Fires Of Enthusiasm
“The public preference for stock is not only as marked
as ever, but also the will to speculate is still a
speculative factor not to be overlooked. The prompt
return of huge speculation and the liberal manner in
which earnings are again being discounted indicate that
it will be difficult to quench the fires of stock market
enthusiasm for long.”
Barron’s, March 24, 1930
Seventy one years later the fires burn bright once
again. Enthusiasm for the stock market has never been
higher – according to the polls.
Americans are sure that everything is going their way:
the recession, so recently discovered, is almost
over…the stock market is once again rising to new
heights…and even the war in Afghanistan is going as
well as anyone could have hoped.
With all this dry tinder, is it any wonder the flames
leap up…and sparks of happy expectation soar into the
dark December skies like Christmas wishes?
“I’ll let you in on the secret of life,” I said to
Sylvie yesterday. “The universe is moral.”
Sylvie is my French teacher. In addition to studying
passe simple and use of the subjunctive tense, we read
French novels and discuss them. She poses tough
questions…and I stumble to answer them.
But yesterday, I was ahead of her. As she leaned forward
conspiratorially, I let her in on our Daily Reckoning
“You see,” said I, “people get neither what they want
nor what they expect from life…but what they deserve.”
“But that is ridiculous,” she responded, shaking her
dark hair and opening her eyes as if she had spotted a
mouse in a cupboard, “a child that is born with a
disease…or a man killed by a burglar…how can you say
they ‘deserve’ what they get?”
“Ah. I know it is not exactly true,” I replied, “at
least not in a way you can prove. But it should be true.
And it is as close to truth as you can get. So, you are
better off believing it…and living as though it were
Sylvie was not convinced. But she is considering the
Meanwhile, “this is a classic end-of recession rally in
the stock market,” says Nancy Lazar.
This is not just turning into a bottoming of the U.S.
economy, Ms. Lazar continues, “it also seems to be
happening globally. You see it in the markets…We are
going to have a synchronized global upturn as a result
of the global ease, and lower global oil prices.”
Ms. Lazar is hardly alone in her views. Such a majority
of people believe as she does that they could elect a
president. In the short run, they can also move stock
prices in any direction they choose. But in the long
run, Mr. Market will measure out whatever reward he
thinks they deserve. And if it is not true…well, it
ought to be true. And Daily Reckoning readers are
advised to act as though it were…
An investor buying a stock at 30 times earnings is
buying at the very top of the P/E range. Prices go
higher, from time to time, but never for a very long
time and never to very good results.
Dr. Robert Shiller, in his book, Irrational
Exuberance, concluded that whenever P/E ratios have
risen to today’s levels, the average investor has never
made a profit over the next 10 years.
Another study, often cited by Richard Russell but whose
details I no longer recall, showed that whenever P/E
ratios exceed 26, investors can count on no more than 5%
annual returns for the next 10 years.
There’s also the risk about which we warn our
masochistic readers almost daily – that the U.S. economy
and stock market could follow in Japan’s footsteps.
After 3 recessions in 11 years, Japan’s shareholders are
down 75%. Who, in America, would want to risk that for
the hope of a 5% return?
Investors who take that bet do not deserve to make
money. There is no law that says they must lose money,
of course. Often, buying high in the hope of selling
even higher actually works. Investors make money, as
even greater fools belly up to the bar and place their
But how many fools could be still standing in line? The
big brokerage houses are already recommending the
largest allocation to equities in history. Private
investors are already more bullish than they’ve ever
been. After-tax earnings – both personal and corporate –
are in decline. How much money could be waiting to buy
into this market?
Even the greatest investor who ever lived says he cannot
tell if the market is going up or down.
“I was no good then [in 1977] at forecasting the near-
term movements of the stock market,” writes Warren
Buffett in Fortune, “and I’m no good now. I never have the faintest idea of what stocks are going to do in the next six months, or the next year or the next two years. But I think it is very easy to see what is likely to
happen over the long term…”
Your advisors here at the Daily Reckoning are no better
at spotting short-term trends than Buffett. Nor are we
in the habit of telling Mr. Market what he ought to do.
Ms. Lazar may be right. Stocks may go higher before they
go lower. But over the long term, we feel sure that Mr.
Market will do what he always seems to do, eventually:
give investors what they deserve.
The stock buyers who bought for the right reasons –
because stocks were cheap – in 1982 have already made
their money. Unless they are greedy or stupid, they have
already taken the money off the table. Those who buy for
the wrong reasons now – because they think stocks always
go up – will get what they deserve too.
Sooner or later, stocks will regress to the mean. And
sometime before hell freezes, those shooting sparks of
high anticipation from December 2001 will fall to earth
as cold, dead cinders.
At least, that is how it ought to turn out.
December 6, 2001
Hello? Where am I? What day is this?
No need to be precise. Just tell me…are we in
the 3rd millennium or still in the 2nd?
On the fifth anniversary of Alan Greenspan’s
famous “irrational exuberance” speech, investors were as
irrational and exuberant as ever. So greedily did
investors take up shares of money-losing techs that a
casual observer might have thought it was 1998 or 1999,
rather than 2001.
There were exceptions, of course. Amazon.com –
yesterday’s news perhaps – stayed where it was, $11.76 a
And investors dumped anything and everything that
might have protected them from a bear market. Bonds took
their biggest loss since January. Gold fell $1.70. Even
the dollar rose.
And why not? The National Association of
Purchasing Managers’ report showed economic activity
picking up – with its index rising from 40.6 in October
to 51.3 in November. And almost every economist and
analyst in the world is sure that things can only get
“Given the aggressive monetary easing that was
done before and after September 11,” says Nancy Lazar,
“given the drop in the price of oil, given the surge
we’ve seen in recent refinancing activity, and on top of
that a record amount of fiscal stimulus, I think we are
certainly more comfortable anticipating an upturn
starting in a matter of weeks.”
Given all that…does anyone doubt that stocks
will rise further? More below.
Eric, what do they say on Wall Street?
Eric Fry at the scene of the crime…
– Wow! What a day! It was a Pamplona kind of day on Wall
Street yesterday. You either ran with the bulls or got
trampled under hoof. The Dow jumped 220 points to
10,114, while the Nasdaq surged more than 4% to 2,046.
– And just like that, the stock market reclaimed Dow
10,000 and Nasdaq 2,000. The Nasdaq has now rallied more
than 600 points, or 47% off of its September 21st low.
Micron, the profit-deficient chipmaker, leapt another
– Of course, if you want to make the really big bucks,
you’ve got to buy the shares of bankrupt companies.
Enron shares have quadrupled since Friday – soaring from
25 cents to just over $1.
– Irrational exuberance is in evidence everywhere.
Yesterday’s list of top 10 percent gainers was full of
$5.00 Nasdaq stocks you’ve never heard of. Names like
Insilicon Corp., Innovex Inc. and Xata Corp.
– The stock market’s bubbly trading action captured all
the headlines yesterday. It also grabbed all the screen
time on CNBC, as breathless market commentators cheered
the market higher. I felt like I was watching a rave, so
ecstatic and “blissed out” were all the CNBC talking
– No question, it’s a lot of fun to make money when the
stock market goes up, and of course it becomes more fun
the higher and faster that the market rises. However, a
looming specter might soon make buying stocks a lot less
fun: a plummeting bond market.
– While most folks were busy counting their paper stock
market profits yesterday, the bond market absolutely
tanked. The 10-year Treasury bond plunged more than two
points, which means that its yield jumped from 4.65% to
– If rates keep rising, you can kiss mortgage
refinancings goodbye, not to mention low-cost financing
for a broad range of consumer and corporate uses.
Perhaps that’s why the shares of Countrywide Credit
(CCR) suffered a 2-point drop yesterday, and why most
other mortgage lenders’ shares performed poorly as well.
– Furthermore, Ford Motor announced a miserable fourth
quarter. What’s the irony here? Blockbuster car sales –
fueled by zero-percent financing deals – almost single-
handedly produced October’s eye-popping gains in
personal consumption and in durable goods orders. These
“impressive” statistics inspired a chorus of pundits to
predict an imminent recovery. Their bullish
prognostications, in turn, emboldened investors to buy
richly valued stocks.
– Now we find out that the very industry responsible for
kicking off this stock-buying love-fest is griping that
it will do worse than previously forecast, despite
selling more cars than it could have dreamed possible
just 3 months ago!
– Just maybe, our great big stock market rally stands on
feet of clay.
– So what about those zero-percent financing deals that
helped sell all those cars? Ford CFO Martin Ingliss
said, “The [financing] programs are very expensive and
– Ford’s biggest problem stems from the fact that many
people who “buy” cars don’t always finish paying for
– “Ford warned on Tuesday that it would make a loss of
about $900m – about 50 cents a share – in the fourth
quarter as rising credit losses and repossessions in its
finance arm add to the woes of the world’s second
largest carmaker,” the Financial Times reports. “Since
mid-September there’s been a sharp deterioration in
economic conditions, leading to higher delinquencies and
– Ford will face a loss of about $1.3bn for 2001 – the
company’s worst result in almost a decade. Inglis,
following the time-worn script of ailing public
companies, announced a “restructuring” that is “designed
to reduce significantly the group’s cost base.”
– Ironically, it will cost the company millions to
implement this “savings plan.”
Back in Paris…
*** Grey weather. Short days.
*** At this time of year, the sun barely rises above the
rooftops. But Christmas decorations are going up
everywhere. In the evening, the big department stores –
such as Samaritaine and Bon Marche – are lit up like
*** “Dad,” said Maria, out of breath after running up
the stairs to my office yesterday. “I just did my first
Christmas shopping. I got something for Sophia and
something…well, I don’t know who it’s for, but it’s
very cute. It’s amazing how fast I can spend money…”