Slow Motion Melt-Down

The Daily Reckoning
Weekend Edition
August 3-4, 2002
Paris, France
by Addison Wiggin

“After more than 2-1/2 years of slow-motion wealth destruction,” says a report from Reuter’s this morning. “Investors are getting fed up and want to see the end of this horrific bear market in stocks. Some are hoping for a snappy, V-shaped plunge followed by a spiffy rally.”

Those investors who’ve been busy bottom-searching seem to believe they’ve found a big one.

The Dow rallied for the better part of the week closing 33 points higher on Friday to 8745… adding almost 8% between Tuesday and Thursday… and ending the week up 5.2%. The S&P 500 also added 5.1% with the Nasdaq pulling up the rear. The Nasdaq was up 4.7% for the week – its first positive finish in the past five weeks.

But even as surly a publication as USAToday doesn’t believe the gains will hold: “Stock Gains May Not Stick,” reads the weekend headline. It’s a bear market for all that’s worth… and you’d be wise not to bet against it.

But “the final stage may not necessarily be a sharp sell- off that clears the air,” Reuters quotes our own Ray DeVoe. “Rather it will be complete exhaustion, followed by (investor) contempt for stocks as an investment vehicle.”

Bear-market routs have been known to end with widespread investor panic but, “there is just too much stock in the hands of the public for this to occur,” says DeVoe. “There is over $4 trillion in stock mutual funds and the question about a V-shaped climax and recovery, if the public does decide to dump stocks, would run into the classic, ‘sell to whom?'”

The best thing that could happen, suggests the article, is for the market to continue its long, drawn-out decline, interrupted by sharp rallies, until it finally develops a sustainable bottom.

Since the bubble burst in March 2000, the Reuters staff tells us, stocks have behaved in a way that is reminiscent of the 1973-74 market, rather than the more egregious example of the ’29 crash.

In 1974, the S&P 500 index shed 45% of the so-called “Nifty Fifty” bubble – roughly the same amount lost since 2000 in the current bear market. Then, the market agonized in slow- motion melt-down for 23 months. The current slide has so far lasted 29 months.

Its worth recalling public participation in the market in the 1970s was nowhere near the level it attained during the tech bubble. “At the height of the stock buying frenzy in the late 1990s,” says Reuters, “half of American households had a stake in the stock market.”

“It is not really a question of how much further the stock market must decline to reach the bottom,” DeVoe says. “Instead I think it is more a matter of time until that exhaustion sets in.”

When will that happen? We don’t know for sure, but we suspect it will be awhile yet. And there will be more than a few rallies left to sucker in the unsuspecting. Take heed: this market is not for the faint of heart.

Cheers,

Addison Wiggin,
The Daily Reckoning
August 10, 2002

p.s. Do these rallies indicate we’ve already reached the “point of maximum pessimism”? “Not likely” says Ray Devoe and suggests what you might expect it to look like in Headlines, News and Insight… below…

p.p.s. Another in our stable of astute analysts, John Myers, was featured in a Forbes magazine interview this week. Funny who will take an interest in you when your portfolio trounces the market, eh? Myers was up 32% in the first half of 2002. Compare that with the Dow… down over 20%… and you might be interested to hear what Myers is thinking.

You’ll find an excerpt from the Forbes piece in Flotsam & Jetsam below…

And, of course, with compliments to our friends at Laissez Faire Books, here’s a look at this week’s:

* * * * The Daily Reckoning’s Book of the Week * * * *

Eat the Rich: A Treatise on Economics
by P.J. O’Rourke Acclaimed as the best political humorist since H.L. Mencken, O’Rourke offers uproarious commentary from his travels around the world, lambasting fashionable politicians, intellectuals and dogmas in Albania, Sweden, Cuba, Russia, Tanzania, and Shanghai, as well as the U.S. Just some of his irreverence:

– “Government does not cause affluence. Citizens of totalitarian countries have plenty of government and nothing of anything else.”

– “How a peaceful, uncrowded place with ample wherewithal stays poor is hard to explain. How a conflict-ridden, grossly over-populated place with no resources whatsoever gets rich is simple. The British colonial government turned Hong Kong into an economic miracle by doing nothing.”

The funniest defense of free-market economics you’ ll ever read!

EAT THE RICH

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THIS WEEK in THE DAILY RECKONING

08/09/02 ASPEN
by Bill Bonner

“…Other speakers included the mayor of Big Ditch, Utah, who showed up with two of his 26 wives. And there was the man who showed attendees how to make home-made bombs out of fertilizer… and legendary speculator Victor Niederhoffer, who explained how to predict market movements from the patterns in music…and Sonny Barger of the Hell’s Angels. Your editor was in goodcompany…”

08/08/02 WELCOME TO THE WARFARE STATE
Guest Essay by Dan Denning

“…no self-respecting lover of liberty could be happy with a scenario where the government gets more powerful, more intrusive, and generally enjoys popular support all the while. The world Orwellian doesn’t do justice to a situation in which millions of allegedly free people willingly give up their rights to privacy and to greatwealth…”

08/07/02 A REPORT TO SHAREHOLDERS
by Bill Bonner

“…at the beginning of the Agora annual meeting, various people and groups were asked to stand to be recognized. Among them was the accounting staff. Able people, every one of them. But too few in number to do any serious cooking of the books. In a small business, one set of books may be a necessity, but two are a luxury few canafford…”

08/06/02 WHAT’S WRONG WITH MAXIM’S INVENTORY?
Guest Essay by Porter Stansberry

“…Maxim’s shares have plummeted, falling to $27. And today the company may be forced to write down the value of its Dallas Semiconductor acquisition. You see, not only has Maxim shown questionable corporate governance in regard to its stock options, but its 2001, $2.1 billion acquisition of Dallas Semiconductor also raises eyebrows upon closerinspection…”

08/05/02 IN GREENSPAN WE TRUSTED
by Bill Bonner

“…And what of Mr. Greenspan; can he not save the situation…by lowering the fed funds rate again….loosening credit even more…or maybe even printing more dollars? He can do nothing else. Raising rates would kill the mortgage refinance business – and stop consumer spending abruptly. The consumer is the last man standing in the U.S. economy. Greenspan must do all he can to hold him upright – even if he is alreadydead…”

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HEADLINE, NEWS And INSIGHT: Market Forecasting in Retrospect… the Problem With Profits… What To Do When The Bear Growls… And Myers’ Garnering Attention From The Big Boys…

The Point Of Maximum Pessimism
by Raymond F. Devoe, Jr.

Are we at that “point of maximum pessimism” yet? The difficulty with answering that question is that you only know about those points in retrospect. Certainly March 10, 2000, with the NASDAQ Composite at 5048 was a “point of maximum optimism,” but few realized it at thetime.

Productivity Without Profits
by Dr. Kurt Richebacher

“…The worst profit numbers by far have been coming from the one sector for which Wall Street was trumpeting unprecedented miracles of profit and productivity growth: the new hightech…”

Bear Market Strategies
by Lynn Carpenter

“…A stock with a strong dividend history is usually worth holding through bad times, even if the price drops, as long as the business remains on track. Such stocks rebound well and typically make up that slump quickly when the recovery comes. And it pays something in themeantime…”

FLOTSAM AND JETSAM: Amazing Who Begins To Ask Questions When Your Portfolio Outperforms A Tough Market…

BULL RUN FOR HARD ASSETS
– An excerpt from a Forbes Magazine interview with Outstanding Investments’ John Myers

“… Forbes: Your portfolio has gained 32% the first half of the year. How’d you do it?

Gold has been strong. We took profits to the tune of 668% on Metallica Resources and 162% on Intrepid Minerals. We’ve also done well with some of our intermediate oil companies like Keywest Energy, up 41% for us, and Canadian gas pick Niko Resources, which gained 102%.

Forbes: Why the focus on natural resources and hard assets?

My core thesis is this: The developing world can’t jump from an agrarian society to a laptop society without building infrastructure: roads, schools and the like. That’s going to take gravel, cement, lumber, petroleum. These countries that are trying to build themselves up have to go through an industrial revolution, which is fueled by oil, coal, minerals and other resources. So the way I see it, you have surging demands and declining supplies. Think of it: If the Chinese reach their goal by 2010 of having as many cars per capita as the European nations, the world would run out of oil in five years.

Forbes: You’ve been proclaiming an imminent resource shortage since the late 1980s. Yet oil prices, for one, have been fairly low.

U.S. oil production peaked in 1970 and has been declining ever since. It’s currently 5 million barrels a day; at its height, it was 11-12 million. Right now, oil is still being found in the oil sands of Western Alberta and in the Persian Gulf, where more than two-thirds of the world’s reserves sit. According to insiders I regularly talk to in the field–CEOs, geologists–the giant pools are all gone. The last so-called “elephant” (a reserve generating over 1 billion barrels) that was found in North America was Prudhoe Bay, Alaska, in 1967. It’s getting harder and harder to find oil; nine out of ten exploration wells turn out to be dry holes. That’s why we’re seeing the trend of smaller companies getting bought out. It’s easier to buy someone else’s.

It’s the same with mining. According to the metals economics group, total worldwide non-ferrous exploration was $5.2 billion in 1997. By 2000, that had fallen by half, to $2.6 billion. Mining companies have cut back exploration greatly because it’s so costly relative to the market price of copper or zinc. Big new veins are not expected to be found.

Forbes: You’re predicting a commodities gold rush similar to that of the 1970s. Why?

First, because of the weakening U.S. dollar and federal debt. Commodity prices worldwide are measured in U.S. dollars. As the greenback slides, as it did in the 1970s, the prices of commodities rise. In recent months, the dollar has been fading. Why? For one reason, the government has been printing money like crazy, making it worth less. Last June the adjusted monetary base was $66 billion. Three months later, it was $87 billion. And a weak dollar is just one of the fundamental factors I see setting the stage for a runup in commodities. There are trillions of dollars jumping out of the stock market, looking for new opportunities, feeding a growing demand for real, hard assets.

The rush has already started. Since January 2000, the TSE index of metals and minerals has risen from 3,300 to 4,600- -a gain of 39%. Meanwhile, the TSE oil and gas index climbed from 4,000 in 1999 to its current level of 10,500. Even Canadian paper and forest stocks have almost doubled since 1999. Compare that to the tech sector and you’ll see why I’m predicting a huge flow of money into hard assets. The resource sector bull market is just getting underway.

Forbes: With the recent correction in gold prices, how do you recommend playing it?

First off, I think it is just a correction and that that gold still has a long way to go. We have plenty of mineral stocks in our portfolio, but for people who are nervous about the stock slide also pulling down gold stocks, I really like physical, hold-it-in-your-hands gold. I’d say put 5%-10% of your investment assets into one-ounce coins: either the Canadian Maple Leaf or the American Eagle coin. And be aware: If you buy gold, plan to buy and hold it a while. The huge commissions make frequent trading unadvisable….”

Editor’s Note: John Myers – son of the great goldbug C.V. Myers – has been helping readers earn suprisingly lucrative returns in stocks largely unknown to Wall Street’s wunderkind since his early 20s. Our man on the scene in Calgary, John has his fingers on the pulse of natural resource profits – including oil, gas, energy and gold.