Good Seats Still Available

The market is still crazy in many respects, but Chris Mayer assures us that opportunities remain…

In 1903, Henry Ford built a racecar. He did this after he left the Detroit Automobile Company, to pursue his idea of going into business himself. He built a racecar because he needed capital and this was the way to raise it – build a racecar, win some races and get some attention.

After he built it, he sought a driver brave enough and strong enough (the car was steered with a tiller, not a wheel) to race it. Ford hired a professional bicycle rider named Barney Oldfield and spent a week teaching him how to drive this new, powerful (but unreliable) racecar.

Before the race, Oldfield uttered what must be one of the most memorable lines in all of racing history. He said, "Well, this chariot may kill me, but they will say afterward that I was going like hell when she took me over the bank."

Fortunately for Oldfield, Ford’s new chariot did not kill him and he went on to win the race. Ford got the attention he needed, raised the capital he required and the rest, as they say, was history.

In my opinion, today’s investors have something in common with Oldfield’s spirit. With some of today’s high-flying stocks, I doubt investors will come out of it as well as old Barney Oldfield did. No, these stocks are going to take investors over that bank.

Tech Bubble: Still Smittin with New Economy Thinking

If you think the tech bubble popped in 2000, I urge you to take another look. America’s love affair with racy concepts, phony values and paper pseudo-wealth continues unabated. The flair for risk-taking is still alive and well. Investors are still smitten with New Economy thinking.

Reading a little of veteran tech watcher Fred Hickey’s analysis a few days before Halloween was like reliving a horror show. I kept thinking, "Not again! Didn’t we just go through this not too long ago? Didn’t pie-in-the-sky tech investing get smacked once already?"

"One would have thought that such a shellacking would have ended the irrational love affair for tech and Internet stocks," Hickey writes. "But here we are, almost four and-a-half years from the bubble’s bursting in March 2000, and we are still waiting for a return to a sane investing environment."

Consider just a couple of these tech marvels…

Hickey comments on Travelzoo. Who knows what Travelzoo is all about, but Hickey notes that at a price of $75, the stock was being valued at $1.2 billion, which was 50 times its sales of $23 million. 50 times sales! That value was so out of whack, that when the company had to raise some money with a secondary offering, private investors paid $40 per share – a 47% discount to what investors in the open market had paid.

Or consider Google, selling for about 186 times earnings, and up about 60% from its IPO. Better yet, just look at the whole NASDAQ itself. Hickey notes that the NASDAQ as a whole is trading for 57 times earnings and nine times sales.

Will Rogers once remarked, "The short memories of the American voter is what keeps our politicians in office." Well, we can say that the short memory of the American investor is what keeps these stock prices where they are.

Tech Bubble: Neverending Luncay

Have investors forgotten the devastating losses that such craziness can lead to? Have they forgotten about the 95% losses on stocks like CMGI, JDS Uniphase, Sycamore Networks and all the rest of the last batch of stocks to carry these kinds of absurd valuations? Have they forgotten that the NASDAQ lost 2/3 of its value in two and-a-half years after starting with such nosebleed valuations?

"Often I sit in my office and I cannot believe what I’m seeing," writes Hickey with exasperation. "The lunacy does not seem to end."

What we are witnessing may be like some sort of Indian summer, a little warmth in the midst of a bearish winter. It’s like a way station to a new, more normal value. What that normal value might be, is anybody’s guess.

Famed contrarian Jeremy Grantham, who’s firm, GMO, manages billions worldwide, puts a more normal value for the S&P 500 about 35% less than what it is today. He writes, "A normal profit margin combined with a normalized or trend line p/e of 16 unfortunately produces for the S&P 500 a fair value of 725, which compares painfully to the S&P’s current price of just over 1100."

Unfortunately (or fortunately, depending on your perspective), the normal market is the one that never happens, as markets tend to overshoot, and a bear market could take us below that reasonable projection.

Having laid out that gloomy scenario, I still think there are opportunities in today’s markets. Believe it or not, bubbles such as these often create opportunities in other neglected areas of the market. It’s like a movie theater where everyone piles in one theater, leaving good seats still available in the other theaters.

These problems are self-correcting. In other words, when one theater gets a bit too crowded, people start looking for someplace else to go.

Tech Bubble: Excessive valuations

The excessive valuations in tech-land are also self-correcting as new competitors start to come in looking for a piece of that money. Think of it this way, to borrow from Edward Chancellor, if it costs one dollar to dig a hole that is priced for ten dollars in the market, the temptation to reach for a shovel becomes irresistible.

New issues, new technologies, and new competitors will try to cash in on those stratospheric valuations. They are going to find it progressively more difficult to find buyers. More and more investors are going to start looking for someplace else to go.

During the next leg down, the intangibles of technology – the supposed "story stocks" and their great promise – will be outdone, once again, by solid tangible assets that actually deliver real cash flows. You have to be very selective and do some digging, but these companies do exist.

When the market comes crashing down, the hideaways will be in these kinds of companies, where the stock market price is a convenience, not the sole purpose of a business plan.


Chris Mayer
for The Daily Reckoning
November 2, 2004

The Dow rose slightly in anticipation of Election Day. The dollar rose, too. Neither move seems worth talking about.

Our beat is markets…and what moves markets. They are not moved by individuals analyzing businesses as if they were their own, but by the great mass of lumpen humans who do no analysis of any kind. Taken one by one, people are fairly agreeable and reasonable. But put them at a national election, a mass market, or a lynching…and they soon make a spectacle of themselves.

We Americans are now enjoying the quadriennial public spectacle of presidential elections.

It is a race between one candidate who is "incompetent" and another who is "incoherent," says The Economist. "It is a contest between a fool and a knave," says The Daily Reckoning. Although, we don’t know which is which.

"The American election comes down to a race to determine which candidate has convinced Americans that he will protect them from terrorism," said the French radio newscaster this morning.

We listened to the news on our way to the train station.

"Both candidates share similar backgrounds and similar points of view. The difference is only a matter of style and emphasis. Both candidates believe America is at war with terrorism. Each offers to do a better job of protecting the nation."

We don’t know what to make of it. The financial markets, confirmed by polls, tell us that Americans have rarely been so confident…so complacent…so sure that things will work out. The International Herald Tribune tells us that the dollar was buoyed up yesterday because "consumers are spending more." In the last quarter, personal spending rose three times faster than personal incomes. How much more confident can you get…spending more money even when you are already deeper in debt than ever before?

"Americans bet their futures on their homes," says our old friend Scott Burns. They buy bigger houses that they can’t afford, with money they haven’t earned yet. If they were to lose their jobs…or if house prices were to fall…they will take large losses. But who worries?

Who knows what the odds of an economic slump really are…but they must be significant. Even money? One in five? One in ten?

The odds of being the victim of a terrorist, on the other hand, are vanishingly small. In the homeland of the brave, it seems almost unbecoming for people to concern themselves with it. Besides, there are people starving. There are people living in misery. There are people living in trailers watching reality TV! Worrying about a one in a million chance of getting blown up by a bearded madman seems a little self-indulgent, or even a little wussy.

But that’s the madness of crowds for you. A man can judge the odds of his neighbor gunning him down fairly well and take reasonable precautions. He will smile, keep his junk on his side of the fence, and not worry about it.

Nor does he get carried away by other threats and dangers of everyday life. He will smoke too much, drink too much and eat too much…taking his chances, honestly and probably accurately.

But, put him in front of the TV news and the terrorist menace becomes as compelling as a tech stock: He has an enemy he’s never seen…with a motive he can’t understand…and a strategy about which he hasn’t a clue. He has no firm ground to place his feet. So he drifts along with the mass hysteria of it. Suddenly, he thinks he sees a terrorist under every turban.


Eric Fry, reporting from Lower Manhattan…

"Mineral exploration, like a kind of cosmic Easter egg hunt, becomes increasingly difficult the longer the hunt proceeds. Today, most of the world’s oil explorers are finding that the best chocolate eggs are long gone. The only goodies remaining are a few stray jellybeans and some candy wrappers… "


Bill Bonner, back in London:

*** How will the election affect the markets? Fleet Street editor Chris Mayer has some thoughts: "Conventional wisdom has the markets trading tepidly because of uncertainty about the outcome of the election. After the election, so goes this thinking, some sort of trend will emerge. Depending on whom you ask, you get different opinions as to who is better for the economy.

"Frankly, I don’t think investors should dwell too much on the question, because it shouldn’t matter. That is to say good investments are good investments for reasons other than who is in office. At least, that’s the way it should be.

"Nonetheless, there are certain trends that should continue regardless of who is in office. For example, while the stock market may be sleepy, the commodities are jumpy. Much of it hinges on news on China. China’s central bank raised its benchmark interest rate for the first time in nine years and immediately sparked worries about demand for commodities.

"You can expect continued volatility here – regardless whose derriere lands in the oval office."

More from Mr. Mayer below…

*** Qian Qichen, one of the main architects of China’s foreign policy:

"The current U.S. predicament in Iraq serves as another example of what happens when a country’s superior psychology inflates beyond its real capability: A lot of trouble can be caused.

"But the troubles and disasters the United States has met do not stem from the threats by others, but from its own cocksureness and arrogance."

The invasion of Iraq "has made the United States even more unpopular in the international community than its war in Vietnam," he said.

"The Iraq war has also destroyed the hard-won global anti-terror coalition," Qian added, saying it had caused a rise in terrorist activity around the globe and widened a rift between the United States and Europe.

*** Today, we get to exercise our constitutional right to decide which party gets to boss us around for the next four years.

We know that you are sitting on the edge of your seat, dear reader…waiting for a last-minute endorsement from us. But we remain impartial and non-partisan; we despise them both.

*** Yesterday marked the jubilee anniversary of another "war on terror." On Nov. 2, 1954, the French government sent three companies of Republican Security Guards by plane and authorized the immediate dispatch of three battalions of parachutists to Algeria, where a sharp outbreak of terrorism, which seemed to follow a coordinated pattern, struck wide areas of the country.

The Daily Reckoning