Back from the Dead

I was raised a strict Catholic. I never missed church or Sunday school. And by the time I was 13, I taught my own Sunday school class. It was commonplace for me to come home from school, say the rosary, do my homework and help prepare dinner – which often included the company of a priest or a nun.

Looking back, I realize that I was different. I grew up like my parents and grandparents did…not like most kids. I didn’t always appreciate it as a child. But I believe my upbringing helped forge one essential characteristic for successful investing: discipline.

My grandmother, daughter of a Byzantium priest, was a child of the Great Depression. Out of necessity, she pinched every penny she had in the 1930s and `40s. And much of the money she was able to save went to the church or to help those less fortunate. Even when she became a successful entrepreneur in Northwest Indiana, she was never a spendthrift. Every dollar she had was treated as if it might be the last.

Call her frugal, if you will. But she knew how to manage her money. She saved, invested for the future, and gave to those who needed it. Now she is well prepared to live out the rest of her life. My grandmother had discipline.

Crash of 2000 Survivors: The Ticket to Wealth

In the 1990s, investors seemed to have little in the way of discipline. They were greedy. Everyone was convinced that the dot-com stocks were their ticket to great wealth. Fundamentals didn’t matter. Value wasn’t a concern. Growth was the buzzword du jour.

So herds of greedy investors flocked to their favorite broker to buy shares of at $40 a share, or at $50, $60, or even $85 a share. And then there was, which sold for as much as $162 a share. The list could go on and on.

The bottom line was that these companies were losing money faster than they could bring in sales. There was nothing fundamentally sound about them. If you put money in any of these stocks, you were speculating…not investing. There’s nothing wrong with speculation, so long as you have enough discipline to cut your losses early on.

But most investors in the 1990s didn’t have that discipline. Instead of selling shares of when it plummeted to $80, then $60 and eventually to $20 – they bought more. This stock had to go back up, they thought. After all, it once traded for over $100 a share.

As we all know now, it never did make it back anywhere close to $100. It was a fly-by-the night dot-bomb disaster. And the speculator-investors lost billions.

Today, you can buy shares of for $1.32 a pop.

Crash of 2000 Survivors: Survival of the Fittest

Despite my religious upbringing, I strongly believe in evolution and the survival of the fittest. In fact, I fail to see any conflict whatsoever between a belief in God and in evolution. If God created man, He certainly is capable of having man (or animal, or plant) evolve to live and thrive in a new or ever-changing environment.

I also believe evolution isn’t just confined to living creatures. Corporations evolve as well – although not necessarily as a result of divine intervention. And those corporations that can’t, go under.

That’s exactly why hundreds of weak dot-com companies came crashing down in 1999 and 2000. They could only survive in a bull-market of extraordinary circumstances – where values, fundamentals and prices didn’t matter.

Once the bull market ended and the Nasdaq bubble burst, companies like died out – and justifiably so. But not all dot-com, or Internet stocks, fell by the wayside.

And that’s an important point to remember. There are some survivors out there. There are some Internet companies on Wall Street that are worth looking at today. And as heretical as that may sound to any established investor, it’s true.

No one wants to be burned twice by the same stupid mistake. I realize that. So it’s easy to understand why most investors are reluctant to even entertain the thought of putting their money in Internet stocks in 2003.

But if you are a contrarian at heart, you may just want to start thinking about the Net again – or at least a few Internet stocks that have turned their businesses around.

In the last several months, I have followed two Internet stocks very closely. One of them is E-Loan, Inc. E-Loan is an online lending company that did $103.3 million in sales last year and recorded a net income of $10.7 million. (Yeah, that’s right. It actually made a profit in 2002.) Couple that with the fact that it trades for just 12.8 times earnings, 1.32 times sales and its revenues grew over 50% last year…and it’s no wonder its stock price jumped 104% in the last year.

Crash of 2000 Survivors: Worth Looking At

And oh, yeah, E-Loan just raised its outlook for 2003. The company estimates it will bring in $14 million in net income – up 31% from 2002 – on $25 million in sales. Seems to me this Internet company may just be worth looking at.

Most Internet companies certainly aren’t value investments…yet. But there are a few companies moving in the right direction. And that’s what Wall Street rewards.

Only time will tell if investors end up making money on any Internet company in 2003. But many of the “Crash of 2000” survivors have evolved into stronger businesses. They’ve cut costs, improved profit margins and increased their customer base. And that took discipline on their part.

God promises that all who believe in Him without seeing shall secure their spot in heaven. For Christians, that is the ultimate goal – to live in eternal paradise. But while we’re still on earth, I say those who can spot a beaten- down stock on the rise can make some nice profits.

Wouldn’t it be ironic if these beaten-down lepers of the market end up among the leading gainers in 2003?

Best regards,

James Boric
for The Daily Reckoning
March 6, 2003

P.S. I’ll let you know how it turns out.


It all seemed so simple, so easy. After the stock market peaked out in March 2000, along came a recession about a year later.

But Alan Greenspan was on the case. He began cutting rates in January 2001; economists expected a recovery in the second half of the year.

The second half of what year? Twenty-seven months, eleven rate cuts and 475 basis points later, we still wonder.

The economy is doing fine, said Lynn Carpenter in yesterday’s essay. But then…where are the profits? The jobs? The healthy consumers with cash-in-hand, yearning to buy more?

Where…in China! Growth rates in Asia are twice what they are in the U.S. and Europe, says the IMF. (More below…)

In America, economic activity is ‘subdued’, says the Fed’s Beige Book survey. Bankruptcies are at record rates, and consumers are losing heart. Nothing seems to be working as it should. The 25-year boom should have made people richer. But hourly earnings barely rose…and a University of Michigan study released in Feb. 2000 found that “the net worth of households headed by Americans under the age of 60 actually declined…” during the previous 10 years. People over 60 had stocks. But even they did a lot less well than they thought. John Bogle, founder of the Vanguard group, interviewed in FORTUNE, estimated that the average mutual fund investor made less than the rate of inflation…from the beginning of 1984 through the end of 2002.

The recession of 2001 should have trimmed consumer spending and debt. Unlike any recession ever seen before, both went up.

Is it any wonder that the recovery never came along as it should have? What was there to recover from?

Normally, after a recession, consumers have pent-up demand…and retailers’ shelves are empty. Not this time. People kept right on buying through the slump. Now, they have neither pent-up demand, nor pent-up savings. What they’ve got pent-up is debt.

Recovery will come, someday…but not easily…not without real savings, leading to a real recession. Maybe several of them, à la Japan. In the meantime, maybe a little war will do the country some good. Americans have come to believe that Iraq is an enemy…and there’s nothing quite as exhilarating as seeing your enemies die. Perhaps Lynn is right; perhaps the post- war celebrations might uncork enough animal spirits to get the stock market moving up.

If so, we would take it as another opportunity to sell.

Over to Eric, for his latest report:


Eric Fry, reporting from New York…

– The stock market tried something completely different yesterday…It went up. The Dow Jones Industrial Average gained 71 points to 7,776, while the Nasdaq inched ahead half a percent to 1,314.

– But the struggling dollar continued to struggle yesterday, especially after Treasury Secretary John Snow told reporters he “wasn’t particularly concerned” about the dollar’s “recent weakness”.

– Snow tried to put the genie back in the bottle later in the day by saying, “While I am speaking of the currency, let me reiterate my support again for the strong dollar…” But the damage had been done. Snow’s tepid endorsement of the “strong dollar” policy made it very clear to currency traders worldwide that he wouldn’t mind if the greenback fell a teeny bit lower. The dollar ended the New York trading session half a percent lower at $1.097 per euro.

– Notwithstanding Snow’s new “kinda strong dollar” policy, gold failed to rally yesterday. The yellow metal slipped a dime to $353.20 an ounce. Meanwhile, bonds stretched their incredible winning streak to eight straight sessions, pushing the yield on the 10-year Treasury note down to a new five-month low of 3.64%.

– By now it should be clear to everyone that Greenspan likes bubbles – both in his bathtub and in his economy. (His fondness for hour-long bubble baths is nearly as well known as his propensity for creating years-long asset bubbles.) Like a 5-year old running across the front lawn with a bubble-wand in hand, Greenspan seems to delight in creating his evanescent, ill-fated orbs. Can’t you just hear him squealing: “Wow! Look at that one!…And look at that one!”

– The stock-market bubble was his masterpiece, of course, but the bond-market bubble and housing bubble aren’t too shabby…if we may be so bold as to call them bubbles. Perhaps bonds and housing are merely enjoying a lengthy – albeit harmless – bull market. We certainly wouldn’t rule out that benign possibility. (Indeed, your New York editor is agnostic on the topic of a housing bubble. But he thinks the bond market is absolutely “bubbleiscious”.)

– The stock market’s endless slide – i.e., the after- effects of the Greenspan stock-market bubble – has so traumatized the lumpeninvestoriat that they have been rushing into the bond market…and in the process, creating a phenomenon that looks an awful lot like a bond-market bubble. After three years of losses in the stock market, the lumpeninvestoriat have started to worry less about the return on their capital and more about the return OF their capital. Hence, their newfound affinity for fixed income.

– Treasury bonds are guaranteed by the government, the hapless lumps assure themselves. They know that if they buy $10,000-worth of 10-year Treasury notes today, Uncle Sam will faithfully repay them the $10,000 ten years from now. What the lumps don’t know – and what no one knows – is what $10,000 will be worth ten years from now. No one knows how many loaves of bread or ounces of gold or prescriptions of Viagra $10,000 will buy in 2013.

– If inflation heats up, their $10,000 will come staggering home in 10 years, capable of buying far fewer goods and services than it does today. In other words, buying a 10- year bond paying 3.64% per year is hardly a can’t-lose investment. To the contrary, buying bonds is a bad bet, says Paul Stuka of Boston-based Osiris Partners. In this week’s issue of Barron’s, Stuka matter-of-factly presents the bear case against bonds.

– “The bond market bewilders me in that rates continue to drop,” Stuka tells Barron’s. “The 10-year is at 3.8% despite the bad PPI [producer-price index] number released recently…Nobody is concerned about inflation right now. In 2002, the long bond returned 13% to 14% and the commodity indexes were up 20% to 25%. I don’t know of any other year where that happened. It just doesn’t fit.”

– Therefore, says Stuka, “I don’t see [buying bonds] as a great bet right now. You have to believe the economy is going to slow; you have to believe the dollar isn’t going to get totally trashed and you have to believe higher deficits won’t matter. A bet on the long bond is really a bet on at least three assumptions…” The man seems to have a point, or maybe three points!


Back in Paris…

*** “I don’t know if we’ll come to France this summer,” said a colleague in Baltimore yesterday. “There’s so much Anti-American sentiment…”

On our recent visit to the U.S., we were shocked by the anti-French attitudes. We’ve seen nothing similar in France. The French detest Americans…just as they always have.

*** “The French are the most productive in the world,” reported our very own Lorraine Amiel. Toyota announced that its French workers were 20% more efficient than its U.S. toilers.

French consumer confidence is falling; it is now at a 6- year low. It didn’t help that, yesterday, France Telecom announced the biggest loss in French history – $23 billion in 2002. At the peak of the Information Age hysteria, France Telecom paid $100 billion for European wireless permits; alas, the technology didn’t work out as expected.

*** “This fits in with a lot of what you and many of your fellow investment writers have been writing about,” begins a friend’s email. “It’s from the Feb. 27th issue of the Far Eastern Economic Review. In an article about migrant labor entitled ‘Take Our Workers, Please’, it states that ‘Here in the Anhui province, eight hours northwest of Shanghai by train, Wu Chengbin, a shy 30-year-old who works in Wuxi, a prosperous city four hours from Shanghai, shows off the modest, concrete home he’s built with his earnings…Wu has worked in an axe factory since 1998, pulling in slightly over 1,000 renminbi per month. His wife works in the same plant, making a little less. In their five years there, he says, they’ve saved enough to build this house (cost: 30,000 renminbi) and put another 20,000 renminbi into the bank.’

“In case you’re not good with numbers,” continues our friend, “let’s assume Wu and his wife average 24,000 renminbi a year over the last five years. That means they made about 120,000 renminbi and saved 50,000. That’s a savings rate of 42% for some poor migrant laborers from China!”

*** “It was NOT a good wine…” began yesterday’s dinner argument…oops, discussion.

Everybody wants to feel superior. Some do it by wearing finer clothes. Others by learning more history. Still others by joining exclusive clubs or using bigger words. But last night, it was wine that dominated the repartee at the noisy apartment on the avenue Mozart.

Your editor is an expert on wine. Not that he knows much about it; he attended ‘wine school’ in St. Emilion…but was so enthusiastic in his tasting exercises that he cannot remember that was said. Still, his body has processed so much of it, he believes he has a visceral understanding of fermented grape juice. Besides, pointing out the absurd pretensions in others makes him feel superior.

“It is silly to talk about ‘good’ wines and ‘bad’ wines,” he began, pompously. “There is no objective standard. All this wine snobbery is only 2% taste and 98% flimflam. There are different wines for different purposes. They are like clothes or women. Tails and top hat may be perfect for a wedding, but you wouldn’t wear an outfit like that on safari. Likewise, some women are good for fun…others are good for work. Some women are perfect for a weekend getaway…but try to live with them day in and day out! They’re just too complex and difficult.

“Well, wines are the same. Some of the wines that are supposed to be the best are fine. But they’re often too rich and complicated to enjoy very often. You just have to find wines you like. Those are the good ones.”

His listeners were not convinced.

*** Fun Facts about Wal-Mart, sent by a reader:

Wal-Mart is the biggest employer in 21 states.

Wal-Mart has more people in uniform than the U.S. Army.

If the estimated $2 billion Wal-Mart loses each year were incorporated as a business, it would rank no. 694 in the Fortune 1000.

Wal-Mart’s sales one day last fall ($1.42 billion) were more than the GDPs of 36 countries.

Wal-Mart’s own brand of dog food (named Ol’ Roy after Sam Walton’s English Setter) is the top-selling brand in the world.

Wal-Mart accounts for 2.3% of U.S. GDP.

Wal-Mart was responsible for more than 8% of U.S. productivity growth from 1995-1999.

Wal-Mart sells more groceries, toys, guns, diamonds (!), CDs, clothes, dog food, detergent, jewelry, sporting goods, videogames, socks, bedding and toothpaste than anyone in the U.S..

Wal-Mart is the largest film-developer, optician, private truck-fleet operator, energy consumer, and real-estate developer in the country.

The Daily Reckoning