales slumped 0.9% in May, “three times the decline economists had expected,” says Bloomberg News. Perhaps this report signals the beginning of a disappointing retail sales trend.

– Interestingly, amidst an otherwise dismal retail sales report, discount chains announced very strong results. Same-store sales increased 6 percent at Costco and 8.7 percent at Kohl’s. Could it be that consumers are reacquainting themselves with the ancient practice of thrift?

– We have marveled often at the US consumer’s stamina. Millions of jobs disappeared, trillions of dollars of stock market wealth evaporated, household savings plummeted, debt soared and STILL…STILL…the US consumer continued to spend…until last month, that is.

– “[This retail sales report] takes the wind out of the sails of those who think the economic recovery is progressing normally,” one economist tells Bloomberg News. “The entire economic recovery could be in jeopardy if the consumer gets cold feet.” The consumer might not have cold feet at all, he might just have an acute case of “empty wallet.”

– Did she or didn’t she? That’s the question on everyone’s lips. Did Martha Stewart unload her cache of ImClone stock based on timely insider information, or did she sell as a result of astute portfolio management? However the sale came to pass, her timing was impeccable. Shortly after selling her shares at $58 dollars each, an adverse FDA ruling caused the stock to plummet. It now changes hands for about $8.

– Is there anything this woman cannot do? Evidently, the talent for sensing exactly when to remove a chocolate soufflundefined from the oven is not so very different from the talent that senses exactly when to dump a high-flying biotech stock. Ms. Stewart pleads innocent to the allegation of insider trading and offers a very plausible explanation – the stock hit her price target, plain and simple. (We should all be so disciplined!) Nevertheless, the specter of scandal hangs over the shares of Martha Stewart Omnivision (MSO). Her company’s stock has tumbled more than 20% over the last few days, thereby trimming Ms. Stewart’s wealth by about $120 million…And that’s NOT “a good thing.”

– Martha Stewart isn’t the only one with a little less cash these days. “The Fed’s flow-of-funds data released last week show that US households continue to operate with very low levels of deposits,” observes Paul Kasriel, economist with Northern Trust. “In the early 1950s, cash was king for many households.” Back then, US households in aggregate held about $1.60 in cash deposits for every $1.00 of debt. Today, they hold a paltry 60 cents for every dollar of debt. And yes, that is the lowest such reading in more than fifty years.

– Even so, CLSA’s Dr. Jim Walker holds out hope for a recovery. What makes Walker so confident? Just this: within the avalanche of employment data and revisions cascading from the Bureau of Labor Statistics (BLS) last week, Walker believes he found the nugget of nascent recovery – the slight dip in the unemployment rate from 6.0% in April to 5.8% in May.

– Walker may be right, but the employment “recovery” is a moving target, at best. On the one hand, the unemployment rate fell from 6% to 5.8%. On the other hand, the BLS reported that 142,000 jobs were lost during the first four months of the year, not the 50,000 it had previously reported…You get the idea…

– Within the near-worthless morass of employment data, however, there is one series that tirelessly tells the tale of “no recovery” – continuing claims.

– Despite the improving unemployment rate in May, continuing claims for unemployment insurance continue to hover near 19-year highs. About 3.8 million Americans are currently on the dole, nearly double the number of two years ago. For a so-called recovery, ISI notes, “this surge in [continuing] claims is unprecedented.”

– Stubbornly high continuing unemployment claims and abysmally low household cash levels do not sound like a the ingredients of an economic recovery. Maybe we should ask Martha Stewart how to cook one up.


Back in London…

*** Steve Sjuggerud reports – from Iceland!- on some really cheap stocks.

“Some of the opportunities (in stocks)are really just ridiculously attractive. To give you an example, one broadly diversified company here has a stake in an English company that trades on the London Stock Exchange. The market value of their stake in that English company alone is worth 25% MORE than the entire value of the Icelandic company, which has multiple, large businesses in addition to this English holding. (Their minority ownership in that English company could be sold tomorrow on the LSE for $200 million. Meanwhile, this highly diversified Icelandic company sells for $160 million in Iceland.) Now that’s what I call a good buy.”

*** Nothing very interesting in the news here in London today. No naughty vicars in the Daily Telegraph. No members of Parliament caught coming out of massage parlors. So spare were the important events, that the Telegraph stooped to reporting that a woman formerly known as “Posh Spice,” now Ms. Beckwith, was charged with being “loud and rude” – not exactly a “man bites dog” story. News vendors will have a slow day…

*** By the way, if you haven’t heard already, we’ll be hosting the Annual Agora Wealth Symposium in San Francisco this year. It’s a bit earlier than last year, so if you haven’t signed up already you may want to do so right away. You can stay in a five star hotel for about half what it usually costs…and get together with some of the sharpest ‘contrarian’ investment minds in the business today. My colleague Addison Wiggin will be speaking.