EXODUS [A Reading From The Daily Reckoning, Jan. 25, 2000 – one year ago today.]

The Bible is full of things for which the rational mind finds no ready explanation. But so is the platform of any political party.

And so is the stock market generally, and the market in Internet stocks particularly.

Christianity does not rest on a literal, simpleminded reading of Genesis. God made man from the dust of the earth, we are told. The ancients, who wrote Genesis, had no reason to lie about it. Darwin came along and described what the process might have looked like if you were able to rerun the tape, fast-forward. You would see the little molecules of ‘dust’ coming together, taking shape, trying out different forms, growing, specializing (just as human progress depends on an ever-increasing division of labor… so does all of nature), dividing, recombining, mutating, flourishing, dying out… whew!

Nothing Darwin said contradicts the Biblical account. His hypothesis, to the extent it proves correct, merely fills in the gaps.

But what if the Red Sea did not part? What if the reporter on the scene decided to make up that part of the story to make it more exciting? What if he exaggerated a little? What difference would it make? The story could be disproved without undermining Christianity’s stock.

The Book of the World Wide Web includes many hyperbolic stories too. But unlike the early Christian martyrs, who were made to suffer for the amusement of Roman mobs, the early “true believers” in the Web enjoyed the mob’s approval.

Many nerdy Internet pioneers are now very rich. [Well, not so much anymore… Addison.] Millions of new disciples have gathered round their banners and bid up their stock.

Our job is to find the trend “whose premise is false.” In this, we are hampered by the fact that we cannot know the future. We can never know, for example, when something will come along that is really new.

Stone Age Pacific islanders got their first glimpse of the outside world during WWII when cargo planes dumped supplies in the jungle. The primitives could only explain this phenomenon in terms they understood – the cargo planes must have been sent by some deity… or were divine themselves. Long after the war was over, the “Cargo Cults” continued to worship the supply planes.

Likewise, when the first water clocks replaced sundials, it was presumed that the water clocks were wrong – because the sundials were the accepted standard of measure.

Since we cannot know which new thing will become the new standard, we merely look for aberrations and assume they will regress to the mean. Usually, they do.

We don’t know what the ultimate impact of the Internet will be. But we do know that the prices paid for Internet stocks are irrational and foolish, by any proven, time-tested measure. Unless there is something going on that is so new and so revolutionary that we cannot possibly understand it… these prices will revert to the mean. [Hmmn… if “the mean” is anywhere between “down 90%-95%” and “out of business,” I’d say we got this one right… Addison.]

Faith is a necessary ingredient for Christianity, but it is not by faith alone that ye enter investment heaven.

Yesterday’s market suggested that investors might be thinking about an exodus. [Praise the Lo’… Ad.] True believers will still hope for a Moses who will deliver them from the bondage of the non-wired world. [Amen, brother Bill…] They may pray for a miracle that will give them 30% per year capital growth. [Ooh, yeah…] They may dream of a land across the Jordan, flowing with milk and honey – a land where even current Internet prices may be reasonable. [Tell it like it is…]

But money, alas, is agnostic. Fickle. Cynical. Contrarian. It does not deliver up what people want — but what they deserve. [Hallelujah…!]

When the Christians faced the lions, Roman mobs would bet on how they would die. With faith enough, perhaps you could have bet on some Daniel and been rewarded. But the smart money was on the lions.

Bill Bonner Paris, France January 25, 2001

*** Addison here… Bill’s on his way to Miami, then Nicaragua.

*** I saw him briefly this morning and asked if there was anything urgent I should pass along to you. “Umm” was his reply. But then, on the way out the door, bags in hand, he stopped: “There is one thing,” he said. “Colombia is now producing 5 times as many cocoa leaves as before the War on Drugs.”

*** OK, then… the show goes on. A veneer of delicious economic news greets us as we delve into the popular press this morning:

*** “Sales at major chain stores are likely to rise almost 4 percent this month compared with January 2000,” according to weekly retail numbers published by the Bank of Tokyo- Mitsubishi and reported by the New York Times. That number far outpaces December’s disheartening figures…

*** “Investors Eye New Bull Market,” announces a USA Today headline. “Fearing they’ll miss a new bull run, investors are piling back into the market,” the article tells us. “Scores of new stocks are sprinting to new highs. Last week, 385 new 52-week highs on the NYSE and only 32 new lows – the fewest since April 1996.”

*** Indeed, Americans are optimistic about the economy, even if they are not as fired up as they were in 1999 and 2000. “In mid-January,” says the NY Times, “67 percent of people surveyed by the Gallup Poll described economic conditions as excellent or good, down from 74 percent in August, but still higher than at any point between 1992 and 1998.”

*** And Nasdaq investors couldn’t be more giddy. While the market moved only slightly higher yesterday – up 18 to 2,859 – the grand casino has ridden a new wave of speculation up 15% for the year. Up 8% since the Jan. 3 surprise Fed move.

*** But, like the buyer of a fine painting at a disreputable auction house who upon receipt of goods peels back a sliver of the canvas only to reveal a Velvet Elvis hidden beneath… so will we discover these rosy headlines appear to be hiding something:

…Lucent, reeling from a $1 billion fourth quarter loss, announced it is cutting as many as 16,000 jobs… and AOL Time Warner will shed 2,000 of its own.

…Textron, an Old Economy purveyor of aircraft, automotive and industrial products – including Cessna airplanes, Bell helicopters and golf carts – plans to cut 3,600 jobs…

…Norfolk Southern, the second largest railroad in the East, will give 2,000 employees the pink slip…

…JCPenney is closing 50 stores… and Loews Entertainment plans to shut the lights on 675 movie screens across the United States and Canada, a move encompassing nearly a quarter of its total screens worldwide.

*** “To make matters worse,” writes Prudent Bear analyst Lance Lewis, “you’ve got the NY Fed chairman yappin’ about how central banks should be more concerned with growth and less concerned with such silly things as inflation.”

*** Easy Al will appear before Congress today and give his first public speech since the Fed surprised the nation and cut rates Jan. 3. To the joy of CEOs, brokers, New Era pundits and a host of government quants, Greenspan is widely expected to announce the Fed’s bias towards further goosing of the markets when the FOMC meets next week.

*** “Though his most recent speech on Dec. 5 in New York sounded rather minor in key compared to his customary hype,” reports Dr. Kurt Richebacher, “it still managed to implement another exuberant jump in share prices, lifting them by about $600 billion in a single day. The Nasdaq soared by over 10%, its biggest daily gain ever.”

*** In 1998, three small rate cuts, initiated by the LTCM crisis, ushered in the greatest asset boom of all time.

*** Dr. Richebacher: “The American borrowing and lending binge collapsed into completely uncontrolled credit inflation in the course of 1998. This was well after the outbreak of the Asian crisis, which started in mid-1997. When the Fed cut its interest rates in late 1998 in the wake of the Russian/LTCM crisis, this credit explosion was already well on its way. It was to last until late 1999. The wildest excesses in the stock market, actually, were to follow in late 1999 and early 2000, when the Fed flooded the banking system anew with reserves, this time supposedly as a precautionary measure against the Millennium Bug.”

*** “To unleash such monstrous credit excesses,” Dr. Richebacher continues, “definitely needs more than just a reckless central bank. Above all it needs two conditions on the part of potential borrowers and lenders: first, wildly inflated expectations of future prosperity; and second, a complete disregard of risk. Lots of people have been at work generating this indispensable hype by blazoning all kinds of miracles happening to the U.S. economy. In this respect, one man has outdone all others – Mr. Greenspan.”

*** The Dow appears to prefer sitting out what one JP Morgan analyst called “sucker’s rally.” The Big Board barely moved yesterday… dropping just two points to 10,646. The S&P 500 climbed just under four points to 1,364.

*** Gold shed another $2.10 of its recent gains… the HUI dropped 6%…

*** The euro slid back a couple of pennies to $.92… the dollar index rose to 111, up 1%… and oil fell $.52.

*** Exxon Mobil, Chevron, Texaco and USX Marathon – four of the five biggest oil companies in the United States – all rode last quarter’s highs in oil and natural gas to record profits. Exxon Mobil saw profits rise 90% to just over $5 billion.

*** Compaq Computer slimly surpassed “diminished expectations” for the fourth quarter and fiscal year 2000. Compaq posted $11.5 billion in sales, up 10%, but as with Intel and a host of other New Economy ringleaders, Compaq also took a heavy hit on investments… $1.8 billion, to be exact, in losses from stock held in Internet incubator CMGI.

*** California’s utility companies have been given a two- week stay of execution… According to Reuters, “The new Bush Administration extended Clinton Administration orders requiring out-of-state power producers to sell surplus electricity to California despite the near-bankruptcy of the state’s two biggest utilities.” The extension expires on Feb. 7, 2001.

*** “This whole scenario is reminiscent of the 1983 banking crisis,” says John Myers of Outstanding Investments. “At the time I recommended that my subscribers buy put options on big banks including Chase Manhattan and Citibank. Everything was set – options were in place to pay a 10 to one return. There was only one problem – the U.S. government stepped in and bailed out the banks. The ‘too big to fail’ slogan on U.S. banks was coined and our options expired worthless.

“Twenty years later, California’s major utilities have been deemed ‘too big to fail.’ The list includes Pacific Gas & Electric, Southern California Edison and San Diego Gas & Electric. But just as bailing out the big banks didn’t settle the Latin loan problem, rescuing big utilities won’t address the energy crisis in California.”

*** On this day in 1938, blues great Etta James filled her lungs with air for the very first time.

The Daily Reckoning