The Other Eden
This royal throne of kings, this sceptred isle
This earth of majesty, this seat of Mars
This other Eden, demi-paradise
This fortress built by Nature for herself
Against infection and the hand of war,
This happy breed of men, this little world,
This precious stone set in the silver sea
Which serves it in the office of a wall
Or as a moat defensive to a house
Against the envy of less happier lands
This blessed plot, this earth, this realm, this England!
Richard II, Act II. Scene I
The same problems that bedevil citizens of Baltimore – crime, bad educational standards, bad taste – also plague residents of Paris, Rome and London…not to mention Lagos and Rio.
So do the same financial tides that splash upon the shores of Malibu and Ocean City eventually wash into the Thames and the Seine.
As on Wall Street, “the market as a whole is still on the expensive side because TMT stocks are still seriously overvalued,” the Fleet Street Letter’s Brian Durrant reports from London. The Financial Times All Share index currently sports a P/E of 22, which is “still historically high,” says Brian.
“Despite sharp falls last year,” he continues, “software and telecom sectors are still on a price/earnings ratio of over 80, which roughly means that it will take over 80 years for the companies to make profits equivalent to their current market value.”
On the sceptred isle, as on the island of Manhattan, people who are paid to be bullish are bullish: “A survey of 12 forecasts quoted in Sunday Business and Sunday Times,” our correspondent continues, “produced an average prediction [for the FTSE] of 7170, within a range from 6600 to 8000. That represents a year-on-year increase of 15%.” (Brian’s prediction: “no higher than 6500.”)
Brian has an opinion of stock values on the other side of the Atlantic, too.
“We envisage a further 40% fall in the Nasdaq index which will lead to more carnage in tech stocks in the UK. On the other hand, there should be plenty of good value elsewhere in the UK stock market. Many ‘old economy’ cyclical stocks that seem to be priced for a recession could do very well this year.”
Perhaps it is wishful thinking, dear reader, but here at the Daily Reckoning headquarters we can’t help but look for order and symmetry in all nature’s works. If that is not the way things develop, well too bad. That is the way they ought to be.
One old English friend, Lord Rees-Mogg, reminds us how symmetry may apply to economic circumstances on both sides of the Atlantic. “A recession,” he writes, “will be on the same scale as the boom which preceded it.” The boom in the United States has been much greater than in the United Kingdom. Will the busts be proportional, too?
Another old friend, Martin Spring, formerly a resident of South Africa, and now of Britain, maps out the argument for investing in Britain:
“If you look at the long run chart of the Dow Jones minus the FTSE 100 you will find that during the 1989-94 period it tracked a fairly narrow sideways range of 250 to 1000. However since 1995 the sideways pattern gave way to a consistent trend of the Dow outperforming FTSE so that the differential reached close to 5000…”
But now, says Martin, “there are reasons to expect this differential to narrow:
1. It will naturally do so in a bear market
2. The UK is less likely to tumble into recession
3. The UK is less exposed to tech stocks
4. The pound is not as vulnerable as the dollar
5. No serious imbalances in economy compared to US.”
The British market may not be headed for a spectacular year. But it could easily outperform Wall Street.
Britain has many of the same economic features as the United States. Thanks to Maggie Thatcher, taxes are about the same in the United Kingdom as in the United States. Labor markets are more flexible than those on the continent.
Martin elaborates: “Britain now boasts a strong currency, an inflation rate only a third of Euroland’s or America’s, and near-full employment. It attracts two-fifths of all foreign investment coming into Europe, while London retains its leadership as the world’s leading international capital market.”
The Bank Credit Analyst shares Martin’s optimism on Britain, citing the record from ’97-’98, when the Bank of England “skillfully manoeuvred the economy into an almost perfect landing, with real growth easing back to 1.6 per cent without any rise in unemployment.”
The financial advantages Britain enjoys are these: The English are not nearly as burdened with consumer debt… The inflation rate is less than half of that in America, which gives the central bank more room to cut rates. And the British pound can decline – making U.K. products more competitive on world markets – without risking a collapse of asset prices.
And while tech stocks are as overpriced in London as they are in New York, there are relatively fewer of them in the United Kingdom. Techs represent a much smaller portion of market capitalization and can be expected to have less of a negative impact when they collapse.
Meanwhile, Martin explains that “average price/earnings ratios are lower than for America or Europe, while earnings growth forecasts for this year are higher than for the US and not far below those for Europe.”
On the other hand, one of the biggest negatives for the British market is that it inhabits the same financial planet as the American one. Dump an analyst in the East River and he may eventually wash up on the beaches of Cornwall or Normandy. “London tends to follow New York, down as well as up,” Martin observes, “…half the profits of London-listed companies come from abroad and the US is particularly important as British groups are the largest foreign investors there.”
But, only 3% of the UK’s output is exported to the U.S…so if American consumers pull back – as we expect they will – it will have only a limited effect on British earnings.
“If you want to invest in an economy with much better chances than the US of achieving a soft landing,” Martin concludes, “look to the UK.”
Your correspondent…still looking for Eden,
Bill Bonner Paris, France February 5, 2001
*** “Capitulation is, I suspect,” wrote Doug Casey recently, “several years down the pike. At which point, [naive investors] won’t have any money left…no one is in the market at the bottom and conversely everyone’s in at the top.”
*** “The investor on the street is still addicted to technology stocks,” says Gail Dudack, recently chief investment strategist at UBS Warburg, which was bought by Paine Webber in November.
*** Dudack, says Barron’s editor Alan Abelson, “was one of the few strategists to warn investors away from the technology stock bubble” last year. “In early March…she correctly anticipated the Nasdaq’s drop.”
*** What’s Dudack saying now? “The market will finish the year more or less flat,” Abelson reports.
*** Who knows? It could finish up, down or flat. Take your pick. Trying to guess the market’s direction is entertaining…but not the way to make money. The way to make money is to buy good investments at good prices.
*** Is Amazon a good company? Not yet. It has never made a profit, though it promises to earn a “pro forma” profit in the fourth quarter. “What’s a pro forma profit?” I once asked an accountant. “Anything you want it to be,” he replied.
*** Floyd Norris reports in the New York Times that Amazon has been monkeying with the numbers for a long time: “In 1999, Amazon’s net loss was double the adjusted loss it emphasized. In 2000, the net loss was 4 times as large.”
*** Amazon’s stock dropped 12% on Friday and is now trading below $15. A better price, but still not a good one for a company with $4 in losses for every share.
*** Doug Casey: “There’s a large coterie of true believers still out there who are willing to pay big premiums in the belief Amazon is a bargain. But I’m still of the opinion that AMZN is a lock cinch for bankruptcy. Its main assets are its approximately 17 million customers, plus some inventory and the warehouses to store it. The market says the business is worth $5.8 billion. I say they will default on their $1.2 billion of debt.”
*** The Internets were the biggest losers in Friday’s session, with the INX index down 7%.
*** “Man, Monkeys and Morons”…a recent newspaper article shows a woman reading a book with this title. The book was an early 20th century appeal for eugenics – that is, improving the race by careful breeding. Few people realize that it was the eugenics movement that morphed into Warren Buffett’s favorite charity, population control.
*** Suppose you had invested $30,000 in 1980…and followed a very simple investment timing system: buy the S&P 500 when the Fed is cutting rates; switch to cash when the Fed it tightening. According to Barron’s Jay Palmer, you would have accumulated $149,000 over the next two decades. If you had simply bought and held the S&P 500 over the same period, by contrast, you’d only have $128,000. Gosh, investing really can be easy, can’t it?
*** Yahoo fell 8% on Friday. Cisco lost 7%. JDS Uniphase slid 10%.
*** Friday was supposed to be the day the Dow would shoot through the 11,000barrier. Instead, it lost 119 points. The Nasdaq fell too, down 122 points.
*** The jobless rate rose to 4.2%, which doesn’t seem like a big deal. The comparative rate in Europe is over 8%. Men, monkeys and morons are still assured full employment in the United States.
*** “As U.S. Economy Slows Down,” reports the NY Times, “Europe Is on the Upswing.” Unemployment in Europe, while still twice the U.S. rate, is at its lowest level since ’91. Growth, at 3.4%, is a lot better than the zero growth that Greenspan sees in the United States.
*** Oil rose $1.37 to $31.19. Gold fell $1.40.
*** Auto sales were surprisingly robust in January. New vehicles sold at a 17.2 million annual rate, up from a 15.4 million annual rate in December.
*** Thanks to generous use of options, AOL goes into its marriage with Time Warner with a dowry of $11 billion in future tax deductions. The AOL/Time Warner combo will pay no federal taxes.
*** AOL fell below $50 on Thursday…then another $2 on Friday.
*** The Dow rose less than 2% last week. The Nasdaq fell more than 4%. There were almost twice as many stocks advancing as declining on the NYSE.
*** “The story of 2001 [will be] the decline of thedollar,” writes Bill King. In short, “Japan used their bubble economy/market to generate liquidity for the globe, and became banker to the world. The US assumed that role utilizing the same scheme in the ’90s. But Japan is a nation of savers; the US is a nation of consumers.”
*** Meanwhile, “the sheer dimension of the monetary pumping,” writes Frank Shostak, by way of Marc Faber, “and the accompanying artificial lowering of interest rates caused a massive misallocation of resources – i.e. the creation of ‘false activities’ that only consume and don’t produce real wealth.”
*** What else is new? Well, our poor choir director! Cecile has the patience of Job, and needs every bit of it. The little Catholic church in Lathus is not at all like those go-go mega-churches of the Bible Belt. The organist has not yet mastered his instrument – though he pumps away cheerfully. Of the few people who turn out for choir practice, fewer still can carry a tune. One soprano has, to my knowledge, never opened her mouth except to gossip. And on Saturday evening I realized that one woman in the alto section is completely, hopelessly mad. Asked to join in on a rendition of “Gloria Esperandum” or some such hymm, “Leave me alone!” she snapped. I joined the choir for amusement…but I may have to give it up. I like music too much.