Heinz:
I still say a meaningful bond rally is out of the question as long as stocks ramp up on any hint of improvement in the bond market.
Interesting article from THE DAILY RECKONING
Charge of the Light Headed Brigade
Some things in life cannot be overdone. The cavalry
charge, for example, cannot be undertaken with too much
enthusiasm or singlemindedness. Circumspection, caution
and second thoughts do not help.
There are huge paintings in the Musee d'Orsay that
record the spirit of Napoleon's cavalry. Meissonier's
paintings, for example, show the collective energy of
men and horses concentrated on a single objective -- the
charge. There is no room for reflection during a
cavalry charge. Even a backwards glance would reveal
misgivings and betray the whole effort. The expression,
"don't look back," originated with cavalry officers.
So, if you're attacking the enemy on horseback, don't
look back.
I reported, months ago, on the comments of one radio
bullmeister, who advised his readers to get into the
stock boom before it was too late. "Ours is not to
reason why," he said, picking up the sentiment from
Kipling's poem, The Charge of the Light Brigade, "ours
is but to buy, buy, buy." I doubt that it occurred to
the advisor that the poem recalled an event in history
that was both extremely stupid and completely futile.
Lord Cardigan, who led the charge, had gotten his
bearings wrong and charged the wrong objective. His men
were almost completely wiped out to no good purpose.
Besides, good advice for the cavalry may not be good
advice for investors. Few people go to their brokers
complaining that their stocks have gone up excessively.
But a moment's reflection... and a brief backwards
glance at the history of market behavior might reveal
why they went up so much... and where they might go
next.
Most things that are done to excess end in later
regrets. Thus, the hardest thing and often most
important thing in life is knowing when to stop. That
is as true for a truck driver, as it is for a young
associate at a company Christmas party, as it is for a
trend following investor.
(Of course, it may also be said of many people that they
never get going in the first place. But let us ignore
that for the moment and stick to the point.)
Back in the late 1980s I became convinced that the
Japanese market was about to crash. The valuations were
simply too extreme. A single property in downtown Tokyo
was worth more -- at least on paper -- than all of
California. My guess was that this was an aberration
waiting for regression to the mean.
I formed this view, alas, a bit early, beginning to
write about it at least by the spring of 1988. A year
later the crash had still not occurred. My friend, Mark
Skousen, made a joke of it. He gave me a special award
at a banquet in October of 1989. It was a mock-up of a
book: "HOW I CALLED THE CRASH IN JAPAN by Bill Bonner."
I wish I had written that book. Two months later the
Japanese market began a bear market. Share prices fell
for the next 10 years... and still, even after a 50%
increase last year, they are less than half of what they
were in 1989.
I did not exactly know WHEN to stop buying Japanese
shares. But at least I knew enough to put on the
brakes.
Looking at the pattern of the Nasdaq over the last three
years, I see Tokyo all over again -- if not the shadow
of death. The Nasdaq went up 22% in 1997, then the rate
of increase doubled to 40% in 1998, and then it doubled
again to gain 86% last year. This kind of exponential
growth is the mark of excess. It is almost always a
prelude to a similar contraction. This will come as a
shock to younger readers -- but stocks go down as well
as up. More on this as it develops.
A similar asymptotic, but even more dramatic, excess can
be seen in the growth of P/E ratios. For more than 100
years up until 1996 the P/E of all stocks, I have it on
the authority of Jeremy Siegel, a professor of finance
at the Wharton School, was about 14. The Nasdaq P/E
rose to between 20 and 25 during the late 80s. And then
it doubled in the early 90s to about 40. By 1998, it
had more than doubled again -- to 100. And then, in the
following year, 1999, it doubled again, now standing on
what must be the pinnacle of P/E excess -- 200! If
things remained at this level, investors would have to
wait 200 years for the companies to earn enough money to
repay their investments.
Marc Faber remarked that he had never before seen this
level of euphoria. How could he? It has never before
existed.
Even during the hey day of the Nifty Fifty -- "one
decision" stocks that had everything going for them,
such as IBM, Xerox, and McDonalds -- P/E levels reached
only an average of 41. And the most expensive of the
whole bunch, Polaroid, had a P/E of 95.
But the Nifty Fifty were good companies. They had
business models that were proven to work. Even so, the
Nifty Fifty boom went bust in the bear market of '68 -
'74. Many of the companies never recovered.
The present euphoria is concentrated on companies that
have very few of the strengths of the Nifty Fifty. They
are more like tulip bulbs than real companies... or
maybe like the mining exploration companies that boomed
in the mid-90s, though on a far more modest scale.
Like the exploration companies, the Internet stocks are
searching for something. And like the Vancouver
juniors, they will probably never find it. That doesn't
prevent the sellers of the stock from making a lot of
money. But it makes it very hard for the buyers.
Doug Casey's most recent newsletter revealed more of the
insanity concentrated in the Internet stock industry.
Amazon.com, which I've ragged about for months, has one
feature I've ignored -- debt. $1.25 billion of it.
I've always assumed the company would shrink to some
modest level of sales, upon which it could make a modest
amount of money. But with so much debt to service, it
will not have the time or flexibility to do so. In the
coming crash, it will be unable to raise capital to
service the debt and will be forced into bankruptcy.
Ameritrade is capitalized as though each of its 450,000
customers were worth $10,000. This is such a
preposterous figure it sounds like it was conjured up by
a Vancouver stock promoter. Doug points out that when
the stocks crash, Ameritrade's customers will disappear
too. And many may visit the company again, merely to
file some sort of sore-loser lawsuit. Thus, many
customers could cease being dubious assets and become
real liabilities.
Dr. Koop, meanwhile, has found 500,000 people who visit
his site to get various ideas and information for free.
His drkoop.com stock values these freeloaders at nearly
$1,000 each. But he's losing about $100 a year on each
one -- which implies that the actual value of each
visitor is a negative 1,000 bucks. This is not a profit
making company -- it's an anti-business...
redistributing investors' capital to Internet surfers
and suppliers.
At least the exploration companies might have stumbled
upon, perhaps by accident as Doug's friend Robert
Friedland did at Voisey Bay, valuable mineral deposits.
These Internet companies are more like Bre-X... the
company that claimed to have discovered one of the
biggest gold deposits ever. The story sent the price of
the shares soaring... and lifted the entire market. All
was well until an independent lab cast a backwards
glance over the test results and found that they have
been rigged. And then the lead geologist decided that
he'd rather be dead than in jail. He went sky-diving
out of a helicopter, without the customary equipment.
All of it was amusing at the time. And so was the
discovery that Japan, Inc. wasn't immune to the
temptations to excess.
But it reminds me how close we might be to another great
financial debacle. I've been warning about a crash in
the Rocket Chips for at least a year. If it occurs
now... it will be right on time.
Your correspondent and ever-vigilant market watcher.
Bill Bonner |
