GREENSPAN'S PUT IS SHOT THE DAILY RECKONING PARIS, FRANCE FRIDAY, 8 DECEMBER 2000 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Et tu, Intel…earnings disappointments everywhere… *** But the fault, dear reader, lies not in ourselves…
but in the WWES! *** Power blackouts…protesters…Christmas parties…and
Wall Street bonuses….and more! * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Et tu, Intel? Less than a month ago, the `must own' Big
Tech company assured investors that its business and
financial progress was "on track." But, yesterday, after
the close of business on Wall Street, Intel confessed: it
would not be able to hit its sales targets for the 4th
quarter. *** Intel's disclosure followed other earnings
disappointments. Motorola and National Semiconductor, for
example, both allowed as how growth and profits may not
measure up to expectations. *** Even beyond the Big Techs, earnings were a source of
embarrassment. Coca Cola and Bank of America said they were
having trouble. Bank of America's problems are worth
further comment…more below… *** Almost all the companies blamed their problems on
situations beyond their control. God, not man, was at
fault. Sales were down across the board at Intel, the CFO
explained, because of "a worldwide economic slowdown." *** And so, stuck in the mud of a worldwide economic
slowdown (WWES) Wall Street sank gently yesterday; the Dow
dopped 47 points. The Nasdaq slipped 43. *** Microsoft fell 6% as analysts realized that maybe a
WWES might not be good for software sales. *** Yahoo! found no cause for cheer either. WWES or not, ad
sales revenue on the Worldwide Web (WWW), are definitely
going down, as people realize that web advertising doesn't
work well. An analyst from W.R. Hambrecht downgraded the
stock…and then Yahoo! fell to less than $35, after having
been as high as $250 earlier in the year. *** True believers in the New Economy must be delighted
with the WWES; it is making it far cheaper for them to buy
their favorite WWW stocks. Amazon, for example! The River
of No Returns slid more than $2 yesterday - it is barely
holding above the $20 mark. *** Amazon also has plenty, indeed perhaps a surfeit, of
debt instruments available for investors with a sense of
adventure. I have not checked them lately, but investors
can expect at least 3 times the return of a passbook
savings account - at least, while it lasts. Amazon has $2.2
billion of debt outstanding, a heavy burden for a company
with no profits. *** Wall Street bonuses will hit another record this year -
even while the customers' yachts fall with the tide of
stock prices. The 178,000 employees of the securities
industry are expected to get average bonuses of $74,000
this Christmas. *** But beyond Wall Street, there is a world of trouble.
Glancing down the list of headlines suggests that the
Autumn of Anxiety is quickly giving way to the Winter of
Woe. *** "The Dow will experience its own Bataan Death March,"
says a cheery note from Bill King. "OTC's are down more
than 50%. Small caps and OTCs typically peak a year or more
in advance of the DJIA." *** When markets are going up, King explains, "companies
feel like the village idiot" when they report losses. But
when a WWES occurs, they see an opportunity to bring losses
out of the closet and get rid of them. "They'll report the
biggest losses possible," he predicts, "looking back 5
years to get refunds from the IRS." *** "Protesters Battle Police in Nice," declared the
International Herald Tribune, describing European leaders'
most important get-together in years. Protesters include
the usual anti-globalization crowd - the rebels without a
clue - and Basque separatists, who know exactly what they
are doing. *** "California Limps Along with Threat of Blackouts," says
an item on the Prudent Bear website. Power bills in
California are 50% higher than last year. *** Oil is below $30. The dollar slipped further against
the euro… and bonds were up again. *** Gold dropped $1.20. But the gold mining companies were
up. Gold stocks rose in the `30s deflation. Gold is real
money, after all…and real money rises in deflation. *** And now, a moment of lachrymose reflection on the state
of the New Tech industry….a note from Andy Carpenter:
"Last year USInternetworking rented a museum for a lavish
holiday gala. This year, no kidding, they'll be partying at
a YMCA camp. Last year they danced to the mellifluous
strains of big band music. This year we can only assume
they'll boogie to the Village People. Last year, USi's 1,000 employees donned fabulous formal
wear. They sipped champagne and martinis in the museum's
glass-enclosed atrium - which features a spectacular view
of our downtown Baltimore skyline. This year's party, no
kidding again, will feature a rustic log cabin, a bon
fire and a $20-a-plate buffet." * * * * * * * * * * * Advertisement * * * * * * * * * * * * A Collective Manic Euphoria Swept the Land… At the beginning of the decade, the tech stocks of the
day… radio… automobiles…electric utilities…
airplanes… were driving the market up wildly. It truly
was a New Era… If you had invested $10,000 in General
Motors in 1919, it would have been worth $1.5 million in
the summer of '29. But by 1933 unemployment had reached nearly 24%…
What happened? Is it happening again? Yes. Says a respected
Austrian economists - and you'd better be prepared. Falling
technology shares are only the beginning. Here's what you
need to do - right now - to prepare yourself for the
collapse of the credit bubble: Credit Collapse * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * GREENSPAN'S PUT IS SHOT Gentle reader, the whole world now turns its weary eyes to
Mr. Greenspan. The financial press portrays him as the
savior of the modern world. TIME magazine, in fact, once
put him on the cover, along with Robert Rubin and Larry
Summers with this headline: Committee To Save the World -
with no trace of humor. In Bob Woodward's book he is the
"Maestro." Fortune ran a cover story: "In Greenspan We
Trust." And on Tuesday, Mr. Greenspan…the former jazz saxophonist
and Ayn Rand devotee…seemed to live up to his billing.
"Greenspan Arrests Wall Street Collapse," said the headline
in La Tribune. Greenspan had apparently done it. He had
pulled out his put option and saved the day. And yet…the dollar continues to fall. And the price of
credit continues to rise. Either of these are probably
sufficient to render Mr. Greenspan's put option worthless.
"Euro continues to rise," reports the financial section of
France's Figaro newspaper. The hapless European currency
has defied almost every financial pundit in the known world
by doing what none of them expected - it has gone up. So delicately balanced - at the margin - is this
international flow of funds that merely a small shift in
sentiment away from the dollar could be devastating. In
effect, if the dollar falls - it means that foreigners will
demand a higher rate of return for buying U.S. assets…and
the cost of credit will increase, not go down as the
Greenspan Put requires.. Alas, Mr. Greenspan's put is shot. Mr. Greenspan's only real weapon is central bank interest
rate policy. But, as mentioned here in the last few days,
that weapon only works when the enemy is in retreat.
Lowering the price of credit does no more to alleviate
credit problems than lowering the price of Jim Beam whiskey
helps cure dipsomania. In both cases, the problem is not the price of the
elixir…but the use to which it has been put. Over the last few years, every silly idea that came along
could belly-up to the credit bar and imbibe almost as much
as it wanted. Trillions of dollars worth of capital were
raised…spent…and have now disappeared. What's left are
I.O.U.s, stocks, bank loans, and bonds. The quality of
these debt instruments is falling rapidly. "The junk bond market is suffering through its worst funk
since at least 1990," reports Boston Globe. "The market is
cheap," according to Fred Cavanaugh, director of high-yield
assets at John Hancock Mutual Funds. "The question is
whether it represents value." "The average junk bond mutual fund had lost 10.85 percent
for the year through Tuesday.." continues the Globe
article. "In 1990, by any measure a disastrous year for
junk bond investors, the average high-yield fund lost about
9.6 percent." "So-called 'TMT' companies, working in telecommunications,
media, and technology, are the most worrisome creditors in
the junk bond market. They borrowed huge sums to build out
new communications networks and some are running into
financial walls. ICG Communications Inc. had borrowed $2
billion by the time it filed for bankruptcy protection last
month." Falling prices for junk bonds means rising costs of credit
for the borrowers - and not just TMT borrowers. J.C.
Penny's bonds now yield 18%….Tenneco Automotive's bonds
yield 21.3%. And the gold producer Ashanti's bonds can be
bought to yield 27%. These are all troubled companies. But that is what you get
after a credit binge - companies with problems…companies
that have taken up too much capital and spent it too
freely. You also get consumers with problems, for much the
same reasons. One company with trouble to spare is the Bank of America.
"They let credit quality get away from them and it's coming
back to haunt them," said an analyst quoted by Bloomberg.
"Loan problems are mounting at U.S. banks," the Bloomberg
piece observes, "…as customers find it more difficult to
pay debt. Bank of America expects to write off $1.1 to $1.2
billion in bad loans in the 4th quarter, compared to $435
million in the 3rd quarter. BOA was the a main creditor of Armstrong, the vinyl floor
maker that went bankrupt a few days ago and Owens Cornings,
which filed for bankruptcy on Oct. 5. Both companies were
plagued by asbestos suits. BOA wrote off a $500 million loan to Sunbeam…and also
lent to Pillowtex and ICG - both of whom went bankrupt on
Nov. 14. A bank with this keen a nose for deadbeat borrowers could
have hardly missed the movie business. In fact, it lent
$1.2 billion to Regal Cinemas - the nation's largest
theatre chain - 2 years ago. Naturally, Regal defaulted and
may also go Chapter 11. When credit is too cheap, people treat it cheaply. The
result is trouble. But it is not the sort of trouble that
can be cured by even cheaper credit. The U.S. economy is now at the end, I believe, of one of
the biggest credit binges in history. The headaches and
regrets cannot be dodged or ignored. And easier credit is
not likely to make much difference - just as it has had no
effect in Japan over the last decade. The entire psycho-profile and attitude of the market is
changing. Instead of dreams…there will be nightmares.
Venture funds are being replaced vulture funds. And hard-
nosed, bitter-end investors and workout specialists are
taking the places of naive amateurs… The focus of serious
investors will no longer be on cleaning up in the
market…but on merely cleaning up. Investors, who used to believe everything was possible and
who accepted every fairy tale business plan, chapter and
verse, are coming to believe nothing and accepting only
chapters 11 and 7. Things can't be put back in order without cleaning up the
trash and butt ends. This won't be done by quarter-point
decreases in the Fed Funds rate. More on this next week…including more insight into why
people would borrow and lend at such a furious pace…and
why Mr. Greenspan's Put will not work… Bill Bonner Your constantly amazed, always amused, and often surprised
correspondent…
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