Beige Book Blues

The Daily Reckoning

Weekend Edition

August 11-12, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Beige Book Blues

“Quick, tell me how much profit Cisco made last year,” writes John Mauldin. “No fair peeking.”

“Clue: they made 2 cents per share last quarter, which was down 85% from last year, so what was their profit in the preceding three quarters? Answer: they did not make a profit. They actually lost 14 cents per share for the last fiscal year.”

Cisco and the Fed’s Biege Book made up all the news that’s fit to print this week. On the surface, “blue chip stocks rose Friday,” reports USAToday. “After a government report indicated inflation appears under control.” That’s good, right?

Well, unfortunately, looking at the Beige Book results from the Fed – and earnings reports from bellwhethers stocks like Cisco – it appears that ‘inflation’ is not our problem… but ‘deflation’. (More in Flotsam & Jetsam, below…)

The Dow jumped 117 Friday to 10,416 rebounding from a 101 drop in the early session. For the week, the Dow finished down nearly 100 points. The S&P 500 shimmied up a few +6 to 1190, but lost 24 for the week.

The Nasdaq lost 6 on the day and over 100 for the week to close Friday at 1956 – losing its battle with the effervescent “2000”.


On week 2 of the Bonner Vacation, the DR seeks a little ‘visibility’ of its own. This week’s theme? “Technology” and the search for wealth in the 20th Century – will it make you rich? Or lead you astray? Let’s take a look:

By James Davidson

“…The hidden logic of technological change permeates almost every feature of society…. The identification of cellulite, along with the multi-billion market for remediating it, are epiphenomena of technology. There has never been more of a bull market in cellulite in thehistory of the world…”

By Addison Wiggin

“…The list of improvements in human life in the last 100 years is truly remarkable. However, while we’re all grateful for the advances of the 20th century, I’ll resist the temptation to explain them and suggest only that the Second Coming of The Bull Market is a little farther off than one might expect…leaving the “little guy” in a bit of a precarious situation if he’s expecting to flip stocks for a profit…”

By Porter Stansberry

“…Somehow, over time, opportunities overwhelm difficulties. The reckonings don’t last. Redemption follows. How do I know that things will get better, despite the reckonings that will surely occur? Because the rate of wealth creation continues to accelerate, despite all of our mistakes…”

By Dan Denning

“…Tech firms are facing a time when it’s increasingly difficult to know where their core businesses are headed, how fast profit margins are shrinking, and what their investments in other companies are truly worth. Wall Street likes to call this a problem of “visibility.” Perhaps what’s lacking, though, is a proper perspective. If only Wall Street knew the story of the chickens with the red contact lenses, they would understand the significance of incremental technological improvements…”

By Bill Bonner

“…I am coming more and more to the belief that markets work on the principle of irony. The same may be true for the way morality affects your investments. The subject of morality has certain parallels…and intersections… with investing. Both can be dull. And both can be perplexing and paradoxical. So, fortify yourself with a cup of coffee. Today’s reflection has no practical application, but it could be interesting…”

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

HEADLINE, NEWS And INSIGHT: credit contracts…huge write-offs in tech…profit carnage in corporate American… yet P/Es are skyrocketing… what gives?

Superior Bank?
by Doug Noland

This Bubble could not be more unsound and, as such, unsustainable. In fact, the unfolding financial fiasco remains ripe for a weakening dollar. And perhaps it will take a sinking dollar to set in motion the inevitable contraction of lending to the vulnerable U.S. consumer. And this being a classic Bubble, any tempering of credit growth will prove quite problematic.

The Glowworm Disconnect
by Raymond F. Devoe, Jr.

If high technology companies have been truly “flying blind” with pea-soup visibility-my question is why should they have such high P/E multiples before they hit the wall? The huge writeoffs are bothersome. They showthat previous earnings were vastly overstated, that these companies overpaid badly for acquisitions-and had no idea what was truly taking place in their core business.

The Worst-Ever Profit Carnage
by Dr. Kurt Richeb?cher

Once incomes and profits are hit by a slowing economy – balance sheet troubles surface and escalate, both personal and corporate. The apparent primary propellant of this U.S. economic downturn is business capital spending. While high-tech hardware is suffering the
steepest slide – the retrenchment is taking place across all sectors.

When High P/Es (Actually) Pay!
by Lynn Carpenter

Okay, it’s counter-intuitive, but the relationship between bonds, P/Es and risk stays true in all markets at all sustainable rates of growth. As bond rates have gone down, their reciprocal, their P/Es, have gone up. To compete now, we can match the long-bond… at even higher P/Es than last year.

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

FLOTSAM AND JETSAM: The Beige Book Blues

“Visibility: The Recession Comes Into Focus”

– From John Mauldin (

“The Beige Book is the Federal Reserve report on the general state of the economy. You can read it at It is normally pretty dry reading. No one can re-cap the Beige Book and make it appear exciting better than my analyst hero Greg Weldon:

– “There is ONE CLEAR CUT COMMON thread running thru the report – a deflationary slowdown is spreading from the industrial sector – through to other sectors of the economy, notably, into the consumer, and real-estate areas.”

I totally agree. They take pains not to use the “D” word, but it is hard not to see it. I have been writing for over two years that deflation is in our future, barring some unusual event. After reading this report, I am more convinced than ever.

From Weldon’s Beige Book analysis. These are direct quotes from the Fed report, an anecdotal evidence of the slowdown in the US economy:

– “Reports from most Districts point to slow growth. Retail sales generally were sluggish and frequently below expectations, despite substantial discounting on a wide range of consumer goods…”

– “Manufacturing activity in nearly all sectors and regions declined further, as producers adjust to weak domestic and foreign demand.”

– “Sustained weakness in manufacturing spilled over to other businesses, with many Districts indicating declines in demand for office space and trucking and shipping services… Stiff foreign and domestic competition kept prices of most consumer goods in check.”

– “The most pronounced reductions were in consumer borrowing… With both borrowers and lenders pulling back in response to economic uncertainty… Layoffs in many high-tech manufacturing and service firms, boosted the number of highly skilled workers applying for jobs through temporary employment agencies.”

– “Reports of reduced work hours, lost overtime, forced furloughs, planned shut downs, and layoffs, were pervasive… continued weak demand for business services, including advertising, computing, data processing, and temporary employment agencies, resulting in employment reductions… ”

We look at the words from the Beige Book without much commentary. There doesn’t need to be much. The news is bad. This is the beginning of the recession.

Unfortunately, we should have at least one more quarter of bad earnings and negative reports. Will investors continue to be optimistic in the face of continued lay- offs?

The dollar is finally showing signs of weakness. I know,from your letters, many of you hold Euro and Swiss accounts. I think you will be very happy you did by the end of the year.”

Thanks John…

Addison Wiggin,

The Daily Reckoning

The Daily Reckoning