| FOLLOW THE CANNON PARIS, FRANCE
WEDNESDAY, 1 DECEMBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** Protestors...riots...A Carnival Against Capitalism...
*** The Nasdaq spike...is it over?
*** A dying company...a good investment... * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Reminds me of the `60s...demonstrators being routed by
tear gas and rubber bullets. Curfews. I remember it
well...the National Guard...bottles flying through the
air...hippies...psychedelic Volkswagen buses... coeds...
Did I mention drugs? Oh to be young again... *** This is the first major riot to be organized via
Internet. While the world focussed its attentions on
Seattle, another riot took place in London. Demonstrators
turned over a police van and set it on fire. They were
part of the worldwide Carnival Against Capitalism...a
collection of various groups with various beefs. *** Consumer confidence turned up after 3 months of
declines. Investors are bullish, too. Nobody's buying
puts. The call to put ratio is at a 12-year high. What
happened 12 years ago...1987? *** The Dow fell 70 points. But the Nasdaq fell 85. And
the Nasdaq 100...the pointiest part of the high tech
spike...fell by 96, after having fallen 53 on Monday. *** This spike is unbelievably narrow. Sixty-five stocks
have been responsible for 99% of the Nasdaq's rise this
year...or only about 1.3% of the total number of stocks on
the Nasdaq. Meanwhile...only 11 stocks on the S&P 500 have
accounted for the indexe's rise in 1999. *** Meanwhile, most stocks are going down...as usual.
There were 40 new highs yesterday...296 new lows. *** Yesterday was a bad day for the Nets...AOL, which
somehow messed up my letter on Monday...fell 10%. Could
the spike have reached its peak last week? Maybe...we'll
have to wait to find out... *** But some of these companies are headed for the cyber-
junkyard no matter what happens. Akamai Technology came
out on Oct. 29. The buzz was good...it opened at $110 and
rose to $204. At that point, it was worth more than the
total capitalization of the Russian market. I have no idea
what this company does...but I guarantee that it is not
worth more than every public company in the world's
largest country. *** Akamai only started in August 1998. Total revenues
since it opened for business are $1.3 million -- about the
same as a liquor store on a good corner of Baltimore. *** A recent issue of "Grant's" reminded me of the kind of
stock I like...a company called Octel, which is so out-of-
fashion that it might as well be a pair of spats on a
Turkish eunuch. So unpopular is the company that even my
own contrarian analysts refused to look at it when I
suggested it some months ago. You've heard of "green"
stocks -- companies that make environmentally friendly
products. Well...Octel might be considered a brown
company...or maybe gray. It makes anti-knock compounds for
leaded gasoline. It also makes a lot of cash. $200 million
was its pre-tax cash flow last year...against a total
market cap of $150 million. Hmmm...of course...leaded
gasoline is being phased out. And this company is doomed.
But it may be a good way to make money in the meantime.
And the price is right. *** Also from "Grant's" comes word of the potential for a
worldwide reprise of the Irish Potato Famine. The cause?
"The unprecedented decline in genetic diversification."
Farmers are using fewer and fewer seed varieties...only
two or three for soybeans and corn, versus 30 to 40 in the
1960s. This increases the likelihood that a plant virus
will attack suddenly and lay waste to the world's crops.
Is there an investment angle? Well...seed companies
specializing in unmutated varieties might be more in
demand in the future than they are today.
http://www.grantspub.com *** More evidence of big increases in money supply -- the
weekly chart from the St. Louis Fed shows the adjusted
monetary base growing at a 10.3%, annualized, since
January. Since July, the rate has increased to 15.9%. *** And here's a number I had trouble finding -- the
actual net worth of U.S. households. Guess what it is.
Just $35,000, according to a study by the Consumers
Federation. Theoretically, the U.S. stock market
represents about $200,000 in capitalization per household
(# of households/total capitalization)...so a 15% decline
would be equivalent to bankrupting half of the households
in the country. *** A 15% decline? Phillips & Drew applied three separate
measures to the market -- similar to those reported here
yesterday. They concluded that the market needed to fall
between 48% and 63% to bring it to a "fair value." *** " The Cyprus stock market is up 719% in U.S. dollars
year-to-date," writes James Passin, who ranges the world
for extreme values. "This is what euro-convergence will
do to a tiny, corrupt, war-torn country with an illiquid
stock market." Passin says his group is buying in "the
Baltics to take advantage of the "next wave" of Euro-
convergence." *** The Russians now say they will have the Chechens under
control within three months...not before Christmas, as
previously forecast. *** But all the news is not bad news. Franjo Tudjman, the
paranoid president of Croatia, is almost dead. This was
relayed to me by Ken Layne, who has begun providing daily
commentary for "International Living." He writes about
travel, world affairs, restaurants, airlines, culture...
http://www.escapeartist.com/international/living3.htm *** This population issue is a hot subject. I've gotten
many replies. Virginia Abernethy, who is accustomed to
debating the subject...having sparred with Ben Wattenburg
and Bob Bartlett on the subject...responds...below... *** "The Irish did not own their `capital...land,'"
replied one wearer of the shamrock. "We were under English
rule. Ireland did produce other crops as well as potatoes,
but these products were shipped out of Ireland to feed the
English in their other colonies, while the Irish were left
to starve. ... Ireland was a factory for the English. The
Irish were already in the depths of poverty and starvation
when the crops failed... We were suppressed by the
English, which brings up another issue, that of genocide,
a very tender issue..."
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FOLLOW THE SOUND OF THE CANNON
There are only three real "old timers" among the
newsletter gurus. Richard Russell, whom I quote often in
these pages...Harry Schultz, who lives in the South of
France...and with whom I have dinner from time to
time...and Jim Dines. By now you know Russell's views pretty well. He believes
in Dow Theory. He does not recommend individual stocks but
concentrates on market timing and relies on compounding
gains over time to make money. His comments range over the
whole spectrum of human behavior, but are focused on the
actual movements of market prices and how they relate to
the Dow Theory. He also has several proprietary
indicators...such as his Primary Trend Index, which he
believes shows him which way the market is really going.
Currently, his PTI is bearish. Harry Schultz is a fascinating personality. He is an
adorable eccentric...whose hearing is not as sharp as it
once was. My daughter, Maria, likes to recall the day that
she and I had lunch with Harry at a fancy restaurant on
the Champs Elysee. Harry's hearing...his unwillingness to
speak a word of French (despite 20 years of living in
France)...and his insistence on eating something that
wasn't on the menu...as well as ordering a drink that the
bartender didn't recognize -- none of this made for a
smooth dining experience. "I thought the waiters were
going to strangle him," Maria recounts. Later I learned
that the restaurant...a Paris landmark for decades...had
gone out of business. I couldn't help but wonder if Harry
had not pushed it over the edge. But Harry is always a pleasure, and I look forward to his
return to Paris. He is an original thinker...with ideas,
information and imagination that go way beyond the
ordinary. I haven't read his letter in a while...but last
I heard, Harry was bearish, too. Both Harry and Richard are old timers with a seasoned
respect for what markets can do. Though they come to
different conclusions, they try to do what I do...figure
out what fundamental forces are driving the market...and
how investors' psychology will respond to them. But the master of psychology is Jim Dines, who has been
both very right and very wrong in his career as a market
forecaster. He wrote the book on investor psychology,
"Mass Psychology." What triggered this discussion of Jim Dines and the old
timers was that I received a copy of Dines' letter. I
believe the sender intended to show me how wrong I am
about the Internet stocks. Dines, readers may remember,
was once the "Original Gold Bug." Now he is the "Original
Internet Bug," a mantle he wears with both pride and
justification.
Dines recommended AOL on the April 7, 1997. AOL was
selling at only $5.56 on that day...giving the Dines team
a gain of 23,233% -- a figure they are not too modest to
share. In large type. He bought AMZN on February 9, 1998 at $4.77. It proved to
be a river of great returns, carrying them to 7,233%
profit since then. Exodus yielded a profit of 2,125%.
USWeb Corp. is up 506%. So Dines is happy. His readers are, I presume, more than
happy. They are buying new homes and taking
vacations...and think themselves geniuses. And maybe they
are. Certainly they have a right to be satisfied with
themselves. And every week, in "Barron's" and other financial media,
you will see Jim Dines ubiquitous ad: "Buy Internets on
Every Dip." Dines is an Internet bull. Almost a raging
Internet bull. A bull on steroids. A bull's bull. "This is the opportunity of a lifetime. Don't expect these
to come along every day. If you want money, if you
seriously want to get rich," he wonders rhetorically,"
follow us." But Dines is no novice. He is not like the new investors
who are said to be piling into the Internet stocks. He is
much shrewder than that...a veteran of several booms and
busts...who has been publishing his newsletter since 1960.
"Look for obsolesence in all traditional parameters of
measuring the value of stocks," he says (which I thought
had already happened...judging from the prices these
babies are bringing). "Eventually, Internets will begin to
devour each other, such as Amazon.com's new auction
diversification heading for an eventual clash with eBay." Indeed, it looks like everyone's getting in the auction
business. Auction sites seem to be springing up
everywhere. Dines is attempting to take advantage of mass
psychology...and so far, doing a great job of it. "In recent years," he says, "we have predicted that as the
Internet boom reached middle age, mutual funds would
finally relent and start buying, which again would send
Nets to unheard-of heights..." His prediction is coming
true. Janus Capital recently disclosed that it bought $3.2
billion of Net stocks during the first seven months of
this year. The previous year it owned only one -- AOL. The big funds are loading up. What else can they do? To be
out of stocks is a death sentence for fund managers. And
what stocks are still going up? Dines reports that
"Internet stock funds are surging in popularity; there are
12 already and 16 more in registration with the SEC." Far from being a simple-minded strategy for first-time
investors, Dines' approach is extremely
sophisticated...and dangerous. It recognizes the
psychological dimension of the Internet mania...and aims
to take advantage of it. "Follow the sounds of the
cannon," was Napoleon's advice to his generals. It is also
Dines' advice to his readers. The money is going into
Internet stocks. That's the leading sector...the last
sector of the great bull market to still be moving ahead.
Get in...and stay in...until it's time to get out. On that point, Dines has no delusions. "We predict that
there will be thousands of Net mutual funds near the final
top," he says, "believe it or not, when we lead you out of
the Nets, the funds will buy them from you at undreamed-of
heights." They're already at undreamed-of heights, in my opinion.
The same kind of heights that Napoleon once saw for
himself --unimaginable heights for a penniless Corsican.
Bonaparte, unfortunately, didn't know when to sell. Maybe
Dines will do better. More tomorrow... Bill Bonner. * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
IS OVERPOPULATION IN THE EYE OF THE BEHOLDER?
BY VIRGINIA ABERNETHY A recent op-ed piece in IBD announces the end of the world
overpopulation threat - if ever, indeed, there was such a
threat. The matter remains, nonetheless, controversial.
The debate arises, perhaps, from a difference in mental
models. Contrast the perspective that comes from observing
that more people are living today at a higher standard of
living than ever before in history, with the dour,
Calvinist-inspired model that cautions against spending
one's capital. Capital is supposed to be saved so that it
can produce income. Income - unlike capital - can be spent
for the enjoyment of consumption.
I learned the caution against spending capital at my
mother's knee, which lets the confessional cat out of the
bag. Yes, I am one of those who think that the world is
now in a precariously overpopulated condition. The
evidence is that people are consuming their capital -
consuming the very sources of continuing flows of income -
that is, living beyond their means. First, the model. Then, some evidence. The natural resources of the Earth include both stores of
wealth and flows. The flows can be likened to income. The
stores are like capital that has been accumulating for
millennia. Examples of flows are sunlight and rain. Stores
are aquifers and minerals, including petrochemicals, which
accumulate very, very slowly. Some resources - such as
topsoil and hardwood forests - fall between these two
extremes because they can renew themselves within a few
human lifetimes. As befits their difference, flows and stores (income and
capital) should be differently used. The complete flow can
be used, usually without damaging future wellbeing. But
one uses up a store at the risk of reducing the next year
or the next generation's income. For example, petrochemicals - particularly oil - are a
stored resource, marvelous because of their versatility
and use in enormously increasing the food producing
capabilities of the planet. Without affordable oil,
fertilizer production, soil conditioning and irrigation,
and food production and distribution would dramatically
decline. Given current technology, world and U.S.
agriculture depend on oil, so the questions arise, are
supplies dependable and are there substitutes.
Setting aside geopolitical considerations - not my subject
here - the facts are that oil requires millennia upon
millennia to accumulate and it is a finite resource. How
long the reserves will last at present rates of use is
disputed. Some say that peak production, followed by
decline, is due inside of a dozen years, and that natural
gas production will peak approximately 40 years later.
Whatever the correct time scale, a great decline in food
production will occur at time that the energy required to
produce the marginal barrel of oil is greater than the
energy contained in that barrel of oil. Obviously, the
rate of use of the remaining resource will depend upon the
size of the population. More people living at a given
standard of living (a given diet) means faster depletion. Fresh water, which is both a flow (rain) and a store
(aquifers), is another good candidate for setting limits
on the population that the Earth can support. Water rates
are gradually rising in developed countries even in the
absence of drought; are higher prices a sign that a
resource is becoming scarcer? Rivers in China, California,
and the mid-East have begun to run dry before reaching the
sea. The water level of aquifers in many regions,
including the United States, is falling by as much as one
foot per year, threatening irrigation agriculture. Water
rights already pit Israel against Jordan and the
nationalist aspirations of Palestine. Turkey, Iran and
Iraq are headed toward confrontations over Tigris and
Euphrates water, as are Egypt and the Sudan over Nile
River water. Are such risks and confrontations tantamount
to overpopulation now? It depends upon the mental model or, in this case, one's
faith that substitutes for petrochemicals and ways to
increase fresh water supplies will emerge. Few people
realize that the United States was on the brink of an
energy crunch in the mid-nineteenth century because
eastern and southern forests were so far depleted. So just
as oil substituting for wood and coal saved us in the
nineteenth century, we could be saved again by technology
that turns some plentiful resource into our new energy
standby. Developing the technology of the future will require huge
investment. If such sums were invested at a rate more or
less commensurate with the depletion of oil and if the R&D
effort paid off, no net spending-down of capital would
occur. My mental model - which begins with the homily that one
does not spend capital - warns that the risks are grave
and, driven by population growth, becoming ever graver.
The signs of capital consumption can be seen in many
places - oil, fresh water, open-space, air quality and so
forth. The United States is at risk of a diminished
standard of living that could cause civic unrest.
Elsewhere in the world, some people are beginning to
suffer already from having altogether consumed the capital
- especially aquifers, good (non-saline) topsoil, and
forests - that used to provide a steady income. Is overpopulation a fact? Well, it depends on your
tolerance for risk and your mental model. * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
A READER WRITES: BY-PRODUCTS HAPPEN When I was a kid in Dallas in the 1930s, 99% of the
traffic was motor vehicles. Still, horse by-product was a
prominent feature of the landscape. I didn't analyze the
situation then. By-product happens. Much later I
speculated on what urban environments must have been like
in the days when horsepower was supplied by horses. I
remembered how impressive the residue from 1% of the
traffic was. The situation when the other 99% made a
contribution must have been catastrophic. Several years
ago I got confirmation. Some magazine (I don't remember
which magazine) reprinted an editorial from the early
1900s hailing the horseless carriage as an agent of
pollution abatement. Jim Jenness * * * * * * * * * * * * * * * * * * * * * * * * * * * * * CONTRARIAN'S GLOSSARY: INFLATION - An increase in the "medium of exchange" that
the first user gets for nothing and the last user gets
nothing for. The classic example of this century, of
course, is the 1922 German mark. An elderly couple that
had managed to put away 100,000 DM in 1922
(US$25,000...1922 U.S. dollars!) could look forward to a
comfortable retirement. In November 1923, a billion marks
would not buy a loaf of bread. Provided by DR reader Paul Edwards
=============================================
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The Daily Reckoning is a FREE e-mail service of Agora
Financial Publishing -- dailyreckoning@agora-inc.com
If you would like practical advice on how to act on the
ideas in this e-mail, then simply subscribe to my monthly
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