Madame De Theiry
Madame de Thiery seemed to want to tell someone. She talked and talked, quickly, hardly pausing for air. It was as if she had waited a quarter of a century for some near-strangers to come along – people who were so completely ignorant of the situation…and so obviously foreign to it…that she could speak her mind without apologizing…and without hiding her thoughts.
It was Sunday evening. She had invited us over for an aperitif. So, we sat on the terrace overlooking a beautiful little valley, with a plantation of oaks and several pastures on the other side of the river. Late in the evening, the sun seemed to hang over an ancient oak tree as if fixed to a wall. Then, suddenly, it was gone.
Madame de Theiry is the sister of the woman whose house I visited a week or so ago – for the wine tasting. The sisters are both in their early 60s, I would guess, and both attractive – with delicate features, auburn hair and thin, smooth skin.
The two sisters married two brothers, as happens more often in rural areas than in the city. Both had large houses and large families – one with 5 children, and Madame de Thiery, 6. And both had lives marked, and shaped, by tragedy.
Madame de Thiery, wife of a prosperous farmer, daughter of another, had lived the “vie de chateau” all her life. She even had a ‘de’ in her last name – testifying to the gentrified milieu from which she hailed.
But the house we visited on Sunday night was no chateau. It was a simple farmhouse – not much different from the one to which Francois retired. In fact, it was one of the houses that was once lived in by her father’s tenant farmers…and then by refugees from Poland.
Readers of these messages are familiar with the meandering little roads I sometimes take. I offer no apology for them. These little by-ways do not get us to our destination in the fastest way…but they often lead us to places we had not expected to visit…where we discover things we had not been looking for.
Digital Men always take the highways. They do not like surprises. Not only do they follow maps, they also have satellite positioning systems built into their dashboards. Racing from one place to the next, they know what they see, but not what they miss.
I was not especially keen to wander over to Madame de Thiery’s last night either. I was in Digital Mode – racing to get ready for the next exciting installment of the Daily Reckoning. But there are always surprises in life – Elizabeth surprised me with a social obligation I could not refuse.
The Big Techs, you will recall, are ‘priced for perfection.’ In the world of Digital Man’s imagination, 1’s and 0’s just pile up…like profits. There are no setbacks worth mentioning and no surprises.
Intel trades at 51 times earnings – but its profits from operations are at single digit rates. (Most of big reported increase in net income came from portfolios investments.)
Microsoft, meanwhile, most recently reported an increase in earnings of 9.5% – but of that, almost 50% came from investments, not operations.
Yet, investors crowd in – paying multiples that should be awarded only small, fast-growing companies. Have they invented a cure for cancer? Do they have a patent on sex? Are they immune from competition? You’d think so.
Intel and Cisco alone represent 12% of the entire Nasdaq. And the bigger they get, the bigger they get.
Despite the Internet, and because of it, investors have less and less real knowledge of anything. Knowledge, like labor, becomes more and more specialized…with each person having a smaller and smaller portion of the total. The average investor couldn’t turn off one of Cisco’s router switches if his life depended on it…and I doubt I could find the ‘Intel Inside’ even with a pair of pliers and a screwdriver.
So, it is not knowledge that drives his investment decisions – it is ignorance. The typical investor knows that he has no hope of ever actually understanding Cisco’s switches or Intel’s chips – so he doesn’t even try. He doesn’t take his computer apart…to study the switches and Intels. He doesn’t pick up the phone and ask the Cisco Kids ‘what the heck do you do, anyway?” He knows it is as hopeless as asking the Pope what is meant by the Holy Trinity.
Instead of seeking knowledge, he seeks safety, comfort, validation, and confirmation. He buys what everyone else is buying…or an index fund where he pays someone else to buy what everyone else is buying for him. Either way, the biggest stocks get even bigger.
“Simply put,” promises Alan Newman, “the more expensive an S&P issue becomes, the more likely it is to become even more expensive. Since the mathematical allocations of share purchases have absolutely nothing to do with corporate fundamentals, larger issues have become inefficiently priced and have remained at inefficiently priced levels for several years now. This has afforded many observers and participants with a sense of permanence for higher prices, although there has been no economic justification for same.”
In Toronto, Newman points out, one company – Nortel – has grown so big relative to the market that it makes up more than a third of the Toronto Stock Index.
What a shame that perfection never seems to last. Accidents happen. Things go wrong. People end up where never expected to be. “In life,” wrote the philosopher Kierkegaard, “only sudden decisions, leaps, and jerks lead to progress. Something decisive occurs only by a jerk, by a sudden turn which neither can be predicted from its antecedents nor is determined by them.”
Digital Men can plot a straight line on a map and add the up the miles. But they cannot imagine a detour. Nor can they understand the quirky, unexpected route of real life.
Against long odds, both Madame de Thiery and her sister were widowed before they were 40 years old. The two brothers whom they had married each had a heart attack at 42 and each died.
Her sister, remarried. But Madame de Thiery struggled on alone. She had 6 children. One had severe problems at birth and died in her early teens.
Sitting on her terrace with the evening light on her face, Madame de Thiery explained:
“I was completely on my own. Everything was changing. My husband had borrowed enormous sums of money. It was different back then. If you had a good reputation, you could borrow money. But the world was changing.
“After the war, we needed to mechanize the farms. And we needed to consolidate them…and drain the fields. It was very costly.
“Everyone offered to help, but when push came to shove, there was no one. I was alone. With thousands of acres. Huge debts. Six children. And 11 farm workers I couldn’t afford.
“What could I do? I had to fire seven of the farmhands. So, I found them other jobs. But they didn’t like what I found for them. They revolted. They wanted things I couldn’t give them. Salaries I couldn’t afford. New equipment. They knew I was at their mercy and they took advantage.
“I know you can’t believe what I am telling you, but it is true. A merchant came by one day when things seemed to have reached a crisis and, after talking to the farm workers, came to me. ‘Madame,’ he said, ‘you have a very big problem. It is not safe for you.’
“Oh, but you cannot believe this…things are so different now.
“But the merchant, who supplied our fertilizer, he was a good man. He stayed around for several hours on some pretext…and finally came back to me… ‘I think they have settled down; it is safe to go to sleep tonight.’
“Finally, some of them left. People complained. They hated me. But I just did what I had to do to keep the place together. But in the end, I had to sell it anyway…”
Your correspondent, reporting what I hear… on the by- ways of life,
Ouzilly, France August 28, 2000
*** Friday was just another lazy, hazy, crazy day on Wall Street. Nothing much happened. The Dow rose 9 points. The Nasdaq fell 10 points. New highs outnumbered new lows two to one, but there weren’t many of either. Volume was very low.
*** Barron’s reports that flow of money into stock mutual funds is still positive…but negative for bond funds. The public – amateur Soroses, mom and pop Buffetts – are moving out of bonds and into stocks. What madness is this? The total year to date yield on Dow stocks has been about a minus 1.5%. The Nasdaq is about flat. That’s including dividends.
*** Bonds meanwhile, are up about 10%, plus you would have gotten about 4% in interest, year to date. Hmmm… 14% vs. – 1.5%… Let me think about this…which would I rather have?
*** The same madness has brought prices of put options to near record lows. No one is betting on a bear market, it seems.
*** Meanwhile, “Stocks Float Higher” is how Reuters reporters describe the situation. The Dow gained 1.33% last week. The Nasdaq rose 2.86%.
*** The bear must be grinning. He has done his work well. He’s managed to put together the biggest, fattest, most complacent herd of na?ve investors in history. He’s tan and fit – after spending the summer at the beach. We never know for sure what the wily creature will do, but he must be thinking about coming back to the office and getting down to some serious business.
*** If I were Mr. Bear, I’d have my eye on the Big Techs. They are priced for a perfect digital world – in which things get better forever. But human progress is marked by episodes of extreme difficulty – as I chronicle below.
*** One of the illusions cherished by investors is the idea that profits are increasing, thanks to productivity gains. Yet, a report in the Wall Street Journal cited a study by Bear Stearns showing that if S&P 500 companies included the cost of employee stock options in their operating accounts profits would have fallen 3% in 1997, 4% in 1998, and 6% last year.
*** “Through the first six months of the year,” writes Alan Newman in his Crosscurrents letter, “Dollar Trading Volume came in at 350.6% of GDP, a record for any six months as far back as our data go (1926).” In February, Newman reports, more shares were traded on the Nasdaq “Bulletin Board,” typically ‘penny shares,’ than on the Nasdaq itself. “This has never occurred in stock market history,” he says, “and probably never will happen again…Can anyone legitimately argue that we have NOT been in a mania?”
*** But an investor – standing in the middle of the great herd – faces a kind of “prisoners’ dilemma.” Stock prices will remain high as long as everyone thinks they will remain high. As long as no one ‘defects’ from this kind of crowd thinking – everyone’s portfolio will be all right. And the more desperate the situation, the less are people willing to tolerate defection.
*** But a smart investor – or investment analyst – can see that the situation is hopeless. And he knows that he is better off abandoning the herd sooner rather than later. So…he sells his stocks and buys bonds. Or worse – he becomes a short-seller.
*** All over the world, in every culture, defecting from the crowd is badly viewed. It is considered not nice. Or immoral. In time of war – a soldier who deserts his post, even a position that is suicidal – faces a death sentence. When Mr. Jonathan Joseph, an analyst with Salomon Smith Barney, downgraded four semiconductor stocks he received a series of death threats. An email told him: “We know where you work and we have a bullet with [your] name on it.”
*** David Futrell had a similar experience after he wrote a column critical of some expensive stocks in the August issue of Money Magazine. He was labeled a ‘basher’ and hounded off Internet message boards. Said Futrell of the democratizing influence of message boards: “This is a crock. They are democracies only if you share the same rosy opinions as everyone else…”
*** More than 4,000 dot.com employees were laid off in August – not a huge number, but up more than 50% from July. A Reuters story reported last month that e- companies are dropping the dot.coms from their names so that people will take them seriously.
*** Friday’s trading was enlivened by a report that Emulex would have to restate its earnings and its CEO was leaving. The news caused the stock to fall $63 – from $108. But the information – which came from the Internet – proved to be false. Can you believe that, bad information on the Internet?
*** Oil rose 40 cents – it’s back above $32 where it seems inclined to stay for awhile.
*** New house prices rose 2.2% last month. That’s an annual rate of more than 14%. But existing house sales slowed to a 5-month low.
*** From “Pulp Fiction,” on Amsterdam: “How come they call a Big Mac a Big Mac… but a Quarter Pounder is called a ‘Royale’…”
“It’s the metric system, stupid….”
Now the metric system comes to Wall Street. Beginning today, on a trial basis, a few stocks will be quoted in dollars and sense instead of fractions. Wall Street is going digital too. Can anything resist the trend?
*** The Dow is still below its record high. Utilities actually hit a new record last week, but fell back on Thursday and Friday.
*** The Dow is still selling at 20 times earnings; the S&P at 29 times.
*** Gold gained $1.10 on Friday. Platinum rose $6.80. And the dollar fell a bit against the euro.
*** And lest we forget where the juice is coming from, another message from that Great Digital Dumpster, the Internet:
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