The World's Most Despised Stocks

“Oh, it’s not the fall

That hurts you at all

It’s the sudden stop.”

Walking Out

By Percy Sledge

“Contrary to my friend Marc Faber,” writes Jim Davidson, recently born again as a New Era believer, “I do not believe that the High Tech investment boom will soon sputter to an end…For those who believe the New Economy is just hype, I can only advise you to fasten your seatbelt.”

Fastening ones seatbelt sounds like good advice. But, the protection may be more useful against a sudden decline of the tech sector than the rapid acceleration that Jim imagines.

The theory of the New Era is that information technology has overcome the boom/bust cycle… or that Metcalfe, Moore and the Lambda Factor have overpowered Graham and Dodd. Value no longer matters. What matters is having the right technology. And don’t worry about greed and fear…or inflation. Anyone who pulls out of tech investments now is just a ‘scaredy cat,’ says Michael Murphy. These ‘Profit Rockets’ as another tech promotion calls them, are headed for the heart of the cosmos.

Despite the theory, the world’s experience with extraordinary market lift-offs of all sorts – as I described a couple of days ago – is that they never escape the gravity of the boom/bust cycle. They go up; then they go down. And they usually come to rest at about where they began. If that is the case this time…that is, if experience trumps the new era theory…what can you expect?

Applying theory will give you any answer you want. Clairvoyant Jeff Bezos describes Amazon in 10 years. And Al Gore, who invented meteorology, describes the North Pole in 50 years. Neither has any clue what will happen in such distant future.

But experience gives us a hint of what might happen in the near future:

“Assume that sometime in the future,” says Marc Faber, speaking of the Nasdaq, “it will give back at least five years of previous capital gains (the average period that bear markets in the US have given back). Again assuming that we saw the peak in the Nasdaq in March (as I believe), this would take the index down to around 1,000.”

A fall in the Nasdaq will almost certainly be accompanied by a fall in the Dow. Bears are not that choosy.

So what do you do? How can you protect yourself? Where can you invest your money?

“I would expect,” writes Faber, “under almost any circumstances, an out-performance of value and emerging economy stocks compared to major US indexes such as the S&P 500 and Nasdaq.”

While ‘the good news keeps rolling in’ for the miraculous U.S. economy…many other parts of the world have had nothing but bad press. Untouched by the Promethean light of the new era, their stock markets have been festering in darkness…rocked by the booms and busts of investors who “don’t get it.”

“Generally, every year several stock markets tumble off their peaks by at least 50%,” writes Edward Bozaan of Waterford Partners, courtesy of Marc Faber. “In the last two years, there have been more declines in the 70% to 90% range than ever previously recorded.”

Why do these markets collapse? Bozaan offers the usual analog explanations: war, government, currency markets and so forth.

“Sri Lanka is a prime example…” he says, “now down 75% off its peak. The government’s war with the Tamil Tigers is now in its 15th year. President Chandrika Bandarankaike, whose life is under constant threat, has survived two suicide attacks in the last year alone. In one, she was severely injured and partially blinded, and several dozen others were killed.”

Could darned cheap Sri Lankan stocks now be worth buying – as a counterbalance to the darned expensive ones on the Nasdaq? Maybe.

“Many stock market declines,” Boozan continues, “can offer terrific investment opportunities.”

Just as every extraordinary market boom seems to lead to an equal and opposite extraordinary market bust… Newton’s law seems to work in reverse. “For example,” Bozaan explains, “12 months after hitting bottom, most of the emerging markets shown below bounced back, with the average one gaining 75.8%. Some rose as high as 700%. And 24 months after their lowest point, many returned with remarkable agility and strength: the average one rose 148.7%, and several rose as high as 1,000%.

Okay. Mr. Bozaan has caught my interest, and I hope yours. Tomorrow, I will give you some of Mr. Bozaan’s recommendations in the world’s most despised stock markets.

Your very humble servant, still searching for the switch…to turn on the Promethean Light…

Bill Bonner

Baltimore, Maryland October 12, 2000

*** “Run out and get yourself fully invested in technology stocks right now-today,” advises an e-mail promotional message from Michael Murphy. “This time around you’ll be kicking your profits all the way to the bank!”

*** Elsewhere, economist Paul Krugman, calls the U.S. a “miracle economy” where “the good news keeps on rolling in.”

*** And Ed Hyman reports that equity fund managers are still as fully invested as ever.

*** The theory of a tech-led, eternal bull market is still intact. But the experience of most investors is another story.

*** I’m even beginning to feel sorry for lame-brained Ms. Wu. Stocks in South Korea fell by another 4% this morning. Damage was widespread in Asia – with the index in Taipei also falling nearly 4%.

*** U.S. investors didn’t do much better. The Nasdaq tried to rally, after 5 straight weeks of falling prices, but Mr. Bear was on the floor…and at the end of the day prices were down 72 points.

*** The Nasdaq is now, more or less officially, in a bear market. It is down 36% from its high – representing a capital loss of more than $2 trillion. Wealth effect… where are you?

*** Yes, finally, Reuters reported the words of an analyst who admitted, “we’re in bear mode,” as the Nasdaq came to rest just 4 points above its May 23rd low of 3,164.

*** And now that the bear has been officially greeted, he is expected to grab his hat and coat and leave. “We are close to the bottom,” said Fred Wilson of Flatiron Partners, a leading tech and dot.com venture capital firm. Mr. Wilson also described why Fortune 500 companies were not increasing their spending on the world wide web in classic terms: “they don’t get it.”

*** Those poor corporate execs – upon whom the Promethean light of the New Era never shines! The Dow went down with the Nasdaq yesterday…everyone suffered, New Economy, Old Economy…saint and sinner…those who ‘get it’ and those who don’t.

*** The Dow lost 110 points. Declining stocks outpaced advancing ones, 2 to 1. The ratio on the Nasdaq was even greater. And the number of new highs on the NYSE was only one-fifth the number of new lows.

*** On Wednesday, when it reached its low for 2000, the Nasdaq was down 22% for the year. The Dow was down 9%.

*** “The bear market that began last spring is now on the verge of breaking wide open,” writes William Fleckenstein. Maybe. But ‘never underestimate the power of denial’ says Fleckenstein.

*** Qualcomm lost $9. Yahoo! was down $17! And Amazon – down $2 5/8ths to close at $27 and change.

*** GE is worth more than half a trillion dollars. It, too, fell yesterday – after meeting expected earnings numbers, but not exceeding them. GE is still trading at about 50 times earnings. It yields less than 1% and has been growing at about 14% per year for the last 5 years. GE may be a great company – but why would you pay 50 times earnings for such a huge company, with so little growth? It doesn’t make sense.

*** Motorola, the world’s largest cell phone manufacturer fell 19% – after announcing slower growth. Could it be that everyone who wants a cell phone already has one? Or, that cell phones are no longer a status symbol? My friend Greg reports that he was at a funeral where, at the dramatic climax, as the preacher’s voice was wrapping around the “ashes to ashes, dust to dust” lines like boa around a swamp rat, the mourning was interrupted by someone’s cell phone. In another episode, Greg was enjoying a private tour of Buckingham Palace with a small group… which again, was interrupted by cell phones. Maybe people have had enough.

*** I don’t even own a cell phone. If you want to talk to me, come down to the Paradis bar…

*** Daily Reckoning readers may remember that at least 6 months ago I called the Big Techs the “worst place” for your money. Now this from the NY TIMES: “Many investors, and many mutual funds,” says an article titled The Rise and Fall of Big Tech, “entered this year with their largest investment in some of the stocks that have done the worst.” For example, “Janus Capital, the mutual fund company, made headlines in January when it bought an entire secondary offering of Healtheon WebMD, since renamed webMD, paying $62 a shares. Yesterday, with the stock under $10 a share, Janus disclosed that it had sold most of the shares.”

*** The price of oil fell a little in NY yesterday, and then rose a little in Asia overnight. Or was it the other way around? Experts say there is 51% less heating oil in stock on the East Coast than there was a year ago.

*** “The American Petroleum Institute (API) reported yesterday,” writes David Tice, “that U.S. distillate inventories (including diesel and home heating oil) actually declined over 3 million barrels to 113 million. This was the largest drop since February.” “Scary” said an analyst quoted by Bloomberg. Last year was an unusually mild winter. We may not be so lucky this time.

*** The currency markets, meanwhile, have been fairly calm. But there is bound to be excitement ahead. Colin Negrych, as reported by William Fleckenstein:

“The U.S. has $65.5 billion in reserves to defend the dollar. This is a pittance relative to the value of U.S. assets held by foreigners, both securities and business interests. When the dollar starts to fall against the euro, as it has been doing for years against the yen, the “dollar crisis” mentality will take hold. The U.S. macroeconomic imbalances make a 25- to 40-percent adjustment in the dollar the most likely outcome. This event will be resisted in every way possible, but the efforts will fail.

“The U.S. has sucked in massive amounts of foreign capital with captivating tales of high returns and low risk bolstered by high growth and low inflation, all made possible by a surge in productivity resulting from the application of technology. There is now plenty of evidence the foregoing is a fatal fiction.”

*** Last year, “there was a bunch of money, but it was a bunch of dumb money,” said one ad exec on ZDnet News, referring to dot.com advertising budgets. “We are not going to see 17 dot.com advertising on the SuperBowl,” said another. Yahoo! and a host of other Internet portal sites are feeling the pinch during this Autumn of Anxiety… Yahoo! shares fell 21% yesterday.

*** Kevin Klombies: “When oil prices fall, the drillers and service companies get clobbered; when the tech cycle ends we find the main customers for almost every one of these companies are… other tech companies. Incestuous? Absolutely. A pyramid scheme. Quite probably.”

*** “Don’t worry about coal going away for one minute.” says Dan Ferris. In fact, you can expect just the opposite. “The electricity crisis could be solved overnight. The generating capacity – 85,000 megawatts, almost double the capacity of the entire state of California’s 46,000MW – is available now just by pushing existing coal plants.”

*** According to Ferris, existing plants use between the 65% – 70% of their capacity. But they can operate up to 85%… That extra demand could account for another 150 million to 200 million tons of coal demand… on top of the one billion tons we’re currently using. Bottom line? Coal demand will continue to track electricity demand.