No Magic

“Have you found another company such as W.R. Grace,” Benoit asked me again on Saturday. We were pouring concrete into a stone wall, in a technique that seems almost foolproof.

It had better be foolproof, I thought to myself. Neither Benoit nor I have any experience in stonemasonry. But it seems simple enough. We lay up the stones on the outside surfaces of the wall we are building – using mortar to hold the stones in place. We run the walls up two feet or so…then, when the mortar hardens, we go back and pour concrete between the two stone surfaces – giving us a single, very solid wall. As long as we keep them reasonably straight – using a mason’s line to guide us – the walls should be okay.

But Benoit is not impressed by physical work. He’s seen enough of that already. He knows what you can get from hard work. What interests him is the stock market – that is, the money you can earn without working.

I had told him about W.R.Grace a few weeks ago – after I discovered that the stock had fallen so low it was trading below 1 times earnings…and at a fraction of book value. The company faced more than 100,000 lawsuits from its asbestos-era work. Still, I was willing to bet that the price of the stock was more likely to go up at that point then down.

So, I mentioned this to Benoit…and he began to follow the stock. When it rose sharply he began to think that I might have the magic touch…that I could find stocks that were about to begin a rising trend.

I warned him that no one could really do so.

“Stocks move up and down almost at random,” I explained. “You cannot predict whether they will go up or down in any period of time. The market is extremely efficient. At the margin, it is unbeatable.”

“That said,” I continued, “there are occasions when stocks are so extremely underpriced or overpriced that they should correct to the mean. You still don’t know when…or how…but the farther they get away from ordinary valuations…the more likely it is that they will come back quickly. It is as if they were attached to ordinary levels by bungee cords. They can go a long way from where they ought to be…but the further away they get, the more tension on them to return.”

W.R.Grace was stretched so far on the downside that the cord almost snapped. And maybe it will snap. But, at least for now, it has pulled the shares back towards the ‘normal’ range (with a lot farther to go).

The Big Tech and Internets, on the other hand, were an example of tension in the opposite direction. They had become outrageous – and exerted such a tug on the bungee cord of reasonable value that it had to spring back.

But apart from that small insight, I confessed to Benoit, I have no magic.

Still, I sensed that Benoit doesn’t quite believe me. “Once a pig learns how to hunt for truffles,” his father said to me one day, “you can’t stop him.” Anyone who can pick one good stock, Benoit must be thinking to himself, can pick another.

So, in the interest of full disclosure, for Benoit’s sake as well as yours, dear reader, I went back and looked at the recommendations, suggestions and gratuitous investment comments I made over the course of the last year. You may come to your own conclusion.

First, I suggested that you “sell the dollar.” This advice was proffered on the 4th of January, 2000, when the dollar index was at 100, and a euro was worth $1.03. Alas, a year later, the index had climbed to 110. And the euro could be bought for just 94 cents.

Perhaps I was not wrong. Maybe I was just premature. But whatever truffle lay buried in this recommendation must still be there. I will keep digging…

Then, on January 6th, I recommended Philip Morris and GM. The cigarette maker nearly doubled, from $23 to $43. But the automaker? The stock did rise during the first 5 months of the year. But if it had been a bargain at the beginning of the year, it was an even bigger bargain at year end – losing about 40% of its value.

The next day was a good one for DR readers. I said that was doomed. The stock, then $66, is about $16 today.

In like manner, I suggested that you might want to sell Ameritrade and The former has fallen from $21 to $8 since then; drkoop has fallen even further – down from $11 to 44 cents.

Similar profits could have been made on AOL or Etoys, both mentioned negatively on the 18th of Jan., 2000. AOL fell from $61 down to $44. Etoys got smashed – from $20 down to 18 cents.

Of course, the whole Internet/Big Tech sector went down. Among those I mentioned:

Cisco fell from $72 to $36 MicroStrategy fell from $21 to $11 Intel dropped from $73 to $33 Micron slumped from $89 to $38 IVillage sank from $6 to $1

And so on…

But what about the non-techs? Let me see…


While I suggested you go long on GM, I recommended the opposite side of the trade with regard to the other big G in the Dow: GE. On January 31st, sober and not under any extreme stress, I said that I thought the world’s biggest and most widely admired corporation was overpriced. The stock, $44 a year ago, rose to $54 on the ides of March…but then, Oh ye of little faith, it fell to where it stands today – about $43.

I recommended Raytheon on Feb. 22nd. It went from $21 to $30. But I also recommended mobile home maker Fleetwood and Newmont Mining – both of which went down.

Procter and Gamble, recommended March 8th, rose from $58 to $72. But Tenneco fell; and so did American Woodmark.

On the other hand, First American Financial nearly tripled, from $10.94 to $31. So did RJ Reynolds (a recommendation from the Fleet Street Letter) – from $18 to $49.

GPC, Pohang, Midland, Visteon, Northrop Grumman – some went down and some went up. Still, not a bad performance…with most selections up.

There were also a number of energy companies – mostly suggested by Dan Ferris, then of the Real Asset Investor – which also went up.

And the record shows a motley crew of foreign stocks that I haven’t yet checked.

Without putting too fine a point on it, it looks like year 2000 was a good one for DR readers. But there was no magic.

I hope we do as well this year.

Your correspondent, still searching for the magic…

Bill Bonner Paris, France January 15, 2001

P.S. It was so cold on Sunday afternoon, Benoit and I retreated into the house to hang pictures. Alas, picture hanging was not foolproof. We propped a large gilt-framed painting against a wall so we could drill holes in the wall. While doing so, somehow a piece of cardboard poked through the century-old canvas. You know the old saying: Three moves equal one fire. (Psst…don’t tell Elizabeth; maybe she won’t notice.)

*** The sales figures for December came out; they were down just 0.1%. Not a big deal. Other economic figures reported recently show the same picture – a softening economy, but not a collapsing one.

*** So, why the hurried 50 basis point rate cut by the Fed on Jan. 3rd? Even Alan Greenspan’s colleagues on the Federal Open Market Committee were surprised. It is rare to change rates between meetings – and practically unheard of to reverse the previous direction of changes.

*** “Speculation is rife throughout the Fed,” reports the Washington Post, “as well as throughout the market, as to what caused Greenspan to decide a big rate cut was needed so urgently.”

*** But Charles Peabody has a hypothesis: A record $600 billion of commercial paper – loans held by banks – needed to be refinanced in the first 3 weeks of January. The Fed may be concerned with the health of the stock market…as well as the health of the economy…but what really keeps the bankers awake at night is the health of their own businesses.

*** “Bank of America had to honor a $1 billion line of credit to PG&E last October,” writes Dr. Gary North. “This is a continuing problem for large U.S. banks in general. They have made credit lines available to companies that, in a credit squeeze, would not otherwise qualify for loans. We are not talking about a few billions; we are talking trillions… The banks can easily get saddled with new loans issued to firms to which they would not otherwise make loans.” (see: Reading The Tea Leaves

*** Few banks have actually cut interest rates – despite being able to get money more cheaply from the Fed. My guess: they’re using their fatter margins to offset rising defaults.

*** So far, the economy is deteriorating…but maybe not as rapidly as it first appeared. Consumers and investors are anxious, worried – but not really negative. They expect Greenspan to save the day.

*** Those that need to borrow money are doing so. Most people are hesitating – either because they expect lower rates or because they are already “spent out” and/or are becoming uncomfortable with so much debt.

*** As the year moves forward, the economy will probably continue to weaken. Stephen Roach may be right – we may see negative GDP growth in the first half of the year.

*** Wall Street is closed today, for Martin Luther King day. But tomorrow, GE will come forward and make its earnings announcement. Will this be the year GE finally misses its numbers…or has to guide analysts to lower numbers? Maybe… GE fell another 2% on Friday.

*** The Dow dropped 1.3% last week. But the Nasdaq, though it fell 14 points on Friday, realized its biggest weekly gain since September – up 9%.

*** The big winners again on Friday were the Internets. The INX rose 5%.

*** Losers were the Big Techs – Gateway lost 8%, Intel was down 4%…and Hewlett-Packard lost 5%. Gateway says it will cut 10% of its staff. William Hewlett, founder of HPI and Silicon Valley, moved on, too. He shed his mortal coil Friday morning.

*** Oil is back over $30.

*** People who hope for another rate cut are likely to get their wish. Why? Because the underlying problem is that there were too many bad investments and bad loans made during the boom period. Those have to be written off, worked out, and picked over. Lower rates can help get the economy moving again – but only after the mess has been cleaned up. Until then, lower rates get adversely selected by the worst credit risks…and make the final reckoning even more difficult.

*** But since lower rates are the only trick Greenspan knows – it’s one he will perform over and over. Rates will fall…and fall…and fall. The dollar will fall too – as it becomes relatively more attractive to hold European or Asian investments.

*** And who knows, gold could rise…

*** Today is Maria’s birthday. She turns 15.

*** Henry, 10, and Jules, 13, took part in a series of skits put on by the local scouts. The ‘scouts’ in France are very different from those in America. “Scoutism,” a young man explained to parents, “is a form of Catholicism…for young people…to instill in them a sense of devotion, faith, and obedience.”

*** Just as he spoke these words, barely audible over the roar of boys playing in the background, Henry came running around the corner, chasing another fellow, and knocked over two metal chairs.

*** But at least Henry had a good role in one of the skits – he played Jacques Chirac, President of France, while a very pretty young girl took the part of ‘Miss France’. The point of the skit I didn’t quite get – but it looked like the actors, if not the audience, were having a good time. And Henry played his role with such confidence, I thought he was right for the role.

*** But I read in the Figaro over the weekend that Henry may have competition. Public Law 1284 gives any citizen of a former French colony or possession the right to run for President. Arkansas was once owned by France. So, says the Figaro, Bill Clinton could run for Jacque Chirac’s job if he wants to.

*** And now I will let you in on some course and salacious small town gossip. It is said that a certain young woman in our burg has been cursed (or blessed, depending on your point of view) with nymphomania. She has “the fire derriere” as the disapproving farm matrons put it. (I am just reporting what I hear.)

*** Well, I saw the thin, blonde woman -looking a little pale and perhaps exhausted, at the scout show, sitting by herself as her younger sister performed. It might have been my imagination, but she seemed a little out-of-place. So, I decided to sit down and keep her company, in proper Christian scout spirit. Besides, it was a cold night and I need the extra warmth.

The Daily Reckoning