ENRON AND THE BUBBLE
dailyreckoning.com
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*** Stocks stink...but gold, well what can you say about it?...
*** Has a bull market in gold shares begun? Is the Pope Catholic?...
*** Record bankruptcies, tougher lending policies, Enron...long live the Queen...and more!...
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Stocks sink...but gold soars. Element number 79 on the periodic table rose $9 yesterday. It's up $20 in the last 2 weeks.
Gold sales in Japan have risen 300%. And mining stocks are at a two-year high. Goldfields rose 13% yesterday. Harmony was up 5%. Gold mutual funds have been the best-performing sector for the past 14 months.
"The new bull market in gold stocks that has been underway for the past few months is not, however, being fuelled by us 'bugs'," writes Gary North. "It's not the gold sector funds or the mining sector funds...the gold sector funds don't have any money, and the mining sector funds are skeptical of gold. It is my view that a few of the more savvy portfolio managers...are buying gold.
"Consider for a minute just how many mutual funds there are - ten thousand? - and how many trillions of dollars are invested in those funds. It is only logical that some of these thousands of fund managers understand the value of gold and are beginning to move a little money into gold stocks."
But why gold? Why now?
Because gold is what people turn to when they become suspicious of other assets. Enron, Global Crossing, Cisco, Amazon...America's favorite stocks may get blown away...but gold stays put.
Eric is airborne this morning...so today's Wall Street notes come from Addison, who is in New Hampshire, and at least in the same time zone as Manhattan...
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Addison Wiggin in Waterloo, New Hampshire...
- Not much doing on Wall Street yesterday. The Dow closed barely changed at 9685, despite another 23% loss for the beleaguered Tyco. The Nasdaq shed 17 points to 1838 on a heavy 2.1 billion share volume. Telecoms and Networkers were all suffering again.
- But the HUI...whoa. The gold bugs index stretched its gains to 46% in just over 2 months. The "barbarous relic" roared to within a whisker of the magic $300/oz mark, closing the day at a 2-year high. The index, which deliberately excludes the big bullion hedging concerns, is now up 148% in 13 months.
- JP Morgan Chase closed at its lowest price since the Long-Term Capital Management crisis of 1998. "I believe we handled everything with integrity, but we had too much exposure" was all JPM Chase CEO William Harrison could say to his staff about the company's dealings with Enron. "Enron was merely the latest in a series of catastrophes," writes Sean Corrigan, the Daily Reckoning's London correspondent, "for an entity many believe was the result of a hasty 1999 shotgun marriage intended to save the two great banking dynasties of Morgan and Rockefeller."
- Here at the Daily Reckoning we keep wondering: why are we hearing so much about Enron? What's the problem? Fortunes were lost, reputations ruined; people didn't get what they expected from Enron...but are they not getting what they deserve? Even senior management - who seem to have escaped with the loot - have not been spared.
- "Ken Lay et al will spend the rest of their lives in purgatory - burned by the courts," suggests your editor Bill Bonner, "poked by devilish lawyers, harassed by the hobgoblins of the press, facing time in the hoosegow as well as the poorhouse. What's not to like?"
- No silver lining comes without a cloud. The Democrats have seized on Enron as a campaign issue. "The more people hear [Enron], the more corrosive it becomes," says a letter from James Carville to Democratic troublemakers. He urges the Democrats to use the Enron issue in the upcoming elections.
- But as Andrew Kashdan points out: "One might not know it from the media feeding frenzy engulfing Enron, but this circus had its origins not in politics...but in economics."
- "At some interest rate," Kashdan continues, "it might be profitable to trade everything under the sun, as Enron wanted to do. At some Fed-engineered interest rate, Enron was certainly given the opportunity to try." More below...
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Back in Gay Paree...
*** Layoffs rose 32% from December to January. And last year more companies went chapter 11 than in 1994, 1995, and 1996 combined.
*** No wonder business financing has been getting harder to get. Lenders are getting suspicious.
*** Let's look at one very interesting case: General Motors is the strongest of the three U.S. automakers. 2001 was the second highest year on record for auto sales. And the Fed cut rates 11 times last year - making it much easier for businesses to finance their debt loads. Yet, Moody's recently downgraded General Motor's commercial paper from P-1 to P-2, making it impossible for GM to sell its debt to money market funds.
*** Result: GM has to pay more for financing at a time when its profits margins are being squeezed.
*** Why is GM hurting? Because U.S. manufacturers have been losing market share for years - thanks largely to the strong dollar. And because selling cars on-the-cheap does not give the company the profit margins it needs.
*** Why might GM be in even worse shape in a few months? Because zero financing and other temptations have done their work - moving auto sales that might have happened in the next few months to the last few.
*** "We expect a double-dip [a drop back into recession]," writes Sy Harding, "because of the way economic activity is being pulled from the future into the present to pull the country out of its mild recession."
*** Fifty years ago today, Elizabeth Alexandra Mary Windsor, 26 years old, took the throne of Great Britain, following the death of her father. Elizabeth II will go down in history, we believe, as one of the world's great monarchs. As we celebrate her golden jubilee, we can't help but reflect that in half a century, democratically- elected governments have done much mischief. Elizabeth, like gold, has done her job. |
