The World's Most Despised Stocks-II

Everyone loves a winner. You know who the big winners are. They are the people who get their pictures on the cover of TIME magazine. Jeff Bezos, for example. Amazon’s founder and chief visionary was TIME’s ‘Man of the Year’ for 1999. His smiling face appeared on magazine racks throughout the nation at about the precise moment when his stock hit its most lunatic high.

The two events are not merely coincidental. Fame and fortune beget friends. But by the time you see your face on TIME as the ‘Man of the Year’ you must realize that you have become about as popular as you are ever likely to be. Few men make it to TIME covers. Fewer still go on to greater fame and fortune.

It is a little like longevity. Few people live to be 100 years old. And if you do, your chance of living another 5 years are almost zero.

Bezos, in other words, had nowhere to go but down…along with the price of Amazon.com shares.

You could also look at the situation through the lens of the new paradigm. The theory was that Amazon.com stock could go up, if not forever, at least long enough to allow investors to get a good return on their money. The theory, gussied up with corollaries such as ever- improving productivity, ever-expanding Internet sales, and ever-growing faith in the New Economy, enticed investors to pay more than $100 a share for Amazon.com at the beginning of this year.

Against the theory was pitted the experience of generations – which is described, neatly, as “regression to the mean.” Every extraordinary sensation is reduced, sooner or later, to a less extraordinary one.

You will not find anything surprising in this. From an investor’s point of view the lesson is obvious: when something or someone has reached what appears to be an extraordinary pinnacle of success, the next move will be down.

The question I pose in today’s letter is this: when something has reached what seems like an extraordinary failure, must the next move be upward?

We saw yesterday how this appears to be so. Looking at emerging markets, we saw that they crash…and then rebound. And since we seem to be on the edge of a major downward slope in U.S. equity prices…perhaps one of these already-depressed markets would make a good refuge.

Edward Bozaan of Waterford Partners suggests a few alternatives.

Columbia, for example, has watched its stock market collapse by about 70% from its 1994 highs – to a 10-year low. “Things have gone from bad to worse,” he writes. “Not only is the country suffering from a recession and its highest unemployment since the 1930s, but social unrest and guerrilla warfare are escalating.”

Contrarians should love Columbia. Even mother nature seems against it – with earthquakes and El Nino adding to the suffering caused by politicians.

It may be a little early for investing. President Clinton is moving forward with a $1.3 billion military and social assistance package that is bound to make things worse. But soon, you may want to consider an investment in Columbia.

“Bavaria,” says Bozaan, “remains one of the cheapest beverage companies in the world. After reaching a high of $11 in 1999, shares slid to below $3 in 2000. Shares are trading at 50% of replacement cost, and its enterprise value is $50 per hectoliter, as opposed to $100 to $150 per hectoliter for the industry globally.”

Or how about an investment in Africa?

Among the greatest failures of the last 50 years is the idea of majority rule.

Majority rule was an almost irresistible theory in the mid-20th century. Throughout most of Africa, the minority – white colonialists – were replaced by the majority – local black governments. More or less.

But though the theory was appealing, the experience of majoritarianism – as it is actually practiced – has been another matter. In Africa, as in America, as more and more people got drawn into the political system – the worse the government became.

You may recall the recent problems faced by Zimbabwe’s tobacco farmers. ‘Comrade Bob’ Mugabe’s black government had replaced Ian Smith’s minority white government in the ’70s. Nearly three decades later, the whites had become an even tinier minority – dwindling from 3% of the population in 1980 to about one half a percent today. And the nation’s GDP has fallen in half. The average person – white or black – is only about half as well off as he had been under Ian Smith.

Mugabe, sensing a growing dissatisfaction with his inept and corrupt leadership, turned to his old friend, a man who goes by the nick-name “Hitler.” Well, ‘Hitler’ rose to the challenge…and soon the country was an even bigger mess than it had been. People were beaten up and sometimes killed, gangs of thugs roamed the countryside, property was stolen by the government as well as by free- lance criminals. And Mugabe blamed the problems on his opponents.

This is the background to what has become an extraordinarily cheap stock market.

I do not expect you, dear reader, to pick up the phone immediately, call your broker, and put in an order for Zimbabwe equities. But that is the point. No one wants them. They are as despised by investors as Amazon.com was, until recently, so loved. If Amazon.com was at its zenith…Zimbabwe was at its nadir.

But if Amazon.com was doomed to collapse – which so far has taken the stock down more than 70% – is Zimbabwe fated to boom?

I do not know.

But Mr. Bozaan describes a Zimbabwe company that might be a contrarian antidote to the Nasdaq:

“One stock I like,” he writes, “is Econet Wireless, the country’s dominant wireless phone provider… When the company was formed in June 1998, 20,000 subscribers signed up. Since then, that number has risen fivefold, to 100,000 and the company expects to double it again in the next 12 months.”

Wireless communication systems are less expensive to install and easier to maintain than land-lines. In Zimbabwe, as in other poor, disorderly countries, copper wires are frequently stolen and sold for scrap.

The cost of servicing each customer is lower than in the developed world – and the un-tapped market is huge. Bozaan thinks Econet Wireless will get a big part of this new market – not merely in Zimbabwe, but in other parts of Africa.

And, even after a huge run up in the value of the shares, the company is still very cheap – even compared to other similar companies.

Even bigger bargains can be found in Zimbabwe farmland. Threatened by squatters and looters…menaced by expropriation and murder…prices have fallen to give- away levels.

Contrarians take note: the time to buy is when blood is running in the streets, as long as it is not your blood.

Your very contrarian correspondent,

Bill Bonner

Baltimore, Maryland October 13, 2000

P.S. I took the overnight flight from Washington to Paris and am back in my office. It was a good trip – I fell asleep before we took off and didn’t wake up until we landed.

*** “The Dow has gone down for six consecutive sessions,” reports the NY TIMES this morning. But “it has been more than a decade since it had a string of seven straight losses.” Today… Friday the 13th…uh oh…

*** Bill is on a plane right now, returning from the US to Paris. He assures me he’ll be in the office to provide you with his essay and additional insight on yesterday’s carnage. In the meantime, stayed tuned…you’re reading “the notes” prepared by Addison S. Wiggin.

*** For starters, the WSJ reports today that “the bear that mauled technology stocks has begun to sink its claws into the rest of the market.”

*** The Dow dropped 379 points – the fifth largest point drop in its history – to 10,034. The index is now 14% off its January high. And it has violated the 10,376 level, which the ever-vigilant Dow theorist Richard Russell says “will be signal that the bear has come out of his lair and a lot of damage lies ahead.”

*** The Dow first topped yesterday’s closing level of 10,034 the week of April 5th 1999.

*** Yesterday, only 414 stocks advanced while 2,133 declined. The A/D ratio has been negative in 17 of the last 20 trading days. And the S&P 500 closed down 34 points to 1,329 – a low it hasn’t seen since October 28th 1999.

*** Home Depot got walloped down $14, losing 30% of its value. And Amazon closed at just a few pennies above $25.

*** Will the Fed get spooked by falling stock prices? Will it be able to “do something?” William Fleckenstein: “We all know that Easy Al likes to loosen up at the drop of a hat – he’s done it the last three years in a row. The problem is now he’s between a rock and a hard place. Oil is going nuts because of demand, capacity and geopolitical reasons, and also because inflation has picked up even though we are headed towards a recession. The end of an economic cycle often looks like this.”

*** “In an inflationary environment,” writes Bill King, “further money pumping exacerbates the problem. In ’99, the global environment became inflationary. If Al tries to pump more credit/money, it will leak into oil & gold, reinforcing inflation, and weakening the dollar.”

*** Gold rose $5 to $278.

*** The zero, I mean euro, remained at $.86 while the dollar index jumped to 115.

*** The BLS released figures showing the US current account balance jumped again for the year ending Sept. 2000. From Sept. to Sept. 1999-2000 imports increased by 6.9%, exports grew 1.8%. Weakening returns on speculative stocks are likely to turn this number around. When it does… who will want to own dollars?

*** The PPI came out a minute ago. The number measures inflation at the wholesale level. Bill King predicted that it would have to be “a minimum 0.5% increase,” he wrote last night “just to make up for August’s bogus numbers. BLS sampled early in August, ignoring the explosion in energy prices.” He was right. The figure came out at 0.9% – showing wholesale prices rising at an annualized rate of more than 10%.

*** Yesterday’s ruckus in Palestine and a bomb-blast killing 5 Americans in Yemen drove oil traders into a frenzy. Fears that an already lagging supply-chain would be disrupted drove NYMEX crude up nearly $3 to $36.06.

*** The Nasdaq continued its slide, too. Early in the day the Big Tech index threatened to rally into positive territory… but gave up, gave in, and finally surrendered another 93 points to close down to 3,074. The Nasdaq is now 39% below its March high.

*** Big tech continued to suffer; Cisco lost a buck; Juniper dropped $6; and Yahoo! – despite positive earnings, and a conceivably healthy business – continued to fall, down $8.75 to $56.

*** Markets around the world felt cold winds of autumn… Tokyo’s Nikkei closed down to 15,330 – it’s lowest since March 9th. Korean stocks dropped again – nearly 2% – now flirting with lows it hasn’t seen since February of 1999. The Hang Seng and Singapore markets were both off more than 2%.

*** “Panic…Second Great Depression by October” proclaims the Weekly World News, September issue. The WWN is an entertainment journal – full of whacky, amusing, made-up news. It is like the International Herald Tribune in that regard, but more entertaining. One article tells how a “Real-life Crusader Rabbit saves sleeping family from blaze!” Another declares that “Adam & Eve’s Skeleton’s Found.” My favorite: “How you can get your loved ones out of Hell,” in which a Reverend Whathers suggests that you “begin with an 8-hour fast…to purify yourself.” But make sure your doctor says its okay. I guess if your doctor won’t go along your loved ones will just have to rot in Hell forever.

*** Bill just popped in. The guy is a maniac. He flew all night. Now he’s in the office ready to work. His essay is below…