Retired In Order

The 3rd millennium began so well…

You will recall, that on the first of January 2001, the world was in pretty good shape, and America stood on top of it, unchallenged and invincible.

Nasdaq stocks had already begun their decline, but otherwise, all of the illusions of the late 20th century were still in place – New Era, the New Paradigm, the Peace Dividend, the Productivity Miracle, Long term, buy-and-hold investing, the Social Security “lock box”, the Federal Surplus, Full Employment, The Golden Age, The U.S. dollar…and so forth.

And now look at it. All of a sudden, the scales have dropped from our eyes.

“So many of the various things that had made for the New Paradigm aren’t what they were…” notes Jeffrey Applegate of Lehman Bros.

Even Henry Blodget has come to wonder. He loved at $100. But at $6, he has his doubts.

“At $6, or 1.4 times estimated revenue for fiscal year 2001,” says he, “the stock is still not inexpensive enough to provide solid downside protection. Although we believe the stock is undervalued on an intermediate and long-term basis, it has not yet reached a valuation ‘floor’ – especially in this market.”

Markets make opinions, as the expression has it. After $5 trillion of market losses, Blodget, Lazard Freres, and perhaps the rest of the world are now looking for “downside protection.”

“You know, there are so many illusions in life,” said a friend at lunch the other day. “It’s always painful when the illusions are destroyed. But it is necessary…it is a good thing.

“I thought about that the other day when I was standing on the platform of the subway,” he went on. “Anyone who wanted to do so could push dozens of people in front of an oncoming train. But we all felt safe. We all had the illusion of security.”

And yet, occasionally, something comes along and reminds us how unsafe we are. If it happens during a bull market in confidence, it is quickly dismissed and forgotten… like the Gulf War or the Crash of ’87. But if it happens when confidence has reached an epic flood…when it has scarcely anywhere to go but down…then the great tide of confidence and bullish sentiment ebbs…and soon becomes a dangerous rip of fear and bearishness.

“We have lived in a fool’s world,” writes Gary North.

A year ago, Americans thought they had nothing to fear. No more wars. No more bear markets. No more recessions. Now, they have them all…3 out of 3. The illusions of the late 20th century have all retired in order, as they say in baseball…

“The psyche of private sector decision-making has been dealt a lasting blow by the events of 11 September,” adds Morgan Stanley strategist Stephen Roach. “Like grief, time will heal. But I suspect the healing will leave the mindset in a very different place. Matters of personal, corporate, and national security can no longer be taken for granted. That will cast a lasting pall on the values that shape risk-taking strategies – for consumers and businesses alike. Increasingly risk-averse investors may be more satisfied to realize moderate, but safe, returns in a less secure world. In economic terms, this could well reduce the preference for leverage and tilt the balance away from the excesses of spending and back toward a long needed rebuilding of saving.”

The preference for spending over saving has a life cycle of its own. Young people do not typically care to save – even though a dollar saved at 30 years of age will be worth many times more in retirement than one saved at 50. Older people, more fearful of the future, will save whatever comes their way – including old newspapers and rubber bands.

Even without the terrorist attacks, or the post-bubble economy, the 3rd millennium was destined to be less free- spending and more fretful than the end of the 2nd. The simple reason: people are getting older.

As people age, they work less and spend less. Economies do not charge ahead when people cut back their working hours and spending habits. They retreat.

And stocks tend to go down too. War or no war, investors typically switch from growth stocks to bonds and income stocks as they grow older. Just as the record boom in U.S. equities in the 1990s can be attributed to the Baby Boomers’ attempt to build capital gains, so might the collapse of stocks in the next 10 years be blamed on the Boomers’ new concern for income.

“The demographics of an aging population have long been pointing [towards a shift towards caution and frugality]…”, Stephen Roach explains, “and The Shock could represent a real wake-up call for saving-short Americans. A similar jolt might effect the risk-taking mindset of entrepreneurs and venture capitalists.”

Who knows where it will lead? Stocks could go down for 10 years. The U.S. economy could imitate the Japanese one – with recession, bear market and stagnation until 2011. The “war” on terrorism, too, could drag on for a decade. And what if the war is lost?

What kind of world has this new millennium brought? We don’t pretend to know. But we can feel the water running between our toes…

The bubbly tide that once bore American investors to an epic level of super confidence…may be going out.

Bill Bonner, with his pant legs rolled…
October 2, 2001

The Fed meets today. Most likely, another rate cut will be forthcoming – the 9th so far this year. Will this one do what the other 8 have thus far been unable to do? Or, will the Fed have to take rates all the way down to zero, as they did in Japan, and still not get a positive response?

In the wake of the September attacks, the Fed, Congress, consumers, investors – everyone has been mobilized to fight against terrorism, bear markets, and recession. Rates have been cut, liquidity injected into the system, and new spending programs approved by Congress. Hundreds of billions of dollars in new credit have been created.

In the popular mind, all this new loot can’t help but trigger a victory for the American economy. And just to make sure it happens, consumers are encouraged to plunge, once more into the breach, with their credit cards in hand…and investors, like Wellington’s infantry at Waterloo, are urged to hold their ground.

“If you believe in the strength of American resolve, hard work, and innovation,” writes Peter Lynch in an ad in the Wall Street Journal, “then take a long- term view and believe in our economic system. I certainly do.”

Thus are the gullible lured into debt and investing at what might turn out to be one of the worst moments to do so in history. The entire world economy seems to be slowing down and growing cautious. Trillions of dollars worth of paper wealth are being destroyed. A single company – Cisco – has been reduced in value by $500 billion.

Eric, what’s the news from Wall Street?


Mr. Fry in Lower Manhattan:

– The stock market was so sedate yesterday it scarcely resembled the same manic-depressive creature that has been tormenting investors for the past two weeks. A token early morning sell-off pushed the Dow down more than 100 points. But stocks clawed higher throughout the rest of the day to close only slightly in the red.

– The Dow finished 11 points lower at 8,834. The Nasdaq had a little rougher go of it, weighed down as it is by the ever-falling semiconductor stocks. The index fell 1.2% to 1,480.

– Worldwide semiconductor sales dropped 42% in August from a year earlier, according to the Semiconductor Industry Association. On a month-to-month basis, the trade group reported that August sales fell 3.4% from the July level.

– The semiconductor sector’s woes typify a widespread phenomenon in the U.S. stock market: Earnings are falling faster than share prices. The result is that even though stock prices have dropped substantially, valuations remain very high. A year ago the S&P 500 Index was selling for just under 29 times its trailing 12-month earnings. Since then, the index has tumbled more than 27%…now the S&P 500’s PE ratio is a point higher.

– Yet, the famously bullish Abbey Joseph Cohen thinks we should put 75% of our savings in stocks like those that make up the S&P 500. A question for Ms. Cohen: Why?

– Several thousand miles away in India, stock prices are falling even faster than the S&P 500’s. But there’s a difference. Corporate earnings are rising in India. Given that the Indian stock market has fallen more than 50% from its all-time high, sits on 8-year lows, and sells for less than 12 times earnings, Indian stocks might be a good thing to own.

– What’s more, since exports account for just 13% of Indian GDP, the country enjoys some insulation from a global economy that grows gloomier by the day.

– German, Italian, and French manufacturing all touched new multi-year lows in September. Greg Weldon of Weldon’s Money Monitor observes that the European Purchasing Managers Index contracted for the sixth straight month. The news out of Japan was even worse, as the so-called Tankan report of Japanese economic activity fell to its lowest level in more than 2 years. The large manufacturing companies surveyed for the report predicted that profits will fall 18.7% in the year ending March 2002.

– Meanwhile, Valero, a new edition to the DR Blue portfolio, “is one of the first companies to benefit from the new war on terrorism,” says Dan Denning. “Earlier this week the company announced it had been awarded $142 million in jet fuel contracts by the U.S. military. The contract more than triples what Valero had previously been providing the government.”

– “Scores of lower Manhattan residents plan to flee to leafy suburbs to distance themselves from the threat of more terror,” the New York Post reports. “Brokers in Westchester, Long Island, and New Jersey say [the exodus] is causing business to boom.” One New Jersey real estate broker has inked a staggering $40 million worth of new contracts for home purchases just since September 11th.

– The Oxford Club’s C.A. Green, echoing a point I made yesterday, says some REIT’s stand to weather the slowdown fairly well. “It’s the first time in 40 years,” Mortimer Zuckerman, head of Boston Properties, told the WSJ, “that I have been in business where there is no excess supply going into an economic decline.” Boston Properties has holdings, among other locations, in mid- town Manhattan. (Green suggests three REIT’s worth looking at in the October 1st Oxford Alert:

– Perhaps it is no coincidence then that shares of American Home Mortgage, a local New York mortgage lender, soared more than 12% yesterday to a new 52-week high of $19.62. Mortgage lenders are among the stock market’s brightest lights these days. Nationwide, a resilient housing market together with a Federal Reserve that can’t seem to cut interest rates fast enough, adds up to good times for mortgage lenders. The stocks are trading so well that they seemed to be almost lighter than air – you know, like a bubble.

– The Fed is expected to cut rates another 50bps to 2.5% today at roughly 2:15pm. To what end? “Lower rates allow businesses to borrow more money,” suggests Gary North, “but businesses don’t want to borrow more money. Despite all the cheerleading on TV and in the financial press, businesses decided a year ago that the consumer was tapped out.”

– San Francisco Giants outfielder, Barry Bonds begins the final week of the baseball season with 69 home runs – just one shy of Mark McGwire’s one-season record of 70. Most baseball fans are pulling for Bonds to break the record. Todd McFarlane is not.

– In 1998, Mr. McFarlane spent $3 million to buy McGwire’s 70th home run ball. No doubt, McFarlane assumed the record would stand for a while. After all, Babe Ruth’s record 60 home runs held up for 34 years and Roger Maris’s 61 home runs went unchallenged for 37 years.

– It would probably take at least 37 years to make $3 million seem like anything other than a ridiculous sum to pay for an historic baseball. But then, wasn’t $3 mil merely “chump change” back in 1998 – when the mere idea of a “B2C e-commerce platform” was worth about $50 million? Today, however, it is doubtful that Bond’s 71st home run ball (if he hits that many) would even fetch $500,000. McFarlane’s ball would be worth something less.

– We Americans still love baseball, just as we still love stocks. But that doesn’t mean that we will still pay any amount of money for either one. Times have changed.


Mr. Bonner, back in the City of Lights:

*** Among the Forbes 400 richest families in America alone, $250 billion of paper wealth has been lost in the last 12 months. The nation’s stock market wealth is down $5 trillion from its peak last year. And this doesn’t count the billions of dollars worth of employee stock options that vanished when stock prices went down.

*** “The late boom in stock prices created wealth for the stock owners,” writes Dr. Richebacher, “but for them only, not for the economy as a whole. Generations of economists would never have thought of rising stock and house prices as ‘wealth creation.’ They would have

derided it as pseudo or paper prosperity.”

*** Mr. bin Laden cannot be that hard to find. A friend of mine, it turns out, had tea with him a few years ago. His letter:

“…Back in ’95. In those days, the Pakistani border guards went home at night, so you could cross into the Nuristan region of Afghanistan by horse – when it comes to landmines, better the horse gets it than you. Anyway, I got sick over there with a nasty case of typhoid and ended up camping on the local mullah’s (a heavy hash smoker, by the way) front porch (closest part of the house to the latrine). Ol’ Osama came by with a band of what were then known as “Black Turbans.” Not much of a conversationalist. He kept stroking his beard and muttering something about killing Canadians. Not the sort of fella I’d go fishin’ with.”