Disgraceful Wallowing In The Misery Of Others: Enjoy It While You Can

I wallow in the collapse of the techs…slowing down like a motorist on the highway to gawk at a gruesome crash.

The Germans have a word for it: schadenfroh. It describes the happiness you feel when an obnoxious neighbor’s house burns down…or you discover that body lying alongside the highway is that of a tort lawyer or IRS auditor (and not your own)…

Pere Marchand, our Catholic priest, would be appalled. We are neither French nor Catholic, but we attend church as if we were. And even an Episcopalian knows that taking pleasure in the misery of others is a very un-Christian emotion.

But it is almost irresistible. There is something oh-so-satisfying about watching the conceits of the new era slip from their polished heights, like a pompous man’s toupee at a cocktail party. Besides, if it is true that investors get what they deserve, rather than what they expect – who am I to argue with it?

Mr. Market metes out his own justice…poetic or prosaic… in his own good time. And it will not always be to your liking. You might as well enjoy it when you can.

Thus we see the headline in Barron’s: Death Toll Mounts inInfo Highway Wreck.

“At least 130 Internet concerns have crashed and burned sinceJanuary,” we are informed. “About 21 ‘Netcos have gone out of business during the first half of November alone compared to 22 shutdowns for the entire month of October… Money and time have simply run out as the public markets no longer areinterested in partaking in the international pyramid scheme better known as initial public offerings.”

PlanetOut.com agreed to couple itself with Gay.com, we learn. Pets.com simply “threw in the doggy blanket”. Other webenterprises merely melted down and dribbled away.

But I write today not merely to share a shivver of schadenfroh….but to address an important issue: what next?

For some reason, the ‘what next’ question also seems to have been on Pere Marchand’s mind in church this past Sunday.“We cannot know,” he said, following a reading from the Book of Revelations, “exactly what the future will hold. That is for God to know. We will find out only when – and if – God wants us to.All we know is that the Book of Revelations tells us that very dramatic events are in store for us. …God’s world is not boring, or easy….”

We cannot know exactly what the future will hold, of course. But we do have some experiences of bear markets that might provide some hints as to what lies ahead.

“Yes,” writes Marc Faber, “a sharp sell-off a la 1929 orJapan after 1989 is entirely possible. But it’s also possible thatthe US stock market has entered a long period of sideward tradingduring which the indexes are bound in a trading range for several years, while individual stocks and sectors move up and down quite sharply, with a bias…to the downside.”

The period – 1968 to 1974 – was a long, confusing sidewaysmarket on Wall Street. “After 1968,” Faber observes, “the USstock market sold off until May 1970, from where it rallied to anew high for the Dow and the S&P 500 in January 1973.” This was the well-known “two-tiered market” in which most stocksfell, but a few – the ‘nifty fifty’ – staged an impressive rally. To most investors, it looked as though the bear market of 1968-1970 was over in 1971. It appeared that a new bullmarket had begun – which, by 1973, had brought stocks to a new peak.

But, “if we take into account inflation as well as the more than 30% depreciation of the US dollar between 1971 and 1973,” Faber explains, “then the high of the US market was not in 1973, but in 1968.”

Taking one company as an example, Litton Industries had been a Wall Street favorite until 1968. But in the first leg of thebear market, 1969-’70, Litton lost 80% of its value. Then, the stock doubled in the rally that lasted until ’73…and subsequently dropped another 80% of the value it had left…

Those who expect a quick resumption of the ’82-2000 bull marketmay be disappointed. Major bear trends can be longer and deeperthan people expect. A Mr. Kurt Leln of St. Paul, Minnesota, wrote a letter to Barron’s explaining that in 1954, the Dow was still 27% lower than it had been 25 years earlier. And, at the beginning of the most recent bull market, in 1982, the Dow was actually 22% lower than it had been in 1966. Investors had endured 16years of a bear market…and lost more than a fifth of their money in the process (not counting dividends).

Looking at a longer period…trough to trough…from ’29 to ’82 – investors had earned an average capital gain of less than 2% per year for half a century, again according to Mr. Leln.

Stock market bulls will be quick to point out that the future isnever exactly like the past. This time, like every time, is different.But that is not necessarily good news.

“To start with,” explains Faber, “the market value of US equities as a percentage of the economy never exceeded 80% at its high in 1968; compare that with over 150% now. The price-to-book ratio of the S&P was never above 2.5; it’s currently at 9. And as the bearmarket began in earnest in 1973, the P/E ratio (trailing 12 month’searnings) of the S&P 500 was 18, compared to over 30 at thebeginning of this year. [Not to mention the Nasdaq, at 150 times earnings.] …in the late 1960s the S&P 500 yielded over 3%. Then in early 1973, its dividend yield dropped briefly to a low of 2.7%,compared to only 1.3% at present.”

“Margin debt,” Faber continues, “as a percentage of market values is presently twice what it was at its high in 1968. Corporate debt as a percentage of GCP was 30% in 1968, compared to 45% now…total debt as a percentage of GDP has increased from 140% to 260%.”

“However, what is at present so unusual is that in the longestAmerican economic expansion on record, during which corporateprofits expanded rapidly, corporate balance sheets have deteriorated badly…In fact, on both the corporate and consumer level, the rush into debt over the last 20 years or so is unprecedented…”

And so might the future be…unprecedented. Unpredictable.Unfathomable. And never boring.

Mr. Leln takes a guess: “I suspect that many of today’s investors would consider it a disaster if the Dow fell to 8500 next year. I can only imagine their reaction if history were to repeat itself, leaving theDow still hovering around the 8500 level in the year 2025.”

If an individual investor gets what he deserves, rather than what he expects, is that also true for the entire market? Americans are more heavily in debt than every before. They believe that stocks will make them rich if they merely buy and hold. They have no savings and an almost infinite confidence in the U.S. dollar and its guardian, Alan Greenspan. What do such people expect? What do they deserve?

More tomorrow…

Your faithful correspondent,

Bill Bonner

Paris, France November 21, 2000

*** Morgan Stanley Dean Witter analysts decided it was time to re-rate a group of big tech stocks yesterday. The analysts quietly forgot whatever they had predicted for the techs previously…and downsized their targets.

*** There were, said one analyst, “eye opening reductions in earnings” that forced them to reconsider.

*** The result? The Nasdaq dropped 151 points, about 5%. It’s back to its level of October 1999, well below 3,000 and down 29% for the year.

*** Cisco lost $1.50. Juniper fell $32.50. eBay was down more than 20%. Amazon dropped below $24.

*** And Yahoo lost $2 after a French court told the company that it had to keep Nazi memorabilia away from France. Nazi paraphernalia is illegal in France. But Yahoo has no way to keep the French from getting on the Internet and visiting its U.S. site. Yahoo is now priced below $50 – a loss of 80% from its high.

*** The biotech index fell 10% yesterday. Maybe biotech’s moment has come and gone too – faster than we expected.

*** But the damage was not confined to the techs. The Dow fell 167 points too.

*** There were 977 advancing issues on the NYSE yesterday, compared to 1849 declining ones. 67 stocks hit new highs…while nearly twice that number hit new lows.

*** U.S. investors are not alone. Markets are falling all over the world. Taiwan lost 6% on Monday alone. Stocks in Taipei have split, the hard way, since March. You can now get 2 for the price of 1.

*** At the meeting of the Foreign Policy Association in NYlast week, Paul Volcker: “They [international investors] arehappy now, but one wonders whether this trend of importing more and more capital can be sustained.”

*** The trend worldwide is towards softer equity prices and tighter credit. “Over the past 17 months,” says economist Nancy Lazar interviewed in Barron’s, “we’ve counted 150 central-bank tightenings and the U.S. Fed accounts for six of those.”

*** As long as other central banks tighten along with the Fed…and equity prices fall more or less in tandem – there may beno reason to expect that foreign investors will stop financing U.S. spending.

*** But, says Ms. Lazar, “my inclination is that the next majormove on the part of the Fed will be to ease…” Why? “The slowdown is here,” she explains, “The question now becomeshow prolonged and how deep and how pervasive will it be. Is it just a U.S. issue, or does it end up being global? On all thosequestions, we lean towards things being weaker, longer, everywhere… We have odds of a recession at 40%…”

*** Signs of a slowdown continue to grow – in both the ‘old’ and the ‘new’ economies. Copper and lumber are sinking. Scrap steel is at a 14 year low. Dram prices have collapsed 56%in the last 17 weeks, and the growth rate in semiconductor orders has slowed from 38% to just 4%. “Outplacement” firm Challenger,Gray and Christmas estimates that more than 20,000 jobs have been lost in the Internet economy in the last 10 months.

*** Consumer and investor confidence are still high. But America is now a nation of portfolio holders, with large debts and no savings.“A drop in stocks to lower levels…” writes investment advisor Kenneth Coleman in Barron’s Market Watch section, “wouldlead to a lower GDP and a lower economy…”

“The huge buildup in wealth in our nation,” he continues, “didn’tcome from wages or longterm investment that finally paid off. According to a poll, 70% of those who were expected to vote in the presidential election own stocks…”

*** “It would seem to me,” wrote Marc Faber recently, “that stockprices will increasingly dictate not only financial policies but all government policy decisions…”

Falling equity prices, lower earnings, recession, put together, will mean lower standards of living. The Fed will find the pressure to ease rates is irresistible. Will that solve the problem? Maybe not…more below.

*** Until now, and perhaps until then, bonds have been a good place to have your money. 30-year Treasuries are up 16% this year. Plus, there’s the 5% interest yield.

*** The euro bounced ever so slightly yesterday. Gold rose against the dollar too – up 60 cents.

*** I may have been unfair in characterizing George Gilder’s relationship with his ‘sponsors’. My apologies to Mr. Gilder, who says that his investment recommendations were not influencedby the $100,000 companies paid to sponsor his conferences. I have no reason to believe he is not being truthful. But the bias tobullishness is subtle, pervasive and insidious – throughout all the financial media. Advertisers, sponsors, clients, IPOS, ‘insider’ shares – who can resist the persuasion of money?

*** Not I, dear reader, not I. Amazon…great company… [Note to Bezos: please keep buying those books from us. Uh…and don’t forget to pay us for them before you go broke…]

*** “What about OPEC?” asks Dan Ferris. “It’s finished,” he says.“In Jamaica last week I predicted $10 oil by the end of 2001 and said I’d eat the piece of paper it was written on if it didn’t come true.”

*** The anniversary of the decisive moment of WWII passed without notice on Sunday. On November 19, 1942, the Soviet Army counter-attacked at Stalingrad, where the German army was hammering its head against a wall for no apparent purpose, more than 1,000 desolate miles from its base of supply. Using a code name perhaps suggested by a New York Times reporter, Uranus, the Red Army surrounded the Germans,trapping 300,000 soldiers. The Germans, led by General von Paulus, surrendered on February 2, 1943. Hitler was furious that Paulus did not commit suicide, labeling him a ‘weakling’ and a disgrace to the German army.Already weak from cold, disease and near-starvation…very few Germans caught at Stalingrad survived the war.

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