Take Me To Your Leader
“Make money while you sleep.”
Socialist President of France, Francois Mitterand, describing, with contempt, how investments work
As recently as three months ago, it was widely believed – including by your author – that the end of the Tech Bubble would also mark the end of the broader illusion that you can get rich without effort or sacrifice.
But instead of going down with the Nasdaq, in recent weeks, the Dow has moved in the opposite direction. When the Techs get hammered down…the Old Economy stocks tended to bounce up. Ordinary investors are taking the destruction of technology casually, as they did the destruction of the previous market leaders – the dot.coms.
Apparently, the appeal of the stock market runs much deeper than the dot.coms, the Big Techs or the Biotechs. Stock after stock…sector after sector…may get killed. But investors still have faith. Not just faith in the bright shining star of stock market wealth…but in the whole constellation that includes the Fed, the dollar, Alan Greenspan, and the U.S. miracle economy.
When will the faith be destroyed? I asked Dr. Gary North recently in an e-mail.
“Dow 2000.” was his terse reply.
Of course, I don’t know if the Dow will descend to 2000… or not. And Gary may have been exaggerating to make his point.
But investors will not give up on the dream of easy money readily. They will only give up when the dream becomes so expensive they can no longer afford it. When and how that will happen is the subject of today’s letter.
Collective thinking is remarkable in that it can turn around in a second…but it can also be almost unbelievably tenacious.
“Crowds identify themselves with one or several leaders,” Marc Faber wrote in his October issue, “and with an idea.”
In “The Greek Way of War,” author Hansen explains that the leader of a group of soldiers went into battle in front of his men, rather than behind them, as is now the custom. The leaders of the losing side almost always died in the battle. And a Greek phalanx, seeing its leaders cut down, was much more likely to break ranks and retreat. In just a few moments, the psychology of the entire group would change – from determination and optimism to complete hopelessness.
The difference between the German army’s collapse in 1918 and its fight to the bitter end in 1945 was essentially a difference in leadership. Sigmund Freud argued that the German masses were emotionally connected to Hitler, Goebbels and the rest of the Nazi leadership in a way they never were to the Kaiser. When the going got tough in 1918 – the Germans did the reasonable thing, they gave up and made peace. But when the going got very tough in 1945, the Germans just kept fighting – even though the situation was hopeless.
Technology has been the stock market leader. Perhaps some investors are emotionally attached to it and disheartened by the setbacks it has received. More likely, most investors have their eyes on a different leader: the dream of getting rich in stocks. ‘Technology’ is merely a conveniently vague rationalization for why it is possible. As noted above, technology has been with Homo Sapiens from the very beginning. But the current generation of investors thinks it discovered it for the first time.
Now that the Big Techs are getting under fire, investors are beginning to get nervous. They’re asking questions. But the questions only seem to go so far – wondering what the tech companies really do, how many computers the world really needs, how many miles of cable, how much a company can afford to pay for a wireless license, how long an investor should wait for a company to be profitable.
So far, I’ve seen no one question the fundamental belief that all New Era investors share: that you can get rich on stocks just by being ‘in the market’. Historically, the real rate of return from stocks is only about 5%. You can’t get rich at 5% – unless you live to be very old. Investors believe they can do far better than that – with or without technology.
So, the techs can blow up in their Silicon Valley bunkers…and still investors will cling to the hope of getting rich in stocks. It is the idea that they are faithful to, not the current market leaders.
Which brings us back to what will ultimately destroy their faith. Already, most investors – especially tech investors – have taken losses. Many of those losses are just ‘paper losses’ of course – because the wealth destroyed was only on paper too. As one investor put it, “I’ve been investing in technology since 1995 – I may have lost money in the last 6 months, but overall, I’m way ahead of the game.”
The game, however, is not over. My guess is that Mr. Bear has not yet sent in his best players. Right now, out in the bullpen, I can almost see one of his most under-rated rookies warming up. Could it be? The euro? He wouldn’t put this green, farm league loser into such a big game, would he?
Ah yes, dear reader, I tried to warn you. Once again, I am going to air my view that the dream of easy wealth in the stock market rests on a footing of dollar bills. That footing, contrary to mass thinking on the subject, is much less steadfast than people believe.
“It remains our conviction,” writes Dr. Kurt Richebacher, unintentionally speaking for both of us, “that the greatest threat to world economic and financial stability is the dollar’s impending collapse.”
And more on that tomorrow…
Your steadfast correspondent,
Ouzilly, France November 2, 2000
*** Tech stocks came back to life on Tuesday…but quick- thinking investors drove a stake through their heart less than a day later.
*** Wednesday, two things came out. First, Bernie Ebbers of Worldcom provided the stake – by announcing that sales were weakening. Then, the National Association of Purchasing Management produced the hammer – reporting its monthly figure for the manufacturing sector. For the 3rd month in a row, the index was down. Only once in 53 years has the index diverged from the rest of the economy, says Caroline Baum, a columnist on Bloomberg.com. “As manufacturing goes,” she says, “so goes the nation.”
*** The NAPM said that new orders slipped for the 4th consecutive month. And “even high tech isn’t growing as strongly as everybody thinks,” said Norbert Ore of the NAPM group.
*** So the ‘soft landing’ is believed to be getting even softer. The Fed’s Beige Book said it sees “slowing growth in some areas.” The typical investor thinks he can feel the tires on the runway. He’s ready to get up, stretch his legs…and get back to the business of growing at a ‘sustainable rate,’ as the Fed puts it.
*** If it were only that easy! How nice it would be if we could all just ease off on the pedal of life a little and go on living forever. Wouldn’t it be nice too, if the heat of summer could just give way to the cool evenings of autumn? Why does winter have come, too?
*** The Dow dropped 71 points yesterday. The Nasdaq fell 36.
*** Worldcom fell 20% to $18. As recently as July it was over $50. Another telecom supplier, Altera, lost 19%. The North American telecom index fell 4.5% yesterday.
*** You may remember that Worldcom’s CEO, Bernie Ebbers, received the ‘margin call from hell’ a few weeks ago. Ebbers bought his own stock on margin…and then, when the stock went down, had to sell shares in order to cover the margin call. He seems to have made the same mistake as IBM’s directors. Though they bought what they knew best – they forgot the cardinal rule of investing: but low, sell high…not the other way around.
*** There were about the same number of stocks going up yesterday as going down. And not much difference in new highs/new lows either.
*** “We’re closer to clueless than any other spot in the knowledge spectrum,” said Jim Weiss of State Street Research, quoted by the NYTimes. Weiss refers to the confusing indicators and stock market movements of the last few days. But investors are almost always clueless. That is why it is so important to stick to the basic rules of ignorance: buy low, say please and thank you… and never have an affair with an IRS agent’s spouse.
*** AT&T lost another $1 to close at $22.
*** The current generation of investors seems to think it invented technology…just as each new generation thinks it discovered sex. And yet, writes Christopher Byron, “An entire generation of companies that was once thought to stand at the absolute pinnacle of technological achievement and possibility are being consigned by Wall Street to the ash heap of history.”
*** Byron refers to companies such as Kodak, Xerox, AT&T and Polaroid. Kodak is down a third since August…Xerox is down 70% from a year ago, and Polaroid has half the market cap it had in 1995. Polaroid’s revenue is unchanged from 10 years ago…and it’s trading at less than 7 times earnings. Good companies? Cheap? Maybe.
*** “You can hardly have $6 billion in revenues and do worse than Eastman Kodak has lately,” writes Lynn Carpenter. Kodak is a “don’t-touch-it-with-a-10-foot-pole stock” says Lynn, which “naturally, piques our contrarian interest.” Since writing about the company for the November issue of Fleet Street Letter – just last week – the stock has already jumped 20% to $43. But, “you could buy this stock all the way up to $53 and still have room for double digit returns.” Kodak is selling at a P/E of 6.9… and pays a dividend of 4.8%…and has recently been placed on the buy list of a big, institutional value player.
*** Well, the ‘flightly’ euro seemed to take the air yesterday – rising 1.5%. The steadfast dollar seemed loaded with too much freight – the dollar index dropped sharply on the NAPM news. Why does the dollar matter so much? And when will investors meet their Waterloo? More below…
*** “As you know, [Amazon] has floated $2 billion (that’s US dollars) in bonds,” says Jonathan Poe, at the META Group, by way of Bethany McLean and Money.com. “The bond market has been steadily bidding down the value of those bonds such that the call value is now 52 cents to the dollar, (very much junk status) which means that bond traders think that Amazon will default on its bonds before 2008! The rate of return on Amazon bonds is currently 16.5%… if you are an investor, and believe what the bond market is saying, you should sell your Amazon stock…”
*** The All Saints’ service went as expected yesterday. After the service, people went to the graveyard, as is customary, to pay their respects to the dead. Cemeteries are amusing, sentimental…even mauldlin places. Many of the gravestones included photos of the dead, encased in plastic or behind glass. One showed a man with a fishing pole. Someone had placed a quote from a psalm on the tomb. I did not stop to read it, but hoped it was something appropriate, such as “Thy rod and thy staff comfort me.” Another sported a photo of a Byronesque young man who died in 1931.
*** But the weather seems to get worse and worse. The wind is howling this morning. It rains episodically. The cows bellow as if they see a butcher creeping through the woods.
*** Red Herring reports that venture capital investors are getting edgy too: “Underwriters have quietly begun entering special provisions into company prospectuses that allow insiders to sell a portion of their position in a company prior to the standard 180-day lock-up period. This new banking device is called an early lock-up release, and it’s popping up all over the place. Aclara Biosciences, via Deutsche Banc; Avici Systems, via Morgan Stanley; and two Goldman Sachs clients, ONI Systems and Sonus Networks, have all recently structured pre-180-day lock-up provisions into their Securities and Exchange Commission-required S-1 filings.”
*** But James Cramer of TheStreet.com is still thinking positive: “My thinking has been and remains that unless we get an improvement in the fundamentals of tech or we get a Fed bias to easing, we can’t break out of these ranges that are being established every day. If we get a further deterioration of the fundamentals – as defined by slowing PC growth, lower wireless sales, less capital spending by telecoms, and no respite from the awful bond market – then we could break to the downside.
“But if we get the fundamentals to stabilize and the Fed to become more lenient, then we have a chance for a marvelous break to the upside. You know me. One of my rules is that with the market, what needs to happen positive tends to happen. I am becoming more and more convinced that we are on the right path for a breakout to the upside.”
*** Yes, the positive tends to happen in a bull market… but in a bear market what tends to happen is negative.