10/29/01 TSAR OF ARABIE * * * * * * * * * * * * * * * * * * * * * * * * * Earnings down…stocks up - the rally continues… Xerox bonds - junk! People fear an epidemic, but
believe in the S&P…housing sales, prices fall… Henri Navarre sets a trap for himself…and more
* * * * * * * * * * * * * * * * * * * * * * * * * The war on two fronts continued last week…as U.S.
troops were drawn further into Bin Laden's trap in
Afghanistan…and U.S. investors were drawn further into
Mr. Bear's trap on the home front. The Dow rose 3.71%, with average stock selling at 27
times earnings…or about 100% more than the long term
trend. As stocks go up in price…earnings are coming down.
There are not many things certain in life, but it is
sure that this trend won't last long. Either earnings
must turn around and head up…or stocks must go down.
We don't see any reason for earnings to rise…so our
bet is that stocks will fall. The National Association of Business Economics reported
"the weakest economic performance and outlook in 22
years." Of NABE's "industry panelists," 90% said they
had revised their forecasts for the 2nd half of 2001
downwards. Xerox had its credit rating reduced to junk status after
its 5th consecutive quarterly loss. Sales of existing
homes and other big ticket items are off substantially.
And unemployment continues to creep upwards. Of course, not every trap proves effective. In 1953,
General Henri Navarre, commanding French forces in
Indochina, decided to lure Ho Chi Minh into a trap at
Dien Bien Phu. It was a superb, time-honored idea: he
would set up a big, defensive position that the Viet
Minh could not resist attacking. Navarre expected the
Viet Minh to exhaust themselves against his
fortifications…just as Clausewitz had described. There was one small problem…Navarre chose his ground
badly: in a valley, where the Viet Minh were able to
draw up artillery to the surrounding hills and blast him
to bits. But that was a long time ago…in such a remote place.
We Americans had little interest in what happened to the
French…just as, today, we have little interest in what
happened to the Russians or Japanese… Eric, what happened on Wall Street Friday? ***** Eric Fry in the big city… - Just like former heavyweight champ Joe Frazier, Mr.
Market is showing himself to be one tough hombre - a guy
who can "take a punch." To be sure, the September 11th
attack knocked him to the mat. But he picked himself
right back up and came out slugging. - Thanks to that indomitable spirit - or maybe thanks to
the irrational exuberance of investors - the NASDAQ and
S&P 500 have recouped all of their losses since the
attack. The robust trading action is rapidly restoring
faith in "stocks for the long term." Even though the
news is mostly bad on Main Street, everything is plus
signs and smiles on Wall Street. - "Today, Americans believe in the S&P 500, but fear an
epidemic," observes Jim Grant. "Forty-one times trailing
net income holds no terrors for them, yet they live in
dread of anthrax. Perhaps we [at Grant's] are missing
the point, but our anxieties are reversed." Grant
considers U.S. stocks frightfully overvalued - clearly a
minority view at the moment. see: Bear Distinctions
- But while Americans are busy buying stocks, they
aren't buying much of anything else, especially not
houses. September new home sales fell to their lowest
rate since August 2000. - "There is reason to believe that the housing boom is
over for now," says Northern Trust economist Paul
Kasriel. "Rock-bottom mortgage interest rates no longer
are pumping up mortgage applications for home
purchases…Perhaps it has something to do with the
labor market…Even under the most generous underwriting
standards, no job, no mortgage.
- "Another indication that the bloom is off the housing
rose," continues Kasriel, "is that new home prices are
starting to fall. The median price of new home sales is
down 5.3% this September vs. one year ago." - Because "equity extraction" from home values has -
almost single-handedly - kept consumer spending afloat,
Kasriel suspects that falling house prices is about the
last thing Alan Greenspan wants to see. Tapping into
those home equity "reserves" becomes quite a bit
trickier when the equity is disappearing. - "Another problem with declining home prices is that it
increases the probability that folks will leave the keys
to their house with their bank as they walk away from
it," Kasriel observes. Already, both foreclosure and
delinquency rates for mortgages are jumping higher. As
banks liquidate the housing collateral they hold against
foreclosed mortgages, home prices might fall even more.
"It could turn into a vicious cycle," Kasriel predicts. - Like the mortgage lending industry, the credit card
sector is also showing signs of distress. "There are two
types of companies in specialty finance," quips William
Ryan, managing director of equity research at Ventana
Capital, "those that have taken charges, and those that
will." - The joke has more than a kernel of truth in it. Two
weeks ago, credit card lender Providian Financial
stunned investors with a miserable third-quarter
earnings report. Not only are its earnings falling, but
its delinquent and uncollectible accounts are both
rising rapidly. - Ventana's Ryan is particularly concerned about the
shaky labor situation and its impact on the sub-prime
lending market. Many of the newly unemployed are sub-
prime credit card holders, and, as Ryan explained,
"these people live paycheck to paycheck, and any
interruption can send [their finances] spiraling out of
control." - "It seems safe to assume that Providian is not the
only fish floundering in the murky depths of credit-card
lending," says Grantsinvestor.com's Andy Kashdan.
"Providian may serve as an early warning of what to
expect from other companies in the industry. The market
understands that to some extent and has thus punished
the whole sector - but the flogging probably isn't
over." (Try grantsinvestor.com for 1 month, free of
charge)
- Even as many average Joes and Janes struggle to keep
their insolvent heads above water, New York's most
expensive restaurant, Alain Ducasse, boasts that its
reservations have been "healthy" in recent weeks, and
adds that no staff cuts are in the works. "Our guests
are ordering just as they did before the tragedy of
Sept. 11," a Ducasse spokeswoman tells Crain's. - Unfortunately, over-indebted credit card holders
greatly outnumber seven-figure-net-worth Ducasse diners. ***** Back to Bill, down on the farm… *** It's the All Saints holiday week for schoolchildren
in Paris. We're taking advantage of it by spending the
week in the country. *** What gorgeous weather we're having in Europe. It
couldn't be nicer: cool mornings, bright sunny days…
and long evenings… *** Mr. Deshais and I went out to the garden to bring in
firewood. In the evening haze, the sun had lit the
surface of the pond and turned it shades of pink and
yellow, like the surrounding trees. We could scarcely do
our work, so distracted were we by the beauty of it… *** What else? "In a minor coup of our own," Addison
tells me, "The Daily Reckoning and the Oxford Club are
co-hosting the annual speakers reception at the New
Orleans Investment Conference in November." Barbara Bush
will be there…John Stossel and Chris Matthews, too.
The Oxford Club's C.A. Green and Porter Stansberry will
be conducting workshops for investors. I recommend the
seafood gumbo… For details click here: New Orleans Investment Conference
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* * * * * * * * * * * * * * * * * * * * * * * * * * * * TSAR OF ARABIE
by Bill Bonner King Fahd rarely speaks. He is 82 years old and suffered
a severe stroke in late 1995 that has left him
incapacitated ever since. Many presidents, kings, and emperors have lacked
capacity, of course. Many have been mentally impaired,
delusional, unreasonable or merely profoundly stupid.
The world would not be a worse place if they spoke less
often…but Fahd's condition is the sort that would
normally disqualify even a Republican from elective
office. "The King," reports an article by Seymour Hersch in The
New Yorker, "with round-the-clock medical treatment, is
able to sit in a chair and open his eyes, but is usually
unable to recognize even his oldest friends." Fahd is being kept alive and on the throne so that
Prince Abdullah does not get the job. There is a
delicate balance in Saudi Arabia…between oil revenue
and Muslim fundamentalism. And Abdullah, 75, is a man
with fundamentalist tendencies who doesn't mind throwing
his weight around. The royal family is hoping that Fahd
can continue breathing until Abdullah is out of the way. We turn our eyes towards the desert this morning, dear
reader. We recall that it was WWI that brought down the
Hohenzollerns, the Hapsburgs and the Romanoffs - the
three great royal families of Europe. We have a hunch
that the war on terrorism will bring down the house of
Saud. The fall of the European dynasties left an empty space -
an opening for terrorists in Russia and Germany. The
Bolsheviks quickly moved into the void left by the Tsar
in Russia. And Hitler's Nazis soon squatted the vacant
lodgings left by the Kaiser in Germany. Both succeeded
by being more ruthless and single-minded than their
opponents…murdering and bullying the social democrats
out of the way. If something similar were to happen in Saudi Arabia, no
matter what befalls him personally, Osama bin Laden's
trap will have served its purpose. Even small, inept groups of terrorists can have huge,
long-lasting effects on the world. Thirty years before
the Bolsheviks, Russian terrorists killed Tsar Alexander
II, in 1881. Alexander II was a reformer. It was he who
had freed the serfs. Yet, the terrorists who tossed the
bomb "got what they wanted," writes Gary North, "the
ruthless oppression of Alexander III. He stamped out
terrorist groups with a vengeance. Six years later,
there was an attempt on his life. The government hanged
the six conspirators. One of them was Lenin's older
brother. This led to the overthrow of Czarist Russia
thirty years later. The tactic worked. It just took
time." Saudi Arabia, writes Christopher Byron in an MSNBC
article, "teeters at the edge of economic and political
chaos, imperiling the economic and geopolitical
interests of not just the U.S., but of the entire
world." "Saudi Arabia, which is roughly one-fifth the size of
the U.S., sits atop 25% of all known oil reserves on
Earth," Byron explains. "It is currently pumping roughly
9.2 million barrels of crude per day, which account for
about 10% of all oil consumed on the planet every day. "It isn't an overstatement to say that the economic fate
of the world revolves around the reliable and unimpeded
flow of oil from the fields of Saudi Arabia. Indeed,
that has been the case for more than 40 years." If Saudi oil were suddenly taken off the world market,
the world price of oil would soar - probably to $100 a
barrel or more. The entire world economy - already
barely growing - would be struck with a long, deep
recession. And it wouldn't be difficult for terrorists to shut off
Saudi oil. Gary North cites a confidential study showing
just how remarkably vulnerable the Saudi oilfields are.
Yet, instead of going after an easy target close to
home…the terrorists of September 11 chose a harder one
far away. Why? Probably because some of the oil revenue
ends up in the terrorists' hands. There are about 6,000 Saudi princes, scattered all over
the world, who have a keen interest in making sure the
oil revenues continue to flow. Over the years, they've
become as expert as the U.S. Corps of Engineers at
diverting little streams of income in their directions.
Thus do their corrupt viaducts of cash transport
billions and billions of dollars worth of oil revenue
flow out of the Saudi sands to various fancy apartments
in L.A., Mayfair, Manhattan and the avenue Foch…as
well as to caves in Afghanistan… Abdullah could be the Alexander II of Saudi Arabia,
threatening reform. But things may have already gone too
far for reform. Revolution is in the air. Living standards in the kingdom are going down. Per
capital GDP peaked out at $28,600 in 1981. Today, the
figure is less than $7,000. Much of the reason for this remarkable decline is a huge
increase in population. Most of the country is barren,
but its people are among the most fertile on earth.
"Nearly half the country's population is younger than
15," reports Christopher Byron. "Public health services
are poor, with the result that the nation's infant
mortality rate of 51 deaths per 1,000 live births is not
much better than Iraq's - 60 per 1,000 - and close to
five times that of Kuwait." According to a NY Times report, continues Byron, "all
public high schools in Saudi Arabia teach mandatory
classes in anti-Christian, anti-Western religious
fundamentalism, with nearly 30% of all class time
devoted to such instruction." "It is compulsory for the Muslims to be loyal to each
other," the Times' piece quotes a textbook, "and
consider the infidels their enemy." "Not surprisingly," Byron concludes, "the country has
become a breeding ground for terrorists. An estimated
50,000 boys leave high school every year only to find it
impossible to land jobs. They become easy recruits for
Osama bin Laden's Saudi-dominated al-Qaida network." Sooner, rather than later, the Tsar of Arabie will sink
into the sand. Then, many of these idealists may make
their way back to the Saudi sands from whence they came
and find themselves in control of much of the world's
oil. Plus, they would come into possession of what Byron
calls "a huge arsenal of some of the most advanced
military weaponry in the world…" "In the years since Desert Storm," Byron explains,
"Washington and its NATO allies have armed Saudi Arabia
with a staggering array of ultra-advanced weaponry,"
including hundreds of fighter planes and helicopters…
and thousands of tanks, missiles and other hardware. But that is a story for another day… Your correspondent…
Bill Bonner * * * * * * * * * Advertisement * * * * * * * * * * * * The Boomer "Dreamworld" of Peace and Prosperity…Just
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* While the United States spent billions on high-tech
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