Under the Top
The Daily Reckoning
Paris, France
Friday, January 07, 2005
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*** Still ignoring the Dow...more guesses for the year ahead...
*** Anticipating Alexander...battles, drinking, and adventure - who could ask for anything more?
*** Victorious in battle, but brought down by fever...language can't touch the world we live in...and more!
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Has the Dow collapsed yet?
Unless the answer is "yes," don't even bother to tell us; we don't want to know. Stocks should fall. Until they do, they might as well not exist as far as we are concerned. This may sound a mite coy on our part, but there's a method to it. Stocks are too expensive. They began what we believe was an epic march down in January 2000. Over the last five years they have merely dillied and dallied - making little downward progress. Until they get to the bottom, we have no interest in them. Why would we want to buy an expensive stock anyway? You make money by buying low and selling high. Buying high gets you started off on the wrong foot. So don't even mention them...unless they've crashed overnight.
Meanwhile, Bill Gross offered his guesses about the year ahead. He saw four things coming:
First, the Fed will keep rates relatively low, says he. We agree. If rates rise, it will be over the dead bodies of Alan Greenspan and his merry band of rate-fixers. But we doubt the Fed chairman will have to lie down and die. The world economy is entering a credit contraction; rates will stay low on their own.
Second, China will revalue the yuan, Gross continues. Maybe. We have no real opinion. What's more, our guess is that it won't really matter. China buys on the world market in dollars. It sells on the world market, mostly in dollars. What happens in between happens in yuan, but it is already the very cheap part of the process. Raising local costs won't undermine China's competitiveness. Even if the Chinese assembly-line worker's income rose from 21 cents an hour to 42 cents an hour, it would make little different to the Wal-Mart shopper.
Third, Europe's economy will remain sluggish. We don't doubt that.
Fourth, stay in cash. With long-term rates low, investors have little to gain by going far out (in maturity) on the yield curve. Long-term bonds will give you little extra return, he says, but a lot of extra risk. Stick with cash, is his advice. It may not be crowned King in the next year...but it is certainly in line for the throne. Cash will be "Prince," he says. We agree. And the best cash is gold. Short rates are low. So are long rates. You give up little by holding gold, rather than CDs. You spare yourself the risk of a tumbling dollar.
[Ed. Note: Still wondering what 2005 will bring and how to prepare? Fleet Street editor Chris Mayer has seven of his own predictions for the year...and some of them just may surprise you. See here:
7 Shocking Predictions for 2005
http://www.agora-inc.com/reports/FST/predictC06
More news, from our team at The Rude Awakening:
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Eric Fry, reporting from New York City...
"As the weak U.S. dollar stimulates - we hope - American exports, it also stimulates manufacturing activity. Our economy becomes more oriented toward producing goods, rather than merely trading financial transactions."
For more on this story, and for more market insights, see today's issue of
The Rude Awakening
http://dailyreckoning.com/body_headline.cfm?id=4396
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Bill Bonner, back in Paris:
*** The movie, Alexander, opens in Paris today. We have not seen it. But we read a little of Alexander's history in anticipation.
Americans will be proud to know that, by invading Afghanistan and Iraq, they follow in the Macedonian's footprints. In fact, it is hard to go anywhere in the Middle East without tramping on one of Alexander's trails. But first, Alexander had to conquer Greece! Ancient Greece of the 4th century BC was an empire put together by Philip, Alexander's father. Alexander got his first war experience in the battle of Cheron, where he was first in line to attack the famous gay battalion of Thebes. The gay men were reputed to be particularly ferocious in battle, since they fought not only for Thebes, but also for their lovers in the ranks.
Once Philip, and then Alexander, was proclaimed "hegemon" of Greece, the Greeks were ready to take up an ancient grudge. For five generations, they had dreamt of making war against the Persians, in retaliation for Xerxes' sack of Athens many years before. Not only that, they thought they would get rich, too. And so, in the spring of 334 BC, Alexander's army crossed the Hellespont into what is today, Turkey.
What an adventure! Battles, jewels, women, strong drink, and new and exotic places - what man could ask for more? The route was long - all the way to Libya, and then over to the Indus River. Alexander founded new cities and new dynasties. But the poor man died less than ten years after leaving Greece. He was brought down - not by the Iraqis or the Afghanis of the time - but by fever. Alexander had won every major battle, but he was a dead man at 33 years old.
*** "By the way," comes a depressing reminder from our legal office in Baltimore, "you should have explained to readers that Agora does not have a proprietary trading program. We strictly forbid editors, researchers and writers from trading in the stocks they write about - in order to avoid any chance of conflict of interest. Nor does the company itself do any stock trading of any sort. Otherwise, we might be tempted to keep the best recommendations for ourselves."
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The Daily Reckoning PRESENTS: The Daily Reckoning has recently been accused of being too "over the top." That doesn't bother us because, as Bill Bonner illustrates, life is just a series of exaggerations. Read on...
UNDER THE TOP
by Bill Bonner
Kiplinger magazine aimed a soft glove at us. Here, we pause to see what else is between the covers of the January issue...and look for some brass knuckles.
Kiplinger's complaint was that some of the things we say are "over the top." We do not deny it. Rather, we protest that we can never seem to get over the top enough. Nature, the markets, and the world itself are simply too...too...over the top themselves. Life is full of surprises, absurdities, and humbuggeries. We have only words to describe them. Our words never seem to be enough. Catastrophe, disaster, horror...where is the word that measures up to the "Death Wave" in the Indian Ocean, for example?
Kiplinger, on the other hand, lives in a different world. It is a world, as near as we can tell, where every thought is commonplace...every idea is convenient... and every stock always goes up. We say that not as a calumny. There is no shame in it. But neither is there any glory. Instead, Kiplinger must live day to day in the dreary dust of following the crowd...painting smiley faces on public buildings.
We stand still in awe and wonder. What beautiful minds construct such a happy, unclouded world? A dear friend of ours believes different areas of the brain control optimism and pessismism. A stroke many years ago changed his personality, he says. Before, he had been evenly balanced between lightness and dark. After the stroke, the windows were always open and the sun always shone. What has happened to the staff at Kiplinger, we ask? Someone should check the water in their Washington, DC headquarters. Maybe it could be bottled.
We look on the masthead, expecting to find Abby Joseph Cohen as Editor-in-Chief. But no. Instead, there is a Mr. Fred W. Frailey, who begins his opening letter with these intriguing words: "You hate me."
In truth, it had never occurred to us to hate Mr. Frailey. We never even met the man. We read on with interest to find out what the source of our animosity was meant to be.
"Just six months ago, I declared on this page that I would not buy Google's initial public offering because I didn't have the stomach for the risk that would come with paying so much for the Internet stock," he writes. So far, so good. But he figures readers are pretty mad, since Google went straight up afterwards.
Mr. Frailey's mea culpa included an admission that Google's P/E of 118 "freaked me out." There is nothing particularly astonishing about this. It should have freaked him out, in our opinion. Unless you really understood the business, which neither he nor we did, buying Google shares was pure gambling - hoping that they would go up for reasons that you could neither fathom nor control. Not buying a stock that would take 118 years' of earnings to pay you back...about whose business model you don't have a clue...whose managers you've never met and whose product you barely comprehend...does not sound dumb to us.
But not buying Google had a strange effect on the Kiplinger editor. It made him feel "stupid," he says. Why? Because the shares went up! How would he feel if the shares had gone down - smart? As far as we know no actual connection has ever been discovered between financial publishers' intelligence and stock market movements, but Mr. Frailey seems to think there is some link. He is so disturbed by it that it leads him to a breathtaking turnaround. In "atonement," he tells us that he is buying the shares now - at $181!
What kind of investment method is this, we wonder? Wait 'til shares go up in price - and then buy them? We have no Googles in our portfolio to prove we are smart. And we certainly have no idea where Google shares will go from here. But we offer this free advice to Mr. Frailey: Think again. Chasing tech shares up to extraordinary levels does not sound to us like a winning formula. Crowd following rarely is rewarding - especially when you're at the tail end of the group.
Mr. Frailey's photo suggests a man with the normal cares of middle age. But on the cover is a young couple without a care in the world. Man and wife smile broadly. They're "looking to buy great stocks at good prices." That certainly sets them apart, doesn't it?
"Where to put your money now," the headline promises. It's a question loaded with traps and troubles; but it seems so innocent...so easy...so risk-free in the pages of Kiplinger. For there on page 21, we learn that all is well in the economy. "Back into balance," says the headline. "Steady growth - more jobs, low inflation and slightly higher interest rates in 2005." How Kiplinger knows these things, we cannot tell you. But they report them in such a matter-of-fact style, you almost believe they are true, rather than mere wild guesses. Of course, they are not. Kiplinger editors are merely reporting a consensus view - one which is likely to be right, wrong, or somewhere in the middle. One thing it is not likely to be is profitable for investors, since everyone and his half-wit brother reads forecasts like this and invests accordingly.
But we push on...why not? It is all in good fun.
"The lackluster market for most of 2004 has set the stage for superb returns in 2005," says old Kip. "Confidence in the economy will grow...gains of 10% are achievable in the coming year."
Then, the magazine brings out its cover stars for the month - a doctor from Rockville, Maryland, and his wife, Jessica.
"This is a moment of opportunity," says the sawbones-cum-market-seer, who "sees opportunity in technology and biotechnology..."
"Given today's interest rates, stocks are, at worst, fairly priced and perhaps even undervalued," the magazine continues.
Nowhere do the editors admit that they have no more idea than anyone else. Nowhere do they say...well...at least that's one guess. Nowhere do they have the modest grace to warn readers that the exact opposite of what they forecast could also come to pass...and that readers ought to at least take a few precautions. Instead, they've got the poor schmucks chasing "great stocks at good prices" at the beginning of what could turn out to be a 15-year bear market!
But what the heck, it's just money.
And over on page 40, they do acknowledge that things might not go entirely as planned. "Some professionals believe corporate profits could actually decline in 2006(!)," they allow. Then, they turn to their handy rolodex to call up some Wall Street shill pretending to be a pessimist. Stocks, says David Durst of Morgan Stanley in New York City, may return "half of what many people think," - or 6%! Wow...what a bear! Won't someone please stop that man before he cuts his wrists?
We searched all 108 pages of Kiplinger's January issue; we could find no clouds bigger or darker than Mr. Durst's pathetic little wisp.
Au contraire, the sun is shining everywhere. On page 32, James K. Glassman tells us it is time to reconsider technology. Growth funds, too, are "ripe for a comeback" on page 54. Meanwhile, real estate will have "no bubble trouble," it says on page 67. Instead, "look for another year of strong home prices." And here we have another insight into Kiplinger's strange world; it is a world with only buyers. People never sell. "The youngest baby-boomers are buying up," says the magazine, "and the oldest are buying up or buying second homes."
What happens when the oldest of the oldest die? What happens when the sun goes down?
What happens when they switch water companies at the Kiplinger's headquarters?
Bill Bonner
The Daily Reckoning
Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).
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