The Second Coming Of The Bull Market

The Daily Reckoning Presents: A Guest Essay… a rebuttal of sorts.


“You plant a rose, you get a rose…you do not get a potato.”

Her accent was thick, but since the discussion had veered headlong into the subject of religion, we had abandoned my French altogether.

La Fete de la Vierge – a religious celebration in honor of the Virgin Mary – is next Wednesday. My French colleagues will be taking the day off from work.

“Well, I don’t know anything about it,” I said.

“What denomination are you?”

“I’m a deist…”

“What’s a deist?”


“Is that like being a Buddhist? I’m a Buddhist. Sort of. I’m Catholic by birth…”

“A deist is a kind of agnostic, but respectful.”

“Do you feel responsible?”

“For many things…but I don’t expect much personal attention, er, from above.”

“Me either. You plant a rose. You get a rose.”

Yesterday Porter suggested that while we’ll “undoubtedly have continuing economic cycles – booms and busts – I’m more convinced than ever before that Bill’s view of the 20th Century as a period of ruin for humanity is totally wrong. And, more importantly, I’m convinced that the coming years will be better for us than we could possibly imagine. Better financially. Better physically. And vastly richer.”

Much of Porter’s optimism can be found in a report published by the Cato Institute titled: “The Greatest Century That Ever Was”.

The report shows the progress we’ve enjoyed in the 20th Century – largely due to advances in technology. “Life expectancy has increased by 30 years,” reads the report’s executive summary, “infant mortality rates have fallen 10-fold; the number of cases of (and death rate from) major diseases – such as tuberculosis, polio, typhoid fever, whooping cough, and pneumonia – has fallen to fewer than 50 per 100,000; air quality has improved by 30 percent in major cities since 1977; agricultural productivity has risen 5 to 10-fold; real per-capita gross domestic product has risen from $4,800 to $31,500; and real wages have nearly quadrupled from $3.45 an hour to $12.50.”

The list of improvements in human life in the last 100 years is truly remarkable. In fact, if you haven’t already, I suggest you give this report a once-over:

The Greatest Century That Ever Was

“The central message of the study,” writes Cato’s Stephen Moore, “is that the fruits of a free society are prosperity, wealth, and better health. All of the evidence [suggests] that in every material way, life in the United States, with a population of 270 million, is much better today than it was in 1900, when the population was 75 million.

“Moreover, the American people are net resource creators, not resource depleters…We have produced more than we have consumed, leaving savings and wealth to our children and grandchildren.”

“Capitalists and entrepreneurs continue to make the world a better place” writes Mr. Stansberry. “And for this, they make a profit and their investors earn a return.”

As an example he provides us with a company worth looking into – Antigenics. “The company has trended higher this year, despite the bear market,” says Porter, “moving from $11 to over $17 today because its success isn’t tied to our economy, but instead to the technological prowess of its scientists.”

I was intrigued, so I took a look. Antigenics is currently trading at $16, has a market cap of $438 million…but no reportable earnings. Porter himself mentioned they have not had a saleable product since 1994. So, I wondered, how do you know if it’s a good investment?

“If I taught a class,” said Warren Buffett, “on my final exam, I would take an Internet company and ask ‘How much is this company worth?’ Anyone who would answer, I would flunk.”

To my mind, you would have to dunk Antigenics into the same litmus solution. The only way you could hope to even get your money back from this stock would be if somebody else wanted to own it exuberantly enough to pay you more for it than you paid. Which might even have worked last year.

“What a refreshing piece by Porter Stansberry,” wrote a DR reader on the website discussion board. “…amid the continuous negative drivel that one usually reads here. The sky is not falling. Once the bull market resumes, what will you do?”

“You could become professional mourners,” he suggests “and appear at funerals with your doleful faces.”

That might be a little too ambitious for us.

In fact, today I’ve set my sights a little lower. While we’re all grateful for the advances of the 20th Century – personally I’m a big fan of the Internet – I’ll resist the temptation to explain them all and suggest only that the Second Coming of The Bull Market is a little farther off than one might expect…leaving the “little guy” in a bit of a precarious situation if he’s expecting to flip stocks for a profit.

Jeremy Grantham points out that in 1929, the markets settled into a 17-year bear market, succeeded by a 20- year bull market…followed in 1965 by a 17-year bear market, then an 18-year bull. “Now are we going to have a 1-year bear market?” asks Grantham. “It doesn’t sound very symmetrical.”

All the usual suspects – Fed rate cuts, the so-called productivity ‘miracle’ – have been rounded up and are standing quietly in the line waiting for their mug shots to be taken.

“Given that the Fed has now reduced interest rates six times this year,” wrote Richard Russell on Tuesday, “the stock market should be surging higher. Since 1971 there have been 13 Fed rate-cutting cycles (not counting the current one). In 10 out of the 13 cycles, the S&P was higher six months after the first Fed cut, and this was true of the Nasdaq as well. From 1971 through 1999 the average gain for the S&P six months after the first Fed cuts was 12.4% and the average gain for the Nasdaq was 16.2%.”

Instead, the S&P at 1183 is 10.4% below its level at the close of 2000, just 3 days before the first rate cut. The Nasdaq is down 20.4% for the year this year…and the average mutual fund down 8.65%. With the news that $1.6 billion dollars was “yanked” out of investment funds in July, you might expect them to decline further.

“Reckonings don’t last. Redemptions follow,” Porter asserts. No doubt, this is true. But how long do you want to wait? Can you afford to wait at all?

“Broken promises, unfulfilled expectations,” writes Mark Rostenko, editor of the Sovereign Strategist. “Rate cuts don’t work, earnings ain’t getting better, the Fed is still full of crap and propoganda, why [would anyone] buy?”

“In 1929 the S&P 500 peaked at 21 times earnings,” points out Mr. Grantham. “In 1965 it peaked at 21 times. Not so long ago it peaked at 33, and is now somewhere around 26…

“[Does anyone] really think,” he continues, “we’re on the edge of the next bull market when the p/e of the S&P is still higher than its pre-’29 crash?”

“Folks are catching on that it might not be so simple this time around,” says Rostenko. In a bear market, with investor recrimination on the rise, one might be a little more skeptical about companies with no earnings…and no products. But that’s up to you…

You plant a rose. You get a rose.

Until then,

Addison Wiggin,
August 19, 2001

The Daily Reckoning

Addison Wiggin is the managing editor of The Daily Reckoning. A founding member of the DR Blue Team, Mr. Wiggin is also the author of The DR Weekend Edition – a weekly wrap-up of contrarian investment analysis.

DR Blue Service

*** “Investors could be throwing in the towel,” an investment analyst told Bloomberg. “The market decline has been such a long, drawn out process, I think they’re giving up.” Investors reportedly “yanked” $14.7 billion from stock funds in July.

*** Our hero, the almighty American consumer, may be capitulating too. According to the Fed, consumer borrowing dropped $1.6 billion in June – the first decline since 1997, and the largest since 1992…the last time the “r” word was on everybody’s lips.

*** And there’s that messy little phrase again…”Merrill Lynch – while refusing to admit any wrongdoing – has agreed to pay $400,000 to settle a claim by Debasis Kanjilal, a New York pediatrician,” writes Prudent Bear’s Marshall Auerback.

*** Kenjilal lost $500,000 betting on Infospace – a Henry Blodgett recommendation. The doctor and his wife sued Blodgett and the firm for $10.5 million. While they bought Infospace at close to its peak price of $133, they had to sell it for $11…the suit claims Blodgett’s recommendation constituted a “conflict of interest”.

*** Mary Meeker, Queen of the Internet, may have also been conflicted. Meeker has been named in a suit by several investors who lost money on Amazon and eBay. They accuse Meeker of making positive recommendations based on “her desire to attract and retain investment banking clients for Morgan Stanley.”

*** Revulsion…retrenchment, recrimination…is this all just “negative drivel”? Perhaps. More in a “guest essay” below. First, let’s check in with Eric.


Eric Fry reporting from the scene of the crime:

– Beige…it’s such a nice, neutral color. It seems like the Roy Rogers and Dale Evans of color – one that could not possibly offend and certainly not one that could cause any harm. But now we know better.

– From the moment the Federal Reserve released its “beige book” yesterday, investors gaped in horror and fled for their financial lives. By the time the pandemonium had subsided, the Dow had dropped 165 points to 10,293. The Nasdaq spiraled down about 3%…falling 61 points to 1966.

– Few stocks escaped unscathed, with all Dow components except Coca-Cola finishing lower on the day.

– Bonds celebrated the grim economic news by rallying sharply – the 10-year Treasury note yield falling down to 5.05% from 5.17% on Tuesday.

– The so-called beige book is an anecdotal survey of the economy produced by the Fed. The latest edition, released Wednesday, featured an economy down on its luck. Specifically, the country’s months-long manufacturing slump is now reverberating throughout the entire economy.

– “Manufacturing activity declined further in recent weeks,” the survey concludes, “as producers responded to ongoing weakness in demand and worked to balance inventories. Reports of reduced work hours, lost overtime, forced furloughs, plant shutdowns, and layoffs were pervasive.”

– Low-lights included: “Conditions in real estate markets softened”; “Many districts noted that airline bookings, hotel occupancies, and hotel room rates fell in recent months”; “Retail sales generally remained weak in June and July”…

– The beige book “does not paint a pretty picture,” First Albany Corp.’s chief investment officer Hugh Johnson told “The illusion of a second- half economic recovery is now transmuting into the prayer for a recovery in the first half of 2002,” cautions my friend Michael Lewitt of Harch Capital Management. “Don’t bet your last dollar on a recovery anytime in 2001 or early 2002 – or it may become your last dollar.”

– As a hedge fund manager specializing in junk bonds, Lewitt enjoys a front row seat from which to view economic booms and busts. He observes, “U.S. companies defaulted on $53.8 billion of corporate debt in the first six months of 2001 and may break last year’s record of $131.8 billion.”

– Yet despite the “repayment optional” mentality that many borrowers exhibit, banks continue to lend willy- nilly to corporate and consumer borrowers alike.

– Meanwhile, home-equity “mining” has become, for some, a kind of career. “There are people [in hot areas] who live on refis of appreciated housing,” observes James Grant citing the Mortgage Bankers Assoc. “Mortgage originations this year will reach [a record] $1.54 trillion…fully half of this year’s refi transactions have put money in the borrower’s pocket.”

– In 1945, Americans owed mortgage creditors just 14% of the value of their homes – the rest, 86%, was theirs in equity. In 1985, they owed 32%. As of the first quarter, they owed 45%, leaving 55% in equity. During the fabulously prosperous 1990s, homeowners ran down their equity by almost 10 percentage points.

– Tell me again what “savings” the boomers are counting on to fund their retirement years?


To Addison, back in Paris…

*** You may remember, back in March, that our own Thom Hickling was on the scene as a coalition of Socialists and Green party activists won the mayoral election in Paris. While partying in the streets in front of Hotel de Ville with the victors, Thom snapped a photo of some celebrants holding a sign reading: “Deviation”. In case you didn’t see it the first time:

*** At the time, we were puzzled by the sign’s meaning. Not anymore. Soon after the election, the Green Party’s Alain Lipietz named a three-mile stretch of road along the right bank of the Seine the “route de la Velorution” – a compound of the word for bicycle and revolution. He banned cars from it, through Aug. 15. The rest of the story made international news.

*** “For the aoutiens, as Parisians who stay in town are known,” says UPI, “the sweet days of empty streets have vanished. Vehicles that usually use the George Pompidou way, as the segment of road is properly named, are being obliged to use and clog up the streets.” Now even the socialists have joined in condemning the pollution and traffic problems caused by the Greening of Paris.

The Daily Reckoning