The Greenspan Put II

Among the sad stories making their way around the worldwide web is this one from Philadelphia. “The Internet mania that thrilled and then battered Wall Street claimed one of its most aggressive promoters as a victim,” reports Joseph DiStefano.

“Like a high-stakes gambler risking the biggest bet of a long career,” reporter DiStefano dramatized the situation, “Safeguard Scientifics Inc.’s chairman, Warren V. ‘Pete’ Musser, borrowed heavily this year to invest in the stocks of the company’s faltering Internet affiliates.”

Mr. Musser is no fool. The 73-year-old investor built one of the most successful new tech incubation companies in the nation – with huge stakes in the well-known stars of the Internet world – such as ICG, VerticalNet, and U.S. Interactive. He did not get to this position overnight. Instead, he began the firm decades ago and knew his business well.

“Of all the guys who should have known better,” said Howard Butcher IV, a Main Line investor, who is described as a longtime Internet skeptic. “He’s a consummate stock promoter. You’d think he would have unloaded it and had his big nest egg of cash instead of being in debt.”

But Musser apparently succumbed to the risk all stock promoters face – he came to believe his own hype.

“There’s nothing new about the ‘new’ economy,” commented Mr. Butcher. Musser was forced to sell 80% of his shares to cover an old-fashioned margin call. The shares, worth $738 million in March, brought less than $100 million.

It may be too late for Mr. Musser, but the financial press worldwide reported that Mr. Greenspan is on his way with help. “Greenspan Arrests Wall Street Collapse” heralded the front page of France’s leading financial paper, La Tribune, yesterday.

Shareholders believe that Mr. Greenspan still holds the big put option that will save them from losses. But does he? Can a change in policy by the Fed save the Mr. Mussers of this world? Or are their investments so imbecilic, so suicidal, so hopeless that they cannot avoid self- destruction? spent $179 to acquire each dog food customer. Now that the company has gone belly-up, what is left? How can a change in interest rate policy bring back the millions that were spent?

Likewise, lost $37 million in the first 9 months of this year – or nearly $400 for every one of its paying customers. announced the closing of its UK office…and a 20% cut in employees. Maybe someday it will find a business model that works. But how will a lower fed funds rate help investors recover the $37 million?

How can the telecoms hope to recover that vast amounts they have spent over the last two years? How can those who lent them money hope to get their money back?

“The numbers coming out of the economy this quarter are going to be modest numbers,” Henry Kaufman forecast yesterday, “It is going to require more than a quarter point move by the Fed to bring some momentum back to the economy.”

Early next year, Greenspan and co. are likely to cut rates by a quarter point. Maybe a half point. Suppose they do?

Many companies are already shut out of the capital markets – not because rates are too high, but because they’re perceived as bad credit risks. Other companies are paying 17% or more to attract capital – even though the Fed Funds rate is half that amount. A rate cut, says Goldman Sachs senior economist Ed McKelvey, “is not going to affect the cost of credit a whole lot.”

A cut in the Fed Funds rate doesn’t all of a sudden make these borrowers more creditworthy. No one is going to jump at the chance to lend money to TheStreet or Amazon or other CWI – ‘companies with issues’ – borrowers just because the Fed cuts rates. It is big Bankruptcies not the big Bottom that is the problem.

If a man borrows more than he can afford…and spends the money on high living rather than productive investments… lower interest rates do not make you want to lend him more. He needs to put his financial affairs in order first – and that can’t be done by borrowing more money.

And there is the dollar. The U.S. economy relies upon vast amounts of credit from overseas. A cut in rates makes it relatively less attractive for foreigners to buy U.S. assets or lend dollars…and increases the cost of imported goods.

Thus, while Greenspan tries to boost the supply of credit through lower rates – he would be fighting a losing battle against world capital flows. For every dollar of credit he added to the U.S. economy by lower rates, two or three would disappear – taken away by foreign creditors…

And whatever Mr. Greenspan may do…it is likely to trail the action of the stock market rather than lead it. A cut in rates is likely to speed the collapse of the dollar.

Already, the average American household has experienced a negative wealth effect due to falling stock prices of nearly $30,000. If stocks continue to fall, even the most aggressive cuts Mr. Greenspan could manage would, in comparison, be as negligible as the wind drag on a runaway tractor trailer.

Sell the rallies.

Your correspondent,

Bill Bonner Paris, France December 7, 2000

*** What’s this? Is the end of the year rally over already?

*** The Dow fell 234 points yesterday. The Nasdaq dropped 93. 1218 stocks on the NYSE rose; 1678 fell. Mr. Bear may be getting ready for a holiday, but that didn’t stop it from mauling a few shares before he left.

*** In particular, he took a big bite out of Apple, after the computer firm reported lower sales and its first quarterly loss in 3 years. Once again, earnings were blamed. If you want to put an Apple share in a Christmas stocking you can do so for just $17 – down from $72 on March 22nd. Another steeply discounted stock is Xerox – which sold for $29 in March and can now be purchased for less than $5 a share.

*** `Must own’ stock, Intel, fell $4.25 – to $31.75. Yahoo! lost 14%. IBM dropped more than $6. Hewlett-Packard and Microsoft both fell about $3.

*** Compaq lost 17%. Juniper Networks slumped 10%.

*** Earnings continue to disappoint investors. Even Dow Jones, publishers of the Wall Street Journal, announced lower earnings. The stock fell nearly $6.

*** The Internet incubus, I mean incubator, Safeguard Scientific, has dropped from $100 to $9 – forcing the CEO to sell his stock to meet a margin call. More below…

*** Oil has dropped to $27. But energy shortages and cold weather dominate the news in the U.S. California utilities are giving customers a taste of the early `70s – asking consumers to lower thermostats and turn off Christmas lights.

*** Who would have thought…that this Age of Information would be marked by such monumental ignorance? Was it a secret that energy supplies were low? That usage was increasing? That autumn follows summer…?

*** Natural gas traded as high as $8.50 yesterday. The liquid has basically doubled in the last month.

*** “What is interesting about this market are the horror stories of utilities being short of natural gas,” says Bill Fleckenstein. “With prices where they are right now, only in our wildest imagination could we pick the price it will trade at in the depths of the winter. I recall pointing out last winter an e-mail I got from a reader who knew someone who was buying $8 natural gas calls for January/February of 2001… it was met with many guffaws. Obviously, whoever purchased those calls, should he still own them, has made an enormous amount of money.”

*** The spread between inflation adjusted TIPS bonds and regular bonds is a measure of the inflation that bond investors anticipate. The wider the spread, the more inflation they see on the horizon. The spread is now narrowing. It was 1.9% a few months ago. Now it has fallen to 1.6%.

*** Bonds rose as stocks fell yesterday – another sign that bond investors believe inflation will be no problem. In fact, they expect the Fed to lower interest rates early next year. Henry Kaufman says interest rates may fall to 4% in this swing of the credit cycle.

*** And the latest money supply numbers from the Fed show MZM – money of zero maturity, or `cash’ as we economists like to call it – increasing at a reasonable rate of 4.5% – down from the near-double digit rates earlier in the year.

*** Also from the Fed – the Beige Book, the Fed’s report on economic conditions around the country – tells of “slowing in the pace of growth” in 8 of 12 Fed districts.

*** If sales growth and debt-financing are the keys to success in the business world – Hyundai would be one of the greatest success stories on the planet. Instead, Korea’s largest company is close to bankruptcy. Seven out of 10 cars in Seoul are made by the firm. People live in Hyundai apartments and shop in Hyundai malls. But the conglomerate has $5 billion in debt – and not much hope of paying it.

*** Telecoms worldwide have borrowed $866 billion since ’97. Where will the money come from to repay these loans? Who knows. Two Canadian banks, for some reason, have the greatest exposure.

*** “There are some warning signs about out economy,” said economist George W. Bush yesterday, “that I think we ought to take seriously.” Translation: if there is a recession next year, it’s not my fault.

*** Bankruptcies, recession, falling interest rates, declining asset values – these are all indicators of DEFLATION.

*** But what do you do in Deflation? Bonds are the place to be, normally. But U.S. bonds are denominated in dollars. And dollars are vulnerable. The euro rose more than 1% yesterday – and is now holding just below 90 cents. The dollar index hit a high of 118.65 on the 24th of November. It fell to 113.23 on Monday.

*** Gold is another possibility. The gold price rose $4 yesterday.

*** “If one looks at various key markets in their entirety, it should be obvious that ‘something just aint right’,” writes David Tice. “An historic real estate bubble runs unabated. Energy prices are out of control. There are extraordinary price moves in the credit market and stock prices continue to move with historic volatility… the unfortunate but inevitable consequence of years of reckless credit and speculative excess.” (see: Something Just Ain’t Right )

*** “I met a woman and her husband in the high-end antique business,” writes my friend Thom. “They say there’s a 12 month antique market indicator for an economic turndown. And the indicator has already kicked in – this quarter. Sales are soft. She’s selling everything that she can and moving to cash. So that when the bottom falls out she can be a buyer at bargain prices. Her specialty is antique jewelry. The market has been great for a long time but now is D.O.A.”

*** “When Franklin Delano Roosevelt proclaimed Dec. 7, 1941 a `date that will live in infamy,’ did he know that his own actions preceding the Japanese bombing might eventually come under a cloud of suspicion?” This message came to me from the Independent Institute, a S.F. think tank.

Last May, the Institute hosted a speech by Robert B. Stinnett (author, DAY OF DECEIT: The Truth about FDR and Pearl Harbor, (Free Press)) who was finally able to examine the long-hidden evidence of the Roosevelt administration’s provocation of the Japanese `surprise’ attack on Pearl Harbor. The Institute summarizes Stinnet’s findings:

“Not only was Japan’s attack on Pearl Harbor expected, it was deliberately provoked through an eight-point plan devised by the U.S. Navy for President Roosevelt. The purpose? To break America’s isolationist opposition to fighting in Europe and the Pacific.

“American officials knew that a spy on Oahu was sending Japanese officials a map of bombing targets.

“The Japanese fleet broke radio silence as it approached Hawaii. The U.S. intercepted Japan’s military codes before the attack. U.S. Navy Admiral Kimmel was prevented from conducting a routine exercise at the 11th hour that would have discovered the oncoming Japanese fleet.

“Basically our policy was that we wanted Japan to commit the first overt act of war,” Stinnett said.

“After the Pearl Harbor disaster, both Kimmel and Short retired under a cloud. Short committed suicide shortly after leaving military service.”