| SOUTH BEACH THE DAILY RECKONING MIAMI, FLORIDA MONDAY, 9 OCTOBER 2000 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Nasdaq investors suffer 8% loss last week…17% for
the year *** Americans are out in space…leveraged against the
world… *** Boo Hoo, again?… slobs at the beach… * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** The Dow held steady last week. But the Big Techs in
the Nasdaq got hit hard. *** Friday alone saw a 3% drop in the Nasdaq, bringing
the week's losses to 8.49%. *** CMGI, the Internet incubus, I mean incubator, fell to
$19 a share - down 87% from its January high of $163. *** Amazon, our River of No Returns stock, dropped $2 to
close below $32. The company will surely achieve
profitability at some level - but enough to service a
$2.5 billion debt burden? *** Intel is below $40 - almost split, the hard way, from
its price a month ago. *** Priceline.com fell to $5 and change - after having
fetched as much as $104 in March. *** 850 stocks rose on the NYSE exchange on Friday. 1977
declined. 50 hit new highs. 127 hit new lows. *** So far this year, Nasdaq investors are down more than
17%. Dow investors are down almost 8%. Oh well, easy come
easy go, right? No one actually bought the Big Techs last
January, did they? *** Certainly not readers of the Daily Reckoning. But a
report in the L.A. Times tells of one sad case. Bernie
Ebbers so loved his own stock that he bought millions of
dollars worth of the shares on margin. But World Com
proved that it could go down as well as up…and Ebbers
got the call that all investors dread - the margin call
from hell. This single call turned Ebbers from a buyer
into a seller - he had to unload $79 million of his
shares to cover his margin position. *** There's an old rule on Wall Street: never meet a
margin call. When you get a margin call, it's a wake-up
call telling you that you were wrong. Don't fight it.
Take your losses and move on. *** Leverage is an amazing thing. "Give me a lever long
enough," said Archimedes, "and a fulcrum in space, and I
will lift the entire world." But the farther out into
space you go, the farther you have to move the end of the
lever to get the earth to budge. Likewise, the more
leverage you have in stocks - the more damage you will
sustain when prices move against you. *** Right now, most of America is out in space, leveraged
with debt…and the world may be beginning to move
against it. Throughout most of the post-WWII period, the
ratio of debt to GDP was 1.4. That is, there was $1.40 in
debt for every GDP dollar. Now, that ratio has almost
doubled. And, most recently, it has taken as much as $4
in new debt to produce another $1 of output. That's how
credit-based expansions work - you have to borrow more
and more to continue growing. *** According to Kevin Klombies, The US has consumed $5.2
trillion in credit in the past 2 and 1/2 years. *** The market for leveraged loans quadrupled in size
between 1993 and 1999, rising to $626 billion from $150
billion. "Last month, the Office of the Comptroller of
the Currency [reported]" says the NY Times, "that the
problem loans on banks' books had doubled in the last two
years, to $100 billion, or 5.1 percent of all outstanding
syndicated loans greater than $20 million." *** Most people don't buy stock on margin, but they don't
mind taking out a home equity line to pay for a big
vacation, rather than cash out of some of their tech
stocks. They've been told that if they just 'stay in the
market,' over the long run, they'll make money. *** And the financial press is still encouraging:
"Companies that are going to drop bombs," said one
analyst to Reuters, "have already done so." Another gave
his optimistic view: "We are kind of hitting a climactic
low." *** Goldman Sachs held two conference calls last week to
support its position (bullish, of course) on the big
techs. *** But the real low may be far ahead and far more
climactic. Dow Jones keeps a world stock market index.
The index hit a high last March 24th at 260.28. Since then
it dropped to 227 on May 24th. The Summer of Love produced
2 rallies in the world index - each one peaking out below
250. Most recently, the index hit 248 on Sept. 24th, and
is now back at 227. Numerologists are invited to inspect
the recurring 24s and 27s. What will Oct. 24th bring? *** Oil rose 33 cents Friday. Gold fell $1.30. I began
reading Peter Bernstein's entertaining new book on gold
on the plane from Las Vegas to Miami. I will have more to
say about it soon. *** GM is taking a page from the Japanese playbook -
offering financing on new cars at zero percent over 5
years. *** Boo.com - London's spectacular e-tail disaster story
- is back in the news. Boo.com is back in business,
backed by a new partner. If reports I heard over the
weekend are correct, Boo managed to spend more than $100
million to produce only about $600,000 in clothing sales.
Maybe it will do better this time. *** And here's something interesting from the Sunday NY
Times: "Pat McConnell, an accounting analyst at Bear,
Stearns, estimates that earnings among the companies in
the Standard & Poor's 500 stock index were overstated by
6 percent, on average, last year because of generous
option grants." But now that prices are falling, says the Times piece,
"new-economy workers may begin to demand old-economy cash
from their employers. That would drive up corporate costs
among technology companies the biggest users of stock
options at exactly the wrong moment, when their
operations are slowing." The article reports that "40%
percent of options held by Amazon.com employees and at
least 36 percent of those held by workers at Microsoft
are now un-exercisable." *** "In Europe, banks are making almost 1/2 of all their
loans to media, telephone, and computer companies -
loaning $252 billion to telecommunications companies
through the first nine months of this year," writes Kevin
Klombies. "With $150 billion in existing short-term loans
in need of refinancing and an industry requiring $500
billion to finance acquisitions, licenses and the cost of
building new networks - the banking system is almost as
leveraged to the telecom story as the companies in that
business." *** Unemployment dropped to 3.9% in September putting the
Fed on alert to hike rates again. *** "In 1980 you needed 25 barrels of oil to buy a single
share of the Dow Jones Industrial Average," John Myers
told listeners at the Agora Wealth Symposium this
weekend. "But by 1985, when oil prices fell to $12 a
barrel you needed 125 barrels to buy a single share in
the Dow. Today, even at $32 a bbl, you need 353 barrels
to buy one share in the Dow." Compared to equities, oil
is cheap. (see: The Best Petroleum Stocks To Own? )
*** Elizabeth reports that it has turned cold and rainy
in France. They're making fires in the fireplace. It's
hard to imagine cold weather here in Miami. It's 8:15 AM
and its already 85 degrees outside. From the top floor of
Loew's hotel in South Beach, steam rises from the streets
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gains in stocks ignored by Wall Street: click here * * * * * * * * * * * * * * * * * * * * * * * * * * * * * SOUTH BEACH "What if God were one of us?
Just a slob like one of us?
Just a stranger on the bus,
Trying to make his way home."
Bob Dylan
South Beach is full of God-like candidates. Curiously, the city attracts more than its share of
Venuses and Adonises…and more than its share of slobs,
too. An art-deco slum in the 70s, the area was discovered by
fashion photographers in the 80s…and finally reached
the tipping point in the early 90s. Suddenly, everyone
was talking about South Beach. Now, people from all over North America and Europe seem
to tumble down to this tip of the Florida peninsula as if
they were loose change finding its way to the bottom of a
drawer. And though there are many handsome bodies promenading
down Ocean Drive, bodies, like stock market P/Es tend to
regress to the mean. And the mean is a slob. There are probably more slobs, pound-per-pound, in a city
such as Duluth or Gary, but they are usually at least
partially hidden from sight, like crazy uncles and
political contributions from tort lawyers. But sin,
insanity and ugliness is right out in the open in South
Beach. You may remember, that according to those who 'get it,"
and George Gilder, in particular, mankind has lived in an
age of darkness - until now. Thanks to an explosion of
bandwidth (that is, an exponential decrease in the cost
of transmitting data) we are about to be tanned by the
"Promethean light" of unlimited, free knowledge. My working hypothesis, dear reader, is that the past was
neither so dark, nor the future so bright, as Gilder
imagines. The extra bandwidth may increase the
availability of information…but like ubiquitous pop
music, and bared bodies, the extra data may not
necessarily be a good thing. One of the popular tee-shirts in South Beach is one with
the familiar face of one of the world's most successful
rebels without a clue - Ernesto "Che" Guevara. Che, a
rich kid with some imagination, made himself a romantic
hero by getting himself executed on this day in 1967. It
was probably, like Elvis's heart attack a few years
later, a good career move. Che must have felt that his
discovery of communism was Promethean, too - an explosive
insight into the way the world should work. But, like
Elvis, communism only looked good from a great distance. I feel a little god-like myself, here in South Beach.
Looking at the near-naked, tanned bodies up close, I am
like the one 'from whom no secrets are hid.' "Leave your brain behind," says a TV ad for the area,
"and come on down to South Beach." A tanned body is de
rigeur, but a brain is optional. Even if you forget and bring your brain to South Beach,
it probably won't function very well. First, there is the
heat. Then, there is the unrelenting pop music. Loew's
hotel is not a cheap flophouse. But even it cannot
resist. In every public spot, bad music interferes with
private thoughts. A friend of mine got out of jail recently, after serving
two years. He reported that the worst thing about being
in prison was that you couldn't escape the constant noise
of radios. At least they didn't charge him for the room. Even in a
$200-a-night hotel, it's hard to get away from it. Don't think you can escape by going outside either. Even
the plants are wired. And the flora of South Florida has
no better taste in music than the fauna. Each clump of
tropical greenery at Loew's seems to sing along with Lee
Greenwood. And as you make your way down Ocean Drive,
each caf?, bar and eatery blares away - and each one with
its own version of bad music. The whines and screeches
are inescapable. There is also constant danger of being rear-ended, so to
speak, by someone on roller skates. A pair of muscle
bound poofters nearly knocked me down, as they raced
along the sidewalk holding hands. One had rings in both
ears and on both nipples. As I was having a scoop of ice cream at a sidewalk caf?,
a retired couple came along. They wore madras shorts…
and their mouths were open, gasping for air. They looked
like they might fall down and die if they weren't
immediately seated and given water. But I am probably
exaggerating the emergency. They sat down and seemed to
have revived within a couple of minutes. A little further down the street an older man with red
socks and a matching tee-shirt, walked along with a
bottle of water on his head. Another man said hello to
everyone he met. Abominations of the flesh are popular in South Beach. A
woman with tattoos all over her sunburned body went by.
So minimal was her outfit that it might have gone
unnoticed…had it not been for the odd bluish color. There are said to be 1500 professional models in the 20-
or so block area known as South Beach. Many of the women
I saw on the street were, by objective measures,
beautiful. Yet, for the more average woman - the more she
revealed, the less attractive she became. I say that partly as an observation, and partly as a
conclusion. It is not what you see that is most alluring.
It's what you don't. This is true of tech stocks as it is of women. The
romance that investors began with the dot.coms is over.
After they got to see a lot of each other, up close…and
in the bright sunlight - the less besotted they became. Investors moved on to the Big Techs. But now that
relationship is in trouble, too. The techs have aged a
bit. As they announce earnings and growth
disappointments, investors notice the wrinkles and feel a
little let down. They dump the techs and look for romance
elsewhere - or swear off these paramours altogether. The commentators and analysts you hear on CNBC are sure
the techs are going to go back up. Like Al Frank, they
think this is a buying opportunity. But they don't understand how romance works. Once the
facts are all out in the open - the spell is broken and
the thrill is gone, forever. Bill Bonner P.S. Investments are "marked to market" on the basis of
what "everybody knows." It is what everybody doesn't
know…or refuses to see…that represents the potential
for profit (or loss.) Even in the Information Age, it is
what you don't know that is important. | 
