The Bare Facts

compelling evidence of a link between bikini-clad super models and stock market performance. Really…it’s an indicator we feel you’ll want to keep an eye on.

Don’t cry for Argentina. The Sports Illustrated swimsuit indicator says it’s time to buy.

Springtime has arrived once more in the Northern Hemisphere. It’s that glorious time of year when wildflowers bloom and wild college kids migrate to sun- drenched locales, where they engage in such essential rites of spring as slurping tequila "body shots" from each others’ navels.

Also, about this time of year, Sports Illustrated releases its infamous "swimsuit issue." For dispassionate financial types such as ourselves, for whom scantily clad models are but so many inadequately dressed Homo sapiens, the swimsuit issue nevertheless offers a particular allure – investment guidance.

As we discovered last year, "Economies go boom when their native assets appear on the cover of Sports Illustrated’s swimsuit issue." And so do their stock markets. After rigorous research, we concluded, "When a bikini-clad supermodel is the first from her country to grace the cover of Sports Illustrated, her appearance kicks off a four-year bull run in the stock market of her native land."

Was this indicator a mere fluke or a new can’t miss barometer of global investment trends? Let the reader decide.

Last year, Sports Illustrated placed the beautiful and "talented" Elsa Benitez on the cover of its swimsuit issue, making her the first Mexican to claim the honor. Four years have not yet elapsed, of course, since Ms. Benitez’ cover appearance. But so far, so good. Despite a very rough time for the stock market here north of the border, the Mexican bolsa has gained a sizzling 35% since Elsa adorned the SI cover.

Sure, this strong performance might seem purely coincidental. But the facts are the facts. Let’s briefly review:

In 1978, Brazil’s Maria Joao became the first foreign-born supermodel to appear on the cover of SI’s swimsuit issue. Four years later, her country’s Bovespa index had soared an astounding 465%. Throughout the early 1980s, American models captured the coveted cover-photo slot in the swimsuit editions. We all know what happened next: U.S. stocks kicked off a mind-boggling 20-year bull market. Next up, in 1986, the stunning Elle Macpherson made her first of several cover appearances. Over the ensuing four years, the Australian Stock Exchange’s 50 Leaders Index rose 75%.

In 1990, the bonita Spanish senorita, Judit Masco, landed on the Sports Illustrated cover. Four years later, the IBEX index had appreciated 21%. When the Swedish beauty Vendela Kirsebom graced the cover of the magazine in 1993, the OMX-Stockholm index rose to the occasion by appreciating 161% over the next four years. "Kiwi model Rachel Hunter might not have lasted with Rod Stewart," we observed last year, "but her appearance on the 1994 cover kept SI’s winning streak alive – barely. New Zealand’s Top 40 Index rose a mere 6% over the next four years."

German "uber-model" Heidi Klum adorned the 1998 swimsuit cover. Now that this indicator has four years under its G-string, we can report that SI’s impressive record remains intact. Klum’s appearance on the cover did indeed presage an eye-pleasing 24% gain for the German Dax Index over the subsequent four-year span.

Which foreign bourse or bolsa should the globe-trotting philogynist now consider? Sports Illustrated gives the nod to Argentina, birthplace of this year’s stunning cover model, Yamila Diaz-Rahi. This selection may seem somewhat counterintuitive, given the country’s current travails. Fresh on the heels of a wrenching currency devaluation and amidst mounting economic difficulties, Argentina may not seem like a red-hot investment destination. But Yamila’s appearance in a swimsuit consisting only of silver and jade argues persuasively to the contrary. "Riches await" would seem to be the message to intrepid investors in Argentine stocks.

"Perhaps these remarkably favorable results are no mere accident," we noted one year ago. "What better way to strike patriotic fervor and self-confidence in the heart of a nation – and stimulate its economy – than by splashing one of its bathing beauties on the cover of Sports Illustrated? When the Czech supermodel Paulina Porizkova first appeared in 1984, her native land was in the grip of Communist rule and had no stock exchange. Today, freedom rings in the Czech Republic and its vibrant economy is the backbone of central Europe. You figure it out."


Eric Fry
April 04, 2002

The Daily Reckoning

Trusting Wall Street in this age of accounting sleight-of-hand can prove disastrous for the individual investor. To make serious money, or protect what you’ve already earned, you need research you can trust.

You may know Eric Fry as the Daily Reckoning’s pithy man-on-the-scene on Wall Street. But in his "day job" as research director at Apogee Research (formerly Eric IS the name you can trust. With cutting edge reporting at Apogee he has helped blow the lid of Corning, Ariba and Cisco – whose shares plummeted by 74% following some very insightful reporting.

Equally impressive to the long side, Eric’s team at Apogee has produced gains of 64%, 98% and 198%, no small task in a tough market.

By the end of February, housing prices had risen 12.2% in the East, year to year…9.9% in the Midwest, 10.1% in the South and 6.9% in the West.

But California seems to be in a class by itself. The median home price rose $47,860 in the 12-month period. "Between $400,000 and $500,000 they’re just flying," says a San Jose real estate agent, "I can’t keep them [listings] on for more than a week."

Thus do Americans get richer without even trying. Stocks have gone nowhere for the last 3 years. But house prices rise like GE earnings – that is, as if floated on nothing but air.

And thus is the remarkable strength of U.S. consumer demand explained, dear reader. Homeowners "cashed out" $152 billion last year.

"So how much did the economy grow last year?" asks the Mogambo Guru. "1%, give or take? What’s one percent of a $9,500 billion GDP?" Mogambo helped us with the math. And guess what? A one-percent increase in the U.S. GDP is about 2/3rd of the money people borrowed on their houses (the rest was used to retire other debt, we suppose).

Mortgage debt rose 10% in 2001…there’s now $6 trillion of it outstanding, the largest debt in the world.

But if home prices keep going up like this…think how rich we’ll all be! Right, Eric…?


Eric Fry from Wall Street…

– "From Microsoft to PeopleSoft, the hard truth is that tech spending remains just plain soft," writes Igor Greenwald of The Nasdaq responded to the soft news from Techland yesterday by tumbling more than 3% to 1,804. The Dow fell 49 points to 10,314.

– Helping to trigger the selloff, two influential Goldman Sachs analysts, Rick Sherlund and Laura Conigliaro, trimmed their earnings estimates on several equally influential tech stocks. In addition to slamming the "softs" mentioned above, the Goldman pair issued some cautious comments about IBM and Sun Microsystems. The common theme: disappointing revenues. Sales in the tech sector simply aren’t recovering as briskly as hoped.

– Yesterday’s headlines also featured a disappointing factory order report – down 1.2% ex-defense – and sluggish same-store sales – down 0.6%.

– The economic recovery script does not include scenes that feature sub-par revenues…this could be a problem.

– It would be bad enough if the reviving economy produced respectable revenue growth that, nevertheless, failed to produce the hoped-for profits. But if the revenues themselves fail to appear, we may have to cancel all future performances of the Wall Streettheatrical sensation, "Greenspan’s Magical Economy."

– Moving from the stage to the diamond, Opening Day in major league baseball is a glorious time. On Opening Day every team is a contender and every baseball fan roots for a team that MIGHT make it to the World Series…no matter how bad the home team might actually be.

– Optimism fills the air in baseball stadiums from coast to coast. The "Opening Day" of the second quarter for the stock market finds investors in a similarly optimistic (and yes, maybe even delusional) state of mind…Stocks can begin a new bull market, no matter how richly priced they may be; companies can start making big profits, no matter how little pricing power they may wield; consumers can continue to spend, no matter how lofty their indebtedness may be. Hope fills the air.

– By the all-star break, if not sooner, the baseball daydreaming is over. Only the real contenders are atop the standings. The stock market daydreams are likely to end even sooner.

– Among the most preposterous fantasies floating around these days is the notion that tech stock earnings will grow dramatically as the year progresses. Based on the latest First Call consensus of Wall Street analyst estimates, the S&P 500 technology sector’s earnings will grow 37% in the current quarter and 133% in the third quarter.

– But yesterday’s disappointing news in the tech sector shows that earnings growth – even the single digit variety – is no sure thing.

– To make matters worse, corporate America must now also contend with soaring interest rates. To be sure, tentative signs of recovery abound.

– Commodity prices are climbing, the oil price has surged to a six-month high, and the 10-year bond yield has jumped more than a half percent over the last four weeks. But curiously, the signs of non-recovery aren’t too difficult to find either.

– Some of the most pronounced evidence that the economy’s recovery may be less robust than advertised is coming from the very place that trumpets the recovery most vocally: Wall Street. The guys and gals on the trading desks are worried about getting a pink slip, even while their own strategists gush about the robust recovery underway.

– An institutional stockbroker I know complained recently, "I’m tired of listening to these guys at Goldman Sachs and Morgan Stanley whining about losing their jobs. Every day when I’m on the phone with them, they’re fretting about getting the axe. They are all running scared."

– Their fears would seem to be well justified. "In an effort to stanch it’s money-losing operation and refocus its efforts, ABN Amro Holding NV said it will close its domestic stock business in the U.S.," the Wall Street Journal reported recently. "The Dutch bank’s move will result in 550 job losses…The bank’s pullback in the U.S. comes at a time when large firms are also trying to muddle through a soft market, particularly in M&A.

– Goldman Sachs Group Inc. said that first-quarter net revenue from M&A fell 37% from a year earlier, while Lehman Brothers Holdings Inc. saw the business fall 50%."

– And just yesterday, CS First Boston announced it will fire another 300 or so of its investment bankers.

– Meanwhile, business isn’t much better over at Morgan Stanley. "The firm’s net income was even lower in the first quarter than it was in the dire last period of 2001," says "Wall Street’s bulge bracket banks believe they can see a light at the end of the tunnel after an awful start to the year. Investors should think hard before believing such talk. Morgan Stanley stock is already up nearly 50% since its Sept. 20 low and, like other investment banks, remains richly priced on any other basis than bubble valuations."

– The economy might bounce, but that doesn’t mean the bubble will reflate.


Back in Paris…

*** The price of gold rose to $307 an ounce yesterday. Why? Who knows. But our guess is that while TV commentators, analysts, economists, and consumeris americanus oozes confidence, the very smart money has its doubts. How can the current account deficit continue to grow? How can consumers continue to spend? What happens when interest rates rise? What if the dollar falls? The smart money has no better answers than we do. But it has the sense to take precautions.

*** Gold is, primarily, a form of insurance. But when it pays off – it can pay off big. The last bull market in gold, in the 1970s, took the price up 16 fold. A similar rise now would drive the price of an ounce of gold above $5,000.

*** What a beautiful day. April in Paris. Birds in the trees. Lovers in one another’s arms.

"Let’s not write about investments today," said Addison, suffering from severe jet-lag after returning yesterday from a trip to Australia and South Africa…where we hope to set up outposts of the Daily Reckoning. "Let’s go out in the park and meditate."

*** "Your comments of late have sparked some serious debate on the discussion board. Several threads exceed 200 entries," Addison tells me.

*** A typical message:

"Bill, I have read your criticisms on what the U.S. is doing in the WAT (War Against Terror) and what the U.S. may do in the future (attack Iraq). My question to you is: What would YOU propose to do to stop terrorists from doing what they are doing? How would you stop Saddam from getting weapons of mass destruction and sophisticated delivery systems? (If you believe every major intelligence agency Saddam is very close on having and delivering these weapons) How do you stop the Saudis from financing these terrorists? This is a REAL problem that is not going away, but begs for a solution…"

*** Here at the Daily Reckoning, we are not in the habit of offering advice to the Bush Administration. (Nor has anyone called to ask for it.) Especially not on foreign policies issues. We have no advice to give. Besides, we do not approve of foreign policies and feel the world would be a better place without them.

*** Still we have an idea or two, which we tried out on Sylvie yesterday. Sylvie is a tutor who uses the Socratic method to try to improve my French. She asks a question. I respond. She corrects my French…and often can’t resist trying to correct my opinions.

"You can’t be serious," said she of my views on the WAT.

A few more gratuitous reflections tomorrow…

The Daily Reckoning