I had a little bird,
Its name was Enza.
I opened the window,
And in-flu-enza.

Children’s Rhyme During the Spanish Flu of 1918

In the Fall of 1918, the War was almost over in Europe. But the Spanish flu was just getting started. By the time it was over, it would kill over 675,000 Americans–ten times the number that died in the fields of France. In the month of October alone, 200,000 people died. And of the over 80,000 Americans who died in the war, more than half fell to the not to German bullets, but to the strange virus.

No one knows where it came from. It got the name Spanish because it first showed up in force in Spain. But historians of the flu now agree that it originated, as all flues do, as a bird virus, either near a military base near Kansas (where it then made its way to Europe via doughboys), or in China.

What’s astonishing from today’s perspective is how little known the flu is to us today. Ask most Americans what the leading cause of death was between 1914 and 1918, and they’d probably tell you it was the Vietnam War [sic]. But herein lies the astonishing insight I’ll share with you today: ’tis nobler to die for an abstraction than an infection.

Spanish Flu: Painfully Repetitive

Investors today – especially given the late rally on Wall Street – are proving this insight in a painfully repetitive way. But in the investment world, the abstraction “appears” to be less harmful.

Despite dismal corporate profits, slowing capital investment and a less than impressive employment picture, Americans are piling back into the market, sending their hard earned dollars off to die in the pits of Wall Street – all in the name of investing “for the long-term.”

Investing “for the long-term” is just an idea… an abstraction. Yet investors patiently watch their dollars get slaughtered in a bear market of attrition. There is nothing noble about it. And by failing to recognize that the game is up, and that Wall Street is riddled with its own form of SARS, investors are making a serious mistake.

There’s a pandemic of greed on Wall Street and it’s infecting even the most venerable of its institutions. According to a recent article in The Wall Street Journal, The New York Stock Exchange is investigating whether five of its seven elite specialist firms responsible for floor-trading are guilty of “front-running” the stocks they trade. “Front running” as I’m sure you know, is when someone, in this case the trader responsible for getting buying or selling your stock, trades in that stock ahead of you to profit.

Spanish Flu: Fleet Specialist and Labranch & Co

The stock in question in the first Journal story on the matter is GE. The NYSE is investigating two firms – Fleet Specialist (a subsidiary of FleetBoston Financial) and LaBranche & Co. – who, according to the Journal article “may have offered inferior prices to investors who send orders to buy or sell shares through the exchanges main trading system.” The SEC, which has been pretty busy chasing down other stories [sic], is just now getting involved.

One has to wonder just how much regulation is going save investors from a system that’s rigged against them, from the board-room to the trading floor. Here’s the basic question for you to ask yourself: If you can’t even buy GE stock without having a Wall Street broker front-run you, exactly what single stock can you buy with any level of confidence?

The answer, I’d submit, is “virtually none.” There are some gold stocks I’m continuing to recommend, for the day when a real pandemic sweeps the world and all exchange is done in gold or silver coins. But for the most part, unless you have a compelling value case, there’s simply too much risk and not enough return in today’s market and today’s economy to be buying and selling single stocks. Stay in the market, investing the way you always have, and you’ll quickly become just another unremarkable casualty.

The real killer in Europe between 1914 and 1918 was not four years of war but four months of Spanish flu. Similarly, what’s killing investors on Wall Street is not two years of recession or two quarters of disappointing profits, but 20 years of a bull market where individual investors routinely got short shrift at the hands of the Wall Street establishment.

Spanish Flu: A Fever of Greed

When five of the seven specialist firms on the New York Stock Exchange stand accused of front running the public, it’s clear that the problem on Wall Street isn’t simply episodic, it’s a full-blown fever of greed that’s deeply rooted in the DNA of the market. How can investors possibly win over time when the entire culture of the Street is rigged against them? The answer is that unless you change the way you invest, you can’t.

That doesn’t mean there aren’t ways to make money.

As I’ve said in these pages before, I believe index funds, exchange traded funds, and a new class of investments that allow you to trade a whole country, sector, or market like a single stock are the best way to be in the market and profit.

These investments are inoculated against the problem of buying single stocks. They’re diversified in the sense that they include stocks from the same country, the same sector, or the same index. But you never have all the risk of owning just one stock. Yet they allow you to take a specific trading idea and pick a diversified investment vehicle that still trades like a single stock. Let me give you an example.

Alan Greenspan’s unprecedented credit boom during the ’90s bull market encouraged rampant financial speculation by Corporate America. One big consequence is the almost inevitable upward pressure on short-term interest rates. The Fed has kept short-term rates low, trying to spur demand-led (read consumption-led) economic growth. It hasn’t worked.

In the meantime, the Fed’s action lowers the rate of return on dollar-denominated assets. In order to make corporate and government debt more attractive to buyers, short-term rates will have to rise eventually. And in the economy as a whole, rising rates would signal a return to saner business and individual borrowing.

But no one said the Fed is sane. And the truth is, it could either lower short-term rates again or even expand its control of rates out to the longer-term rates (the 10- and 30-year Treasuries). The scenarios are intriguing. But how could you directly invest in either an easy or tight monetary policy without exposing yourself to unnecessary risk?

The traditional way would be to buy (or sell, depending on your analysis) “interest-rate sensitive” stocks, i.e. financial and bank stocks. These are companies that benefit (or lose) when interest rates change. They are proxies for playing interest rates directly. But why buy the proxy when you can buy the real thing?

Right now I’m looking at CBOE-listed interest rate options. CBOE lists options on the 13-week Treasury (IRX), the five- year interest rate (FVX), the 10-year interest rate (TNX), and the 30-year interest rate (TYX). A call buyer anticipates a rise in rates. A put buyer anticipates a rate cut.

Since (for now) the Fed really only has control of the short end of the yield curve, I’d look at the options on the 13- week bill (IRX) and the five-year note (FVX). When the Fed last cut rates, it did so by half a point on Nov. 6, 2002. The interest rate indexes that responded the most to the surprise rate cut were IRX and FVX.

Naturally, both IRX and FVX fell. The rate cut was unexpected. And as the respective indexes for the short-term debt fell, put buyers cleaned up. Any surprise move by the Fed, either up or down, is a good opportunity for speculators to take advantage of these CBOE interest rate options. And if the Fed does something unconventional outside of the Treasury market, it is still likely to cause huge volatility in these CBOE indexes.

You simply couldn’t make this kind of investment 10 years ago. Today, you can’t afford not to at least seriously consider it.

The old way of making money in stocks, by buying individual stocks are mutual funds, has annihilated the retirement plans of millions of Americans, even if they don’t know it yet.

For every investor who got skinned alive in Enron, WorldCom or, Imclone there were dozens more who anonymously lost money believing in a myth, and losing a few pennies here and there on trades they thought were safe.


Dan Denning,
For The Daily Reckoning
Paris, France
April 22, 2003


The U.S. House of Representatives just passed a $2.2 trillion budget, bringing federal spending up to about $25,000 for every family in the nation.

The Congressional Budget Office estimates that deficits over the next 10 years will reach $1.2 trillion. The Financial Times gives a $1.5 trillion estimate. And Goldman Sachs puts the number as high as $4.2 trillion.

Meanwhile, the states face huge financial problems. They’re cutting back on police, libraries, roads — just about everything — in an effort to close the $100 billion gap between revenues and expenditures.

“State governments are under siege,” says the President of the National Conference of State Legislatures. New York faced a “doomsday budget,” say the press reports.

How come the states are forced to cut back…while the Feds keep expanding?

Fed governor Ben Bernanke explained last summer: “We have atechnology called a printing press…”! The states can’t print money; the feds can.

But while they can print it, they can’t control its value. Mr. Market will have the final say on what the dollar is worth, not Mr. Bernanke or Mr. Bush.

We don’t know what Mr. Market will say, of course. But each dollar of deficit spending by Congress… and each dollar of trade deficit… is another reason to think he might turn even more negative on the greenback.

Foreigners own $8 trillion in U.S. dollar assets…and have already knocked 20% off the dollar’s value compared to the euro.

Compared to gold, the dollar gained ground during the run-up to the war against Iraq…but now seems to be falling again. Yesterday, it dropped $6.30 per ounce of gold.

Eric Fry, with the latest news from Wall Street:


Eric Fry from New York…

– Animal spirits subsided a bit on Wall Street yesterday…or perhaps the only animal spirits in evidence were those of a desert tortoise, rather than the swarm of honeybees. The Dow slumped 8 points to 8,329, while the Nasdaq Composite slipped 1 point to 1,424.

– Crude oil continued its surprising rebound, gaining 32 cents to $30.87 a barrel. The napping gold market, meanwhile, awakened from its slumber to gain $6.30 to $333.90 an ounce.

– Most of yesterday’s high-profile earnings reports were better than feared, but far worse than needed to spark a sustainable stock market rally. What’s more, the Conference Board’s index of leading economic indicators (LEI), released yesterday, offered scant hope that corporate earnings will be improving any time soon. The LEI fell 0.2 percent in March after plummeting 0.5 percent in February. Inside the numbers, five of the ten leading indicators fell: building permits, jobless claims, interest rate spreads, money supply and consumer expectations. The good news is that five of ten indicators did NOT fall. Still, in all, the report continues a monotonous string of sluggish economic data. The economy is stuck on a “negative feedback loop” like a wailing child on a scary carnival ride.

– In other words, says Deutsche Bank economist Cary Leahy, “Why should firms add to payrolls if they see no pickup in demand growth? Why should demand growth pick up if jobs growth isn’t?”

– Clearly, America’s Human Resources departments are doing a lot more firing than hiring. Initial jobless claims spiked to 442,000 in the week ended April 12 – the largest weekly tally in a year. Likewise, the four-week moving average climbed to an 11-month high of 424,750. The Labor Department attributed the steep increase in jobless claims to layoffs in the auto industry. General Motors, along with the other two of the “Big Three” auto manufacturers, halted production at several factories, citing weak sales.

– Isn’t General Motors the same auto company whose “strong” earnings report last week incited a mini-frenzy of buying in GM shares? Interestingly, GM, the car-maker, earned almost all of its net income last quarter as GM, the finance and mortgage-lending operations. Of the $1 billion that the company earned during the quarter, $700 million came from its finance unit. Meanwhile, profits at the automotive division tumbled 16%.

– Hmmm…some banks give away toasters to attract new customers. General Motors, apparently, gives away cars. “This economy is weaker and we’re concerned about it,” GM Vice Chairman John Devine admitted last week. And well he should be concerned. Despite heavy discounting on new cars, GM’s U.S. market share fell to 26.6% — down from 28.2% a year earlier and 29.2% in the fourth quarter of 2002. At least General Motors can still find buyers for its vehicles at SOME price. Out in Silicon Valley, many tech companies can’t seem to find buyers for their gizmos at any price.

– “Silicon Valley and its largest public companies are still waiting for the long-anticipated turnaround,” the San Jose Mercury News reports. “Silicon Valley is clearly on a losing streak. The annual Mercury News listing of Silicon Valley’s biggest 150 public companies shows that during the latest four quarters, the 150 companies lost $18.4 billion on $265.4 billion in sales. A year earlier, the SV150 lost $89.8 billion on $251.5 billion in sales. More than half of the SV150 companies – 79 in all – are losing money, and many are burning through cash to stay in business.”

– My! How the New Economy has aged!…Incredibly, despite the rugged conditions in Silicon Valley, the tech-stock-laden Nasdaq Composite Index keeps chugging ahead. The Nasdaq has gained nearly 30% from its October lows. What are the buyers thinking? Or are they thinking at all? Perhaps they are merely dreaming…


Bill Bonner back in Paris…

*** In the last two months nearly 500,000 jobs have been lost in the U.S. – following the longest stretch of job losses in 50 years. Even state and local governments are laying people off.

*** This past weekend was a big holiday in France. So many people were leaving Paris on Friday night that the TGVs (the high speed trains) were full. Maria and I felt lucky to get seats on the slow train. Not that you have any reason to care about this, dear reader, but we will recount the adventure anyway…

The train left in good order… despite a nationwide rail strike. The rail system is run by the government, so railway workers are all government employees. But that doesn’t stop them from going on strike.

We rolled along, enjoying the view of the countryside in spring. But then, in the middle of a yellow field of mustard seed, the train stopped. The engine had broken down, we were told.

A few minutes later, another train crept by and stopped at a tiny station about a half-mile up the tracks. If we wanted, we could get on that train, said the loudspeaker. Thus began a strange scene. Men, women, young, old, halt and lame…got out of the first train and made their way up the tracks to the second. People soon realized that it was easier to walk through the blooming mustard seed than along the tracks, so the whole group …which must have numbered about 300 people… tramped through the field.

Your editor gallantly offered to carry a plump, older woman’s bag… Then he spotted a prettier woman with a bag that was much too big for her….well, the old lady could take care of herself!

Eventually, after much sweating and cursing, the crowd arrived at the second train. The first to arrive mounted…but by the time we got there we were met by a slightly cross-eyed stationmaster wearing his hat askew, his jacket unbuttoned, and carrying a signal device which looked a little like a cricket bat.

“This train is full,” he told us. “Just wait here…another train is coming…it’s just 3 minutes away.”

And so the train doors were closed, leaving about 200 people to wait. And wait. And wait.

The stationmaster darted about…the crowd began to complain bitterly. At first, we thought he carried his signal baton for professional purposes…gradually, it became clear; it was for self-protection. As time passed, he sweated more and more…walked faster and faster, not even pausing to answer questions…and then even refused to come over to the side of the tracks where we all stood.

Then, at last, a train arrived. But it was an odd train full of sleeper cars on an overnight run to Madrid. A door opened. A conductor who looked like Ricky Ricardo stood blocking the passage. “You cannot board this train without a ticket,” said he, in very bad French.

The crowd on the dock was outraged. We had been waiting for nearly two hours. A group led by a loudmouth with thick black-rimmed glasses seemed to be preparing to rush the train. But Ricky Ricardo slammed the door shut and the train edged away. The crowd, beside itself and out for blood, turned towards the stationmaster…who backed up quickly, slipped into his office and locked the door behind him. The man with glasses harangued the crowd and screamed insults…the crowd began beating on the glass window…while the stationmaster shouted into a telephone.

Suddenly, a group of gendarmes with billy clubs came upon the crowd from the rear. Looking grim, they pushed back the crowd and then conferred with the stationmaster…calm and order were restored. In a few minutes, the police came out and the man with the glasses engaged them in discussion. He must have been very persuasive….for they were soon joking together…and the gendarmes seemed to have taken his point of view… The crowd’s spirits lifted at the thought that the cops would haul the stationmaster away from his desk and hang him from a lamppost.

By this time, your editor was ready to strangle the stationmaster himself. What stopped him was the threat of jail time and the pretty blond woman whose bag he had carried.

“Are you English,” she inquired?

“No, American.”

“I bet the trains work better in America.”

“Well, we have fewer of them… but I think they do work better.”

“Maybe your government employees are not as stupid as ours.”

“Oh no… when it comes to stupidity we yield to no one.”

Finally, a train limped into the station to take us on our way — the same train we had abandoned three and a half hours earlier. It was Easter weekend, joked passengers; the train had not been repaired; it has been resurrected.