Waiting for the Other Shoe to Drop

The hangover may not be over yet… says the Taipan Group’s Christoph Amberger, but bargains are already beginning to mount. And what’s this? Is he really calling a bottom…?!?

"Are you better off than you were two years ago?" a garrulous Al Gore recently asked of an obedient audience attending a Democratic "Where Are They Now" event. The response, as planned, was synchronous head wagging and the mouthing of a collective "no!"

It made me think.

"Better off" implies a comparative process, whose result depends on evaluating two states of being. But to evaluate properly and reasonably, you have to be able to apply the same criteria. If you aren’t able to do that, your results are questionable at best.

For example, you could make a valid claim that each and every German back in 1923 was a multimillionaire. Of course, that was during the Inflationszeit, and a billion Reichsmark was just enough to buy a stale loaf of bread at the local baker’s, who in turn "stretched" the flour used to make it by adding sawdust. Today, few Germans are millionaires when you compare their numbers to those of 1923. (Especially now that the former Deutschmark-millionaire requires twice as many Euros to keep his status.)

The last bout of "hyperinflation" we experienced here in the States might not have affected the buying power of the currency or the cost of living. But it created an illusion of wealth by over-inflating the paper valuations of companies and the equity stakes they issued. In this regard, the goateed Internet millionaire whose million-dollar mortgage and car loan for his Ferrari were secured by his overvalued stock options was much like the Hausfrau of the early Weimar Republic who carted billions of Reichsmarks to the grocery store in a wheelbarrow.

Or take that other terminal affliction of the late 20th century: collectible toys. Contemporary with Pets.com, smallish stuffed animals and trading cards developed value trajectories that can only be compared to the launching phase of intercontinental missiles. Three trademarks stand out in my memory: Beanie Babies, Pokundefinedmon, and Tickle-Me-Elmo. Their real values fluctuated between those of a roll of dental floss and the promotional matchbook of a dancing school for Mormon singles. After all, they were nothing but stuffing, miniature glass eyes, cloth, and stiff paper.

And yet, people were willing to pay through the nose. Beanie Babies retailed for between five and ten dollars. Some wily storeowners in resort towns managed to sell them for fifteen. And at the height of the frenzy, there were collectors who would pay several hundred dollars for special "retired" models…each of which cost about 50 cents to make.

The "values" for Pokundefinedmon cards made Mary Meeker look like Little Orphan Annie. The Holographic Charizard. A simple, uninspired card with holographic foil at times switched hands for fifty dollars or more. Not bad at all for a card whose production cost and inherent value was less than a penny.

Adding up the year 2000 "valuations" of the toys that are scattered like the dead of the Battle of Austerlitz throughout my children’s rooms, I could have sighed contentedly and folded my hands above my stomach: Harvard, here we come!

Unfortunately, the Beanie Baby math of 2000 that determined empirically that I was way ahead of the game had just about the same shelf life as Clinton Era prosperity.

To arrive at an objective comparison of "how well off" we are today compared to the year 2000, wouldn’t you have to adjust the perceived (and politically more marketable) reality of that year by taking into consideration what we know today?

If companies were able to leverage each other to the hilt based on crooked Enron-style deals, suspicious AOL- style double-booking of revenues, and balance sheets whose "gains" reflected mostly stock appreciation (which in turn depended on media manipulators), shouldn’t there be something like a restatement of stock market gains and GDP for the late 90s, allowing us to compare apples to apples and Milk Duds to Milk Duds?

In other words: were we really "better off" in 2000 when the price for the Holographic Charizard represented a full day of work for a minimum-wage laborer? Or did we mainly feel better because we were blissfully ignorant of the fact that most of the perceived wealth of that era consisted of smoke and mirrors, fluff, and holographic foil?

Shouldn’t Al Gore’s question have been: are you smarter today than you were two years ago? There, the only appropriate reply would have been: you betcha!

But of course, nobody trying to muscle back into public office would like to ask that question.

The hubris that shaped the attitudes of the year 2000 – and still appears to tinge the rosy nostalgia of liberal entertainers and politicians – was not quite unreasonable at its core. After all, the Western world had just stared down the biggest bugbear of a half- decade. The Y2K debacle that wasn’t. When the lights didn’t go out on New Year’s Eve, wishful thinking became common knowledge. The system was simply too big to fail.

Of course, the cautionary lesson of the 20th century was that nothing is too big or stable or important to fail. This lesson should have been learned when the Titanic sank, the Soviet Union imploded, and Kevin Costner’s "Waterworld" was pulled down into box office pond scum by its own overblown sense of importance.

You may be able to delay terminal failure. But there is an immutable law of nature that you can’t do so interminably.

This appears to be the realization of Heizo Takenaka, Japan’s new economics minister, who seems determined to put his country’s "too big to fail" banks out of their decade-long misery.

Japanese banks are presiding over untold billions in bad loans. And yet, under the Japanese brand of capitalism, they thus far have been allowed to "save face." Bankruptcies and serious restructuring that would have cleansed the industry – and indirectly, the Japanese economy – have been delayed for ten years now for fear of the short-term political and economic repercussions.

But these corporate patch-up jobs have created their own nightmares. Japanese banks now also hold grandiose positions in corporate equity. Each drop in the markets – the most recent triggered by fears of Takenaka’s terminal accountability – translates into yet another dent in their capital.

In the first couple of trading days in October, latent losses on shares held by the 12 largest commercial banks in Japan jumped by a stomach-churning 46% to US$41 billion, according to the Daiwa Institute of Research. With the Nikkei 225 at the 8,600 level, the capital-to- asset ratio of these banks is a bit more than 9%. That’s a smidgen above the minimum 8% required for banks to operate internationally. A drop of the Nikkei below 8,000 – a mere 7% drop below today’s close at 8686 – and some banks may indeed find themselves behind the eight ball very, very soon.

(After all, what’s another 686 points considering the Nikkei has already lost four times that in less than two months?)

U.S. banks are coming to grips with their own hangovers caused by the binge of leveraging cable, telecom and Internet companies to the hilt while the going was good.

They now find themselves saddled with the assessment that 13% of all outstanding loans are either in default or unlikely to be repaid. Risky loans, according to a survey by the Fed, rose to US$236.1 billion in the year ended June 30, up from US$192.8 billion a year before.

This means we probably haven’t seen the end of the Big Bubble Hangover yet. Japan may still have a few thousand points to shave off the index before there are lasting improvements.

But there are early indications that there may be an end to the dry spell in the markets. In early October, Thomson Financial indicated that U.S. insider selling in September fell to its lowest monthly level in eight years, dropping 55% from US$1.5 billion in August to US$671 million in September.

That’s the lowest volume since December 1994.

Executive purchases totaled US$130 million in September, about half August’s level.

What is that telling us? We have three ways of looking at these numbers: One, corporate executives are still so comfortably off that selling their positions at these prices won’t make a difference. Two, they have stopped paying attention to their monthly portfolio statements – like the rest of America. Or, three, they’re expecting a rebound.

Insider buying has picked up on Lucent, Microsoft, Intel, Motorola, Campbell Soup, B/E Aerospace, Chesapeake Energy, and MetLife Inc. And there’s another thing. Stocks are getting dirt cheap. You can buy Ford for seven bucks and change, the most innovative chip manufacturer for five dollars and change, and the patent holder of a revolutionary self-contained heart pump… will cost you half the price of a Beanie Baby.


Christoph Amberger,
for The Daily Reckoning
November 4, 2002

P.S. At the Taipan Group, we’ll be using every dip as a buying opportunity. If you are waiting for 1,000 on the Nasdaq or 6,800 on the Dow, there’s a good chance you’ll see these levels. But, although it may be heresy to say in The Daily Reckoning, we don’t expect the market to linger there. Three months from now, we expect it won’t matter exactly where you enter the market, as long as you are long.

Editor’s Note: As publisher of Taipan, J. Christoph Amberger’s is constantly in touch with Taipan’s worldwide list of contacts, analysts, traders, economists and investors and coalesces their insights into the most promising investment opportunities.

You can find out more about Taipan Trader’s most recent calls – including gains of 480% gains in less than a month…150% gains in under 15 days…50% gains in less than 24 hours.

The More Volatile The Market, The Faster And Bigger Your Returns

All eyes were on the Dow and Nasdaq last week. Is the bear market over? How high will this rally carry stocks? No one knows the answers, but investors seem prepared to hold on to their stocks – or buy more – while they wait to find out.

What they will find out – sooner or later – is how low a bear market can take stocks. But that doesn’t mean the Dow can’t go up another 1,000 points before…

We found two items in this morning’s news more intriguing than stock prices. First, consumer spending went down 0.4% in September – while the savings rate rose to 4.2% versus 3.4% in August.

Could consumers finally be doing what they have to do?

They can’t keep spending money they don’t have on things they don’t need forever. ‘Something’s gotta give,’ we keep telling ourselves. Either the consumer has to wise up and start protecting himself by paying down debt and increasing savings…or the foreigners are going to stop financing his excess consumption.

It takes $1.5 billion of imported capital, every day, to keep the American consumer credit economy living in the style to which it has become accustomed. The money comes from foreigners, who still take dollars in exchange for valuable goods. How long will they continue taking them? we kept wondering. Sooner or later, the foreigners will want to get rid of some of their dollars, we guessed.

But it was beginning to look like consumers might continue to spend…and foreigners might continue to lend…for much longer than we could keep forecasting that they would stop.

The September figures, though, look like the beginning of a trend; the U.S. consumer is turning a little bit Japanese…spending less, saving more, and destroying the American consumer credit economy is the process.

And guess what else? The dollar fell – against gold and against other currencies last week. The spot price of gold edged up $5.40 last week. The euro, in futures contracts for December, rose to more than 99 cents.

Eric? More news from Wall Street?


– The bulls held sway on Wall Street for the fourth straight week, as the Dow Jones Industrial Average gained about 1% to 8,515 and the Nasdaq added more than 2% to 1,360. Last week’s gains capped off a stellar month for the stock market.

– Despite a continuous string of grim economic reports throughout October, the Dow enjoyed its best one-month performance since 1987. What’s powering this frenzied stock-buying? Are the bulls on to something, or merely on something? The parade of recent economic statistics has been so horrifying that Addison likens them to "the opening scenes a Stephen King novel." And yet, stocks are soaring. The Nasdaq has gained a stunning 22% from its October 9th low, which means that the bulls are either prescient or self-delusional…We suspect it is the latter.

– Part of the rationale behind the bad-news-is-good-news stock buying is that the economy is so sluggish the Federal Reserve will feel compelled to cut interest rates again on Wednesday…And, as everybody knows, rate cuts are bullish for stocks, right? In fact, the eleven prior rate cuts were so bullish for stocks that the Nasdaq lost 75% of its value.

– Curiously, the U.S. dollar did not participate in the exuberant financial Oktoberfest on Wall Street. Maybe the greenback just didn’t feel like partying. But if the biggest one-month stock rally in 15 years can’t pull in enough foreign buying to support the dollar, what will? The gaping U.S. current account deficit certainly won’t help, and neither will the moribund US economy. Net-net, the dollar faces some serious headwinds.

– Almost everything about the U.S. economy these days spells S-L-O-W. "The October employment numbers were just plain ugly," says Alan Abelson of Barron’s. "The unemployment rate edged up a notch; but we’re convinced it’s understated and, in any case, destined to climb in the months ahead. Payrolls shrunk again, this time by 5,000; but, more significantly, 29,000 jobs were lost in the private sector. Hours worked overall declined 0.4% and factory hours worked dropped twice as much."

– Sherry Cooper of the Bank of Montreal Financial Group observes that the 5.7% unemployment rate may be worse than it appears. That’s because the U.S. economy is suffering "a very different kind of joblessness than ever before – it is primarily white collar and highly educated. They are people who have never been unemployed before. They are managers, business consultants, auditors, engineers, technology workers and investment bankers."

– Illustrating the point, a recent issue of Business Week profiles Craig and Malene Comes of San Jose, Calif., who "were raking in $120,000 a year and living la dolce vita. The two computer technicians indulged in lavish trips, hired a cleaning lady, and ate out almost every night. Then, both were laid off. Today, they get bags of groceries from a San Jose food bank, have joined the ranks of the uninsured, and beg their parents for $1,045 in rent for their 600-square-foot apartment."

– Unfortunately, the Comes’ travails are not entirely unique. Within the Conference Board’s latest consumer confidence survey, the jobs-plentiful index imploded to 14.8 in October from 35.6 a year ago, while the jobs- hard-to-get index soared to 27.3 from 14.9 a year ago.

– Hmmm…jobs are both scarce AND hard to get, especially for well-paid professionals. No wonder confidence is eroding.

– Given the increasingly hostile economic conditions, plunging consumer confidence seems a rational response…and so does saving more and spending less. Unfortunately, rational behavior sometimes stunts economic growth. Now that many consumers are becoming savers, retail sales are falling off rapidly. The BTM- UBS Warburg chain store sales index dropped 1.9% during the week ended October 26 – the lowest reading since January.

– "The sharp plunge in the October Consumer confidence Index should not be taken lightly," cautions Comstock Partners. "Every drop in the index to 80 or below since 1967 was associated with a sharp decline in retail sales…This does not bode well for retail sales as we enter the holiday spending season…retail sales have already declined for two consecutive months at a time when consumers are up to their neck in debt…Without consumer spending growth there is nothing else to pick up the slack."

– But Alan Greenspan’s 12th interest rate cut is gonna make it all better. Just you wait and see!


Back in Paris…

*** Scoff. Sneer. Have you heard of the ‘Presidential Cycle,’ dear reader? Apparently, stocks tend to go up after the mid-term low. This has been the case since 1914, with an average gain of 50%. The worst results came in the Hoover Administration. The Dow rose 23.4% between December of 1930 and February of 1931. The biggest gain occurred during the Reagan years, with the Dow up 81.20% between ’86 and ’87.

Investors think the low-point has been hit for the Bush Administration. Maybe it has. But it is all idle entertainment to us. Investors get what they deserve, eventually. Even if they have to wait a while. A man who buys stocks at the current P/E of 48 (based on S&P’s estimate of core earnings) deserves something…but not a profit.

Here at the Daily Reckoning Paris headquarters, we’re not particularly interested in the Dow. We take it for granted that stocks go up and down. We also take it for granted that we cannot know which direction they will take. Not being traders, what difference does it make?

*** The All Saints vacation is over. The boys are all back in school in Paris. The girls are both in the U.S. – one, a very young fashion model in New York…the other, a college student at a small school in West Virginia. Your editor is leaving today to visit them both…

The Daily Reckoning