| UGLY MONEY THE DAILY RECKONING PARIS, FRANCE MONDAY, 20 NOVEMBER 2000 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** "America Without A Head" - sounds uncomfortable...but it
could be worse. *** Post-election rally? Don't count on it... *** Ebbers, Schrader, Walker - getting the `margin call from
hell' ...bankruptcy epidemic...turkeys...and more * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Well, it has been 10 days and still neither George W.
Bush nor Al Gore have been elected president. So far, so
good. *** Today, the leftist newspaper in Paris, Liberation,
proclaims "America Without A Head." But something
interesting happened on Friday morning. It looked for all
the world as though George W. Bush had become the head that
America so nervously awaited. The Dow shot up 90 points. The
long-awaited post-election rally was apparently beginning.
Instead of continuing upwards, however, prices soon reversed
course and began to fall - even before the Florida Supreme
Court forced the corks back in champagne bottles in the
Austin, Texas. *** What is this telling us? Wall Street favors Bush...but
even news of his victory is not likely to produce much of a
rally. *** "Stocks are headed south for the winter," said Bill
King. The election is just a distraction. *** On Friday, the Dow logged another 26 points towards the
equator - that is, south. The Nasdaq went in the same
direction, but not quite as far. It ended the day down just
4 points. *** The Nasdaq is down 41% since March. Any way you look at
it, this qualifies as a bear market. But you'd never know it
from reading the popular financial press. "They haven't
figured out," wrote Doug Casey recently, "that denial isn't
just a river in Egypt." In the minds of investors and
financial journalists markets are always closing "off their
lows." A bottom is always in sight. And a light is at the
end of every tunnel. *** And most professional analysts still have never met a
stock they didn't like. Few downgrade a stock below
"accumulate" or "market perform." `Sell' is a four-letter
word on Wall Street. *** And yet, the destruction is visible in every direction.
"It breaks my heart..." said an analyst from Thayer Capital
Partners, to a reporter from the Washington Post, "our whole
technology community is falling apart." *** Among the things falling apart is a company called
PSINet. As you drive north from Washington on highway 95 you
find PSINet on the Ravens' stadium in Baltimore. The big
neon sign must have been put up at a time in the company's
life when the future seemed brighter than it does now. The
stock, which traded at $60 in March rose by 19 cents one day
last week - to $2. *** The chairman of the company, a Mr. Schrader, had pledged
his own shares to the bank to collateralize a loan. Alas, a
$60 stock is much better security than a $2 stock - and news
emerged last week that the bank had taken more of Mr.
Schrader's stock than he expected - and was selling it. Mr.
Schrader thus experienced the same sort of drama that has
visited Bernie Ebbers of WorldCom and Jay Walker of
Priceline.com - the "margin call from hell". *** On a personal note, the editor of Target Marketing
called me some weeks ago. He had put my photo on the cover
of the magazine in 1998 and named me "Marketer of the Year."
Amid all the dreams and extravagant hopes I once held for my
career - being Target Marketing's Marketer of Year was not
one of them. Still, mindful of Sid Vicious's remark that the
only bad publicity is in the obituaries, I was grateful for
the recognition. Little did I know, the title came with a
curse. *** "How's business," he asked. He then chatted a little
about the goings on at Priceline.com and explained that,
following my moment of glory, Jay Walker succeeded me as
"Marketer" for the next year. He also allowed that almost
every "Marketer of the Year" subsequently stumbled badly. *** Have I stumbled badly too? I will leave that to you to
decide, dear reader. I just hope that my `call from hell'
does not come with an invitation I can't refuse. *** The Post article on PSINet informs us that it is "one of
the world's largest networks for Internet traffic," and that
it lost $1.38 billion in the last reporting period. Could
that last figure be a typo? Why didn't the bankers call
sooner? *** A small detail in the story also records that 12% of the
shares in PSINet are owned by Janus Capital Corporation.
Janus is deeply invested in techs - with 47% of its holdings
in the sector. My guess: we are about to see another face of
the Janus people. *** Technology is cyclical, of course - like the mining
sector. But, like mining, the cycles can be long and deep.
Too long and too deep for casual investors to survive. *** Amazon has fallen to $27.50. The bond market is pricing
Amazon's obligations as though the big River of No Returns
is going to dry up completely. *** From the WSJ, we hear on the street that George Gilder
was not quite as drifty as he appeared. He was not merely a
shill for the Promethean Light of the New Era - he was also
chained to specific companies who paid him to talk up their
stocks. *** "Bankruptcy Epidemic on Horizon," proclaims a piece by
John Crudele in the NY POST. Crudele cites a study by SMR
predicting that personal bankruptcies will rise 10-20% next
year, continuing a 10-year trend. *** One quarter of homeowners have less than $1,000 in the
bank. 27.5% have between $1,000 and $5,000. Now, with higher
energy prices, and falling stock prices, these people are
feeling the squeeze. David Levy of the Levy Institute: "The
chances are 2 to 1 that we'll have a recession in the next
12 months." *** Debt has been growing 2 times as fast as income. A
recession, and rising bankruptcies, would deflate the credit
bubble and bring things back to `normal'. *** In the old economy, as in the new one, things are
slowing down. The auto industry led the nation in job cuts
in October. Now suppliers to the auto industry are cutting
back. Weirton Steel announced that it would lay off 3,200
people over the Thanksgiving holidays while it drew down
inventories. *** The euro fell on Friday - to 84.83 cents. It was off
1.3% - but still holding above its all-time lows. *** Mr. Deshais, our gardener, is fattening up the turkeys.
He cooks a big pot of potatoes to feed them. They look
healthy - but not fat. He's going to kill one of them on
Thursday. France does not celebrate Thanksgiving. The
children will be in school. So, we'll have our dinner on
Sunday. *** Mr. Deshais has returned to his wife. He may have
returned to his old habits, too. But more on that some other
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newsletter, "I feel like I ought to be wearing a mask when I
go into a store there." A value investor can find opportunities in many different
places - in many different investments. But you have to know
what you're looking for. Doug is referring to prices in New
Zealand...a subject to which I will return in a moment. Friday, we examined the proposition of value as though it
were an aesthetic principle. I will state it broadly - value
is found where people don't want to look, that is, where
things are ugly. The more repulsive, the better. Why is this so? It is because people do not suddenly become
Al Gore when they buy investments. They are still subject to
emotions, feelings, peer-pressures, fears, doubts, pride and
so forth. So they end up buying investments just as they buy
almost everything else. They buy the things that make them
feel good about themselves. They want to live in fashionable
neighborhoods - even though the TV reception is no different
and the prices are higher. They buy designer clothes, even
though they are made from the same fabrics and stitched by
the same seamstresses that supply Walmart. They want to be
on the winning side of a sports event - even though it makes
no difference in their lives. If a man wants to feel that he is really modern and hip...a
`digital man', to use Ed Yardeni's expression... he buys
tech stocks and feels superior merely for owning them. This part of the investment was described in Grant's as the
"entertainment portion". Applying another untested,
intuitive principle - that the total return from all
investments over time will be roughly equal - we arrived at
the realization: the higher the entertainment return on an
investment, the lower the financial return. The ideal stock would be in a company where the
`entertainment' portion was negative - a stock so ugly that
they would have to pay you to own it. Imagine a company, for
example, that strip mines national forest land to get
asbestos that it then puts in cigarettes - using sweatshop,
child labor in India to roll the smokes by hand. No specific
company comes immediately to mind, dear reader, but I will
keep my eyes open. The principle should apply to all manner of investments.
Real estate, for example, should give a greater financial
reward the less desirable and attractive it is to own the
property. An apartment in the most fashionable area at the
height of a boom should be expected to have a very high
`entertainment' return ...and a very low financial return.
Ugly commercial property, by contrast, ought to provide
higher rates of financial return. Liquor stores in bad
neighborhoods ought to produce, on the average, higher rates
of financial return than those in good areas. I do not know, but I would guess that pornography, drug
dealing, and prostitution have high rates of return per
dollar invested. They are activities that - except in
certain milieus - you don't brag about, nor feel good about. Even currencies should be subject to the same law. Ceteris
paribus, abject currencies that no one wants ought to
provide greater financial rewards than the dollar - which
everyone knows is `super'. And so, with our customary cheerful perversity, we might
look around the world for the ugliest money we can find. Thus was this thought incubating in the back of my brain
like the bovine encephalitis virus, when I began reading
Doug Casey's commentary on the New Zealand dollar. "The NZ$ has been the worst performing currency in the
world," Doug observes, "...that's not an exaggeration. The
only one that's done worse is the Zimbabwe dollar; even the
Philippine peso and the Indonesian rupiah lost only 20%. The
euro is down about 26%." Why has the kiwi dollar done so badly against the American
brand? Doug provides two explanations: "Part of it has been the weakness of wool, meat, dairy,
timber and other basic commodities in recent years. The
world has needed fewer NZ dollars to acquire the main things
the country produces." The second reason is "surely the socialist government that
was elected there last November. These are not just an
ordinary bunch of knuckleheads going through the usual drill
about stealing from the rich and giving to the poor, or even
the old-style cloth cap-wearing, working man's socialists.
These people are very New Class, with academic backgrounds,
which means they're totally divorced from both `the people'
and reality." Doug continues: "When you look at who these people are and
what they've done since their election it's easy to see why
the kiwi dollar has cratered." What they've done has been to increase the top marginal tax
rate, from 33% to 39%...re-nationalize the health service...
and embellish legal provisions favoring employees over their
employers. Union bosses, for example, now have the right to
examine a company's books to see what kind of pay raises a
firm can afford. None of these provisions sound terribly radical to an
American living in France. But, as Doug says, "a currency
is, in many ways, tantamount to stock in the government that
issues it." The election of the socialists in 1996 was
clearly a sell signal. Since then, the NZ dollar has fallen
from U.S. 70 cents to its current level of 40 cents. In the beauty pageant of national currencies - the Kiwi
Dollar gets the "Miss Congeniality" title. Very nice
personality. If the currency is ugly, will investors be rewarded for
owning it? "For at least the last five years, a Kiwi dollar
would buy you in New Zealand just about what an American
dollar would buy you in America..." The standard of living
in NZ is about the same as the U.S., but last year, when the
NZ dollar traded at about 50 cents, the cost of living was
only half what it was in the U.S. Now, the NZ currency is
even lower - at 40 cents. For every ugly dollar you spend in
New Zealand, in other words, you get $2.50 worth of goods
and services. "This is a superb time to get on a plane and check it out,"
Doug suggests, " - especially now that winter is coming to
the northern hemisphere and spring to the southern." "If you're not of a mind to check it out personally," he
adds, "NZ government bonds are a good way to play the
currency. I'd stick with short maturities, since guessing
the direction of interest rates is a different game
entirely. The bonds yield a little over 6.5% all across the
yield curve - about a 75-100 basis point advantage on their
American counterparts." "The current government...will be gone in two years, if not
before," Doug concludes. Then, the NZ dollar might be far more attractive...and we'll
have to begin looking elsewhere. Your humble and obedient servant, Bill Bonner | 
