The Tragic Death of Curtis Moberly

Fools, wise fools and greater fools…novice investors, take heed!

Two Sundays ago, a man was killed on a motorcycle just a few miles from my house.

Curtis Moberly was riding his brand new 2003 Harley Davidson Heritage, having purchased it only minutes before. He went around a turn, lost control, and slid into a car. As he lay in the road, another car came from behind and ran over him.

Moberly was 39 years old. I can just imagine him, saving up to buy a new bike, this great symbol of freedom among men – especially middle-aged, American men. Then, in an instant, the vision transforms from dream to nightmare, becoming the instrument of his early demise.

The local sheriff said speed wasn’t a factor in Moberly’s loss of control. He didn’t die because he pushed the envelope too hard. A newspaper article said he tried to lay the bike down because he lost control. I obviously can’t predict the outcome of the sheriff department’s investigation, but at first glance, it seems that Curtis Moberly died because he just didn’t know how to handle a simple turn…and panicked.

Wise Fools: The Small Voice Within

The thing I can’t fathom is this: I can’t believe Curtis Moberly didn’t have some sneaking, small voice somewhere within him that said, "buying this bike is a bad idea for you," or even, "this could kill you, you know." I can’t believe he didn’t know that some curve like the one that killed him wasn’t at least a possibility, somewhere in his future. It’s like the way a gambler knows he’s going to lose. It’s just there, unspoken, perhaps even denied at every turn, but no less present and certain.

Curtis Moberly was from the same town as me, though he died in another town nearby. I know he lived near me, since the town is so small that everyone lives near everyone else.

The accident made me wonder about Moberly’s and my neighbors, the few thousand other denizens I see coming and going through town each day. Specifically, I wonder how their financial situations resemble Curtis Moberly and his brand new motorcycle.

They probably feel great, having just made money for a whole year after losing it for three years straight. They feel the way Moberly felt when he drove his new bike off the Harley Davidson lot. It’s the same feeling you get after struggling through any difficult period, after which you come out on the other side with something you’ve been wanting for some time. Elation. Release. Triumph. I’m there. I’ve made it.

Perhaps they’ve increased their 401(k) contributions to take advantage of the "new bull market." They’ve got some momentum going. They’re feeling good and they’ve now got the money to justify that feeling. They’re over the hump of the 2000-2002 bear market. Now they’re cruising along, the way Moberly was cruising along just before he took the turn that ended his life.

Wise Fools: What Am I Doing Here?

As with Curtis Moberly, I find it difficult to believe there isn’t a nagging little voice inside his former neighbors. "Do I really have any idea of what I’m doing?" it asks. "I know nothing about any of these companies, and I’ve just bought a piece of them for thousands and thousands of dollars. I spend more time buying a new car…or motorcycle…than I do allocating my own investment funds. What am I doing here? Something is wrong with this."

It’s probably not such an articulate voice as that. And probably not very loud. I imagine it’s easily drowned out by a good CNBC story or a quick look at one’s rising Ameritrade balance. By the time Moberly’s little voice was audible, telling him to bail out, it was too late. He’d reached the point of no return. Investors were there in 2002, and now they think they’ve dodged a bullet. I doubt it.

Curtis Moberly’s poor neighbors are probably as unprepared for their futures as he was for that last turn. After all, they’ve invested in mutual funds through financial planners and 401(k) plans. Maybe they have an Ameritrade account with a few thousand bucks in it, which they churn a little every day, buying and selling Sirius Satellite half a dozen times a week.

I’m willing to bet they know as much about investing, have as much experience at it, as Moberly did at riding a Harley hog: very little. I remember what the Christian brothers called us as high school sophomores: wise fools. That’s what investors are today, and what Curtis Moberly was – may he rest in peace. Wise, having had a little experience. Fools, not realizing they haven’t had enough experience. Moberly won’t get fooled again. I bet investors will continue to get fooled for as long as there’s a stock market.

All across America, investors are about to slide into an oncoming price slide, the way poor Curtis Moberly slid into an oncoming Subaru. Make no mistake about it, stocks will slide. They’ve never been this expensive without sliding downward towards cheapness again.

The equity risk premium is forecasting that most stock market investors will lose money in the coming years. The rational investor has no reason to expect to make money in 90% of all mutual funds out there today. No rational reason to buy almost all the stocks out there, especially those that individual investors love the most, like Sirius Satellite, XM Satellite Radio, Sun Microsystems, Intel, Cisco and Microsoft. Those are the stocks individual investors bought the most of the day before this writing, according to my broker.

Wise Fools: 10 of 8000

Consider what I’ve done in my investment advisory, Extreme Value. In the last 14 months, I’ve only found 10 stocks that were cheap enough to buy, with enough upside to justify hanging onto them. 10 stocks out of 8,000 or so.

Fortunately, we don’t hold any stocks in the Extreme Value Model Portfolio that I wouldn’t buy more of if the price slid far enough.

As for all those people buying stocks like Sirius Satellite Radio, Intel, Cisco, Microsoft and Pfizer…well, they’re going to lose their money. Period. They’ve paid way too much and gotten way too little. No margin of safety. No 90,000 acres of raw land in Hawaii. No idea of what price is too low or too high.

All investors have are promises: satellite radio promises; microprocessor promises; internet router promises; Windows- based software promises.

One day soon all these promises, even if they’re technologically sound, will look to investors like the promise Curtis Moberly made to the bank when he signed the agreement to repay the loan on his new Harley Davidson.

Good Value Hunting,

Dan Ferris
for the Daily Reckoning

October 30, 2003

Dan Ferris is the Editor of Extreme Value, an investment advisory service that uncovers the safest, cheapest stocks in the market. Dan has recently published an 80-page analysis on his latest discovery – a way to own some of the most valuable real estate in the world, at a 99% discount, through a handful of companies listed on the NYSE.

We begin today’s insensitive remarks with a rich, deep, belly-laugh.

"Senator Charles Schumer, Democrat of New York, and two of his colleagues," reports the International Herald Tribune, "sent [U.S. Treasury Secretary] Snow a sharply-worded letter:

"’As you know, China is not the only country engaged in illegal currency manipulation,’ the letter charges."

Already, we can barely contain ourselves. Illegal currency manipulation? Schumer is referring to China’s decade-long policy of maintaining its currency at the same value as the dollar. The U.S. has announced to the world that it intends to destroy its own currency…and has set about doing so, cutting rates 13 times and introducing, over the past 15 years, more dollar credits than during the entire prior history of the republic.

A lower dollar reduces the weight of America’s 9 trillion in overseas obligations…it reduces the competitive advantage of low-cost foreign manufacturers…and it offers the consumer – hanging on his cross of debt – a little vinegary refreshment. But in trying to lower the value of its own paper money, the U.S. drags down the dollar-linked yuan along with it…and gains nothing.

"We are also concerned with Japan’s on-going and massive intervention in global currency markets," continue Schumer and his free-coinage posse. "These actions, intended to obtain an unfair competitive trade advantage for Japanese export industries, amount to a substantial subsidy of its major exports."


What else can we say? We have heard of pots calling kettles black, but here we have the biggest marmite on the stove fuming and bubbling over.

"The American Fed under Alan Greenspan," explains Kurt Richebächer, "has radically broken all rules and traditions of caution and reluctance in central banking. Not only has it acted with unprecedented aggressiveness in lowering its interest rates and in opening its money spigots: in order to lower longer-term interest rates, it has been bluntly inviting leveraged carry trade in bonds with the assurance that the Fed will keep interest rates low for a long time even if the economy recovers."

And yet, Senator Schumer, and practically every other analyst and commentator, is convinced that this is the way things work. Managing an economy is just a matter of improvisation. They do this…we do that…then, everything works out for the better. The Fed lowers rates…or it raises them. The president says something. A negotiation with the Japanese produces some agreement. Congress cuts taxes…or it increases them.

Is that how it works, dear reader? If the U.S. government wants a lower dollar…won’t it get what it wants? Won’t Schumer and his fellow demagogues do what is necessary to keep the economy moving? Won’t it all work out somehow…by pulling a few strings here and tightening a few loose screws there?

Let us ask the question another way: can the greatest ever build-up in debt be managed by a little tinkering here and there…some bluff and bluster by empty-headed politicians…and some hocus-pocus by Fed economists?

Or, does it work some other way, whereby debt bubbles end in debt busts…no matter how many arms are twisted or knobs turned? People don’t necessarily get what they want, we keep saying, but what they’ve got coming. Usually, they get it good and hard!

Eric Fry, our man in New York, is already on the scene at this year’s New Orleans Investment Conference.

We shall be joining Addison and Eric in New Orleans tomorrow. In the meantime, we turn to Jennifer Westerfield, another denizen of the Paris DR HQ, for more news:


Jennifer Westerfield, writing in Paris…

– At first blush, yesterday’s news from the mortgage market was nothing unexpected: "Mortgage Applications Off in Oct. 24 Week," remarks a Reuters headline. Existing homeowners are still laying claim to imaginary equity – refi applications nudged higher last week – but overall mortgage applications fell half a percent.

– But troll a little further in the headlines, and you’ll discover a very interesting development at our favorite government-coddled mortgage lender. "Fannie Mae Reports $1.2bn Accounting Error," writes the Associated Press. Due to a "flawed application of new accounting standards," Fannie Mae claims, the lender had previously understated its portfolio by $1.7 billion. Now, Fannie admits both its total assets and unrealized gains on certain securities are each over a billion dollars more than originally reported.

– Erm…do we detect a bit of déjà vu in this scenario? Last June, your New York editor provided in-depth coverage of the scandal involving Fannie’s smaller ‘cousin’, Freddie Mac. Freddie also reported its own ‘accounting error’…a similar story of significantly underreported figures intended to ‘smooth earnings.’

– "Here we go again, First Freddie, now Fannie," declared Rep. Richard Baker of Louisiana, longtime critic of the two lenders. "And here’s Fannie, just like Freddie…announcing a bigger than $1 billion accounting error, asking us to believe it’s no big deal."

– Together, Fannie and Freddie make up the lion’s share of the mortgage lending market – and wield a giant-sized influence over the U.S. economy. "What a mortal can easily see," wrote Jim Grant in Grant’s Interest Rate Observer, at the time of Freddie’s ‘accounting error’ disclosure, "is that a Freddie accident would be a dollar accident as well as a corporate-finance accident." Who knows what trauma a new ‘Fannie accident’ could bring to the economy?

– The dollar does not need a new ‘accident’ to add to its woes. Yesterday, the yen, sterling, the Australian and New Zealand dollars all climbed to fresh highs against the green(soon to be multi-colored)back. The pound rose to its highest level in five years, at $1.70.

– Meanwhile, in the equity market, indices around the world continued to drift gently upward. U.S. equities gained ground for a third straight day; the Dow edged up 26 points to 9,775, while the Nasdaq added 4 to 1,937. Most European bourses posted gains, while Japan’s Nikkei managed a 1.7% advance to 10,739.

– Gold for December delivery rose $3.60 to $387 – still above your editor’s new $370 buying mark. Bonds stumbled: the yield on the 10-year Treasury note rose 0.09 points to 4.2% percent.


Bill Bonner, back in Ouzilly…

*** The administration aims for a gently falling dollar. So far, the dollar has glided down so gracefully that scarcely anyone has noticed. Still, it is down nearly 6% against the euro since the beginning of September.

"You’re saying the dollar has a lot further to fall?" asked a French friend last night. "Great. I buy my products from the U.S. and sell them in Europe. The cheaper they are, the better I like it.

"You know, there are some great products in the U.S.. But often, you Americans are only interested in your own home market. Which makes sense; it’s so big. But what I’ve found is that there are a lot of very good products in America that can be reworked slightly and sold into micro-markets around the world."

*** The risk of a weak dollar policy is that the dollar might turn out to be weaker than expected. Americans cannot really work their way out of debt, because they have too few products to sell. Likewise, foreigners cannot work off their net $3 trillion in U.S. dollar assets by spending them on U.S.-made goods; there are not enough good products they want to buy.

There was a time, before 1971, when a foreign government with a large surplus of dollars could go to the Treasury in Washington and exchange his dollar bills for gold. This had the effect of limiting central bank reserves to what could be covered by gold. But now, what can a foreigner with extra dollars on his hands do with them? He can only exchange them with other foreigners for other currencies.

Of course, the same may be said of stocks. A stock buyer can only sell his stocks to other investors. But stocks usually have some intrinsic value that puts a cushion under price declines. Companies have factories, land, offices, patents, technology, customers, stores, products. And, an investor can look to a stream of profits that encourage him to hold the stock, even if its price is falling.

But why would anyone want to hold onto a falling currency? The real rate of return – after inflation – from holding short-term dollar deposits is already near zero – or below. If the currency were to fall just 10%…what foreigner could resist selling at least a part of his stash?

But to whom would he sell? Only to other foreigners with exactly the same worries. Which is why the dollar may not merely float down…but drop like a tax collector tossed out of a 20th floor window. In the wink of an eye…it could lose 50% of its value.

*** Your editor’s father hails from the steel mills of Donora, Pennsylvania. Hard to believe, but the Monongahela Valley in which the town is found must have been the Silicon Valley of the early 20th century. And Donora was a thriving burg on the cutting edge of applied technology. Today, it is little more than a metropolitan reminder that things do not always get better. "Donora is located on the western bank of the Monongahela River in Washington County…

"Modern Donora began in 1900 with the development of heavy industry in the area. The town was incorporated in 1901. Its name is a combination of Nora Mellon, wife of R. B. Mellon, and W. H. Donner, the purchasers of the land along the river on which their Union Steel Company constructed a rod mill that later became the American Steel and Wire Works. In 1902, the Carnegie Steel Company completed a facility that consisted of two blast furnaces, twelve open hearth furnaces, and a forty foot blooming mill furnace. At the same time, the Matthew Woven Wire Fence Company erected a facility. A third rod mill was constructed in 1916. A year earlier the Donora Zinc Works began production. Such industrial expansion required more effective transportation facilities than the river barges and short-line railroads could provide. The Pennsylvania Railroad bought what had been the Monongahela Valley Company and expanded rail service. By 1908, the Donora station had the largest volume of freight in the ‘Mon Valley.’ Of course, these industries needed workers, and job-seekers flocked to the area, especially recently arrived immigrants. In 1948, 14,000 people resided in Donora, and additional thousands lived in towns in the immediate vicinity.

"1948 population: 14,000+ "2000 population: 5,653

"In the early 1960’s, the nail-mill closed. Then the other mills and factories shuttered the doors and locked the front gates. By the late 1960’s and into the 1970’s, Donora was a distressed town. Population declined as people died off or moved away. Looking at the other side of the coin, the cemeteries have many fine tombstones recalling individuals and families of the days when, as the saying goes, ‘a lot of money got pulled out of that valley.’ But by the mid 1970’s, only the very old, and those with few options or little imagination, remained in Donora. And, to be fair, a few die-hards who wanted to stay and try to make a difference in the life of an old town. But how could a worn out old mill town, filled with environmental ‘legacy sites,’ and in a high-tax state to boot, compete with the Sun-Belt and with overseas production? How indeed?

"Now, the finest old houses along the main street have been converted into funeral homes. The commercial district is a collection of discount stores, mixed in with vacant real estate. There are a few commercial developments that are trying to make a go of it, but any substantial outside investment comes only on the heels of a great deal of state or federal aid. And obviously, things are not what they used to be. To end on an upbeat note, however, I think that in the shadows of the present one can still sense the proud past. And a proud past is always worth recalling, because if one could do it before, cannot another do it again?

"And on a note more germane to The Daily Reckoning, one has to wonder if Donora serves as a tale of caution, whispered into the ears of modern America by the Fates. ‘You too, my friends, can be swamped by the economic storms.’

"A final comment: According to the above-cited history, between 1900 and 1916 there were at least six major industrial facilities erected or placed on line in the humble town of Donora, PA. Looking at the United States as a whole in 2003, how often does anybody build a new mill or factory anywhere, let alone build six of them in one small area? I read all the time about new housing developments, shopping malls, office buildings going up. There is the occasional warehouse or ‘distribution center’ erected along some nexus of interstate highways, to serve the malls and outlets. But build a new mill or factory? I almost never hear of such a thing. And of those mills and factories that are being built, we are closing old ones a heck of a lot faster than we are building new ones. Welcome to Donora."

The Daily Reckoning