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Sure, there is some overlap in payables and receivables, but at least LBWR is dealing with major companies who will pay pretty much on time.
I look at the canine stuff as simply icing on the cake. For each dog and man you stick out there, you invest say, $75,000 annually and collect $150,000 annually -- 100% profit and it doesn't impact Dexter or LBWR's time hardly at all. It's almost like having your mob guys run around the neighborhood "collecting" from the shop owners for you.
I remain,
SOROS
Amazing how you're loved when you find out the right information. I'm still digging and still have questions unanswered, but this bit of information, at least for me, goes a long way. Problem is, now I have to buy back higher than I sold.
I remain,
SOROS
Sorry. I'm just playing with you for all the grief I took earlier.
KPMG in Egypt CONFIRMED they ARE working with SLJB. I am going back in, if that says anything.
I remain,
SOROS
******Okay. For all those who accuse me of bashing, I hope the ones with real thoughts do not buy that. I have continued to pursue every lead I can, and wanted everyone to know that I FINALLY got through to KPMG in Egypt.
I remain,
SOROS
Have not many people speculated that the reason KPMG has not been able to confirm a relationship to SLJB is because perhaps SLJB is not the entity being audited. That is, SLJB is perhaps owned by another company or they fall under a larger umbrella? If so, what do these words from SLJB's releases mean? It seems they are claiming here that SLJB IS the parent company and IS the company earning the large amounts of money?
"The posted financials are a compilation of Sulja Bros. and all of its North American and Middle Eastern wholly owned subsidiaries."
I remain,
SOROS
I'm not assuming anything. I'm asking for information. Since the price is still the same, I'd love for someone to PM some or any information I can call on and verify. If I could, I would buy again. I still find it hard to believe that all the people here, especially those with large amounts invested, have not been able to 100% verify anything, and if they have, I find it equally puzzling, since they already have their positions, that they would tell me "to do my own DD" or "I can't share my information" -- both responses I have received via PM. IMO, they either know absolutely zero, or if they know anything one way or the other, they want me to simply accept blindly, and that strikes me funny also. DD in a company should take some time (I'm willing to spend even more than I have), but it should not be a complete mystery or be next to impossible to find, and those that have any solid information should be willing to share it with other investors once they have their investments made. I've shared everything I have come up with. Unfortunately, that has been a big fat zero. Surely, everyone who is long would like to have more to go on from the largest shareholders than "hang on to your hats" or "can't you read the press releases?" or "I have a feeling we're about to rocket" or "put the pieces together." Obviously, many are content to just "believe" or "hope," but for those of us who are a little more anal, how about some links other than those put out by SLJB, some phone numbers and names to speak with, or some valid email addresses where someone will actually answer?
I remain,
SOROS
Obviously, too many to search. Can you narrow it down to "world-renowned" companies doing hundreds of millions in business like those in the SLJB releases?
I remain,
SOROS
I'll be the first to admit it -- right after I bang my head on the wall and finish throwing up!
Anyway, has anyone posted contact information for the Red Sea Group, Wessel, or any of the other companies mentioned in the press releases -- something other than a recording? Also, since the Red Sea Group is world-renowned and very large, can someone point me to links about the head guy, Ahmed Khalil Al-Muslmani?
Examples
Warren R. Staley, CEO of private Cargill (very large private company) has links
Robert A. Broermann, just a CFO of a private company with operating income of 148 million has links
It's hard to find a large company, private or public, where the head guys do not have links.
Who runs the Red Sea Group? Vista? Consultech?
I remain,
SOROS
I guess I should just shut up, but I got taken in a similar stock story where I trusted other's information as fact. I really believed it, or I would not have had almost $100,000 in it. I don't want anyone to sell based on what I say because I could be wrong. I just wish they would do the DD themselves and not place blind faith in others they really don't know and who may be manipulating things. Unverifiable words in a press release are NOT proof of anything in a pink sheet company. If a company says they are doing business with so-and-so, you should be able to call so-and-so and verify it. You shouldn't get reprimanded like a child and be told to "just shut up and believe and don't bother our business plans or get the %$#@ out." Can you see Home Depot management treating even a tiny shareholder that way? It should tell you something.
I remain,
SOROS
I'd guess that is the full report. One of the KPMG people, who after searching for SLJB and coming up blank, volunteered to search D&B for me. The reply was, "All I show is basically two addresses and phone numbers."
I'm sorry, but a lumber yard with 38 employees stumbling into multi-billion dollar deals just doesn't ring right. Perhaps someone has addressed this, but why are all these huge companies that need cement and lumber not doing business with other, easily available huge companies in the industry who can also export the same and probably do everything much cheaper and much more efficiently and with tons of credibility and checks and balances already in place and working? You don't really believe that SLJB owns some special license that the major contractors don't have or don't have access to, do you?
Has anyone checked to see the true financial condition of the two SLJB lumber yards or the personal condition of Sulja himself? Someone surely has the contacts to do this. It might provide you more facts. If I had as much money in this as a few of you claim to, I'd have already flown to speak to Sulja himself or some of the principals in this deal now. What's a few hundred dollars to remove any questions left unanswered or based on total faith? Has anyone actually spoken to any of these people? I thought I read early on that someone did, and the person they got was crude and basically said, "If you don't believe me, screw yourself."
Brashness combined with verifiable facts can be a positive, but history has shown that guys with this attitude who don't offer solid proof to their words are usually just blowing smoke up your . . .
I remain,
SOROS
Difference here is we don't have to "speculate" or second guess what is real or not like with most small companies. I'd be surprised to see much bashing because what would they have to really question.
I'm banking on steady, verifiable news for the next few years, not weeks.
I remain,
SOROS
Thanks. Probably won't stay long. Only bought a quarterly subscription so I could PM some people on SLJB as I did further DD. Got too nervous on that one to hold. Tried to explain my position and got thrashed over there. I may get impatient on LBWR, but I no longer worry about it at all. The fact that I have been buying so much lately and finally have my average almost even probably helps.
I remain,
SOROS
I'm really not trying to generic bash or cause trouble. Ask rrufff. But if you take those 11 points and substitute the word "verify" for the word "read," then you'll at least understand partly why I sold and why others are justifiably uncomfortable. Sure sometimes answers don't come until they come, but if SLJB really wanted to, I can't help but think at least some of those points could be verifiable IF they wanted to put the proper information out there for their shareholders. I know, "when the audit comes" etc. But can't those still holding admit that they are placing a huge amount of trust in people they don't know and excusing or ignoring a lot of things which should not have to be excused or ignored IF management wasn't handling things like they are?
Believe me, I understand the position a lot of people are in. I sold it all because if I kept some, I'd be irritated if it went up or down -- should have sold more or sold less. Now, since I'm out, I naturally see things even more skeptically because it supports my position and what I have done with my money. If I were all in, I would do the opposite because otherwise it creates too much internal conflict. Those who are not manipulators should understand this. Those who call me and anyone who says anything except 100% praise and cheerleading are one of two things. They are either manipulators on the other side, or they are not too bright. I can discuss, and have discussed all this with rrufff, and we still get along and exchange information and thoughts. For someone to categorically say that this company is absolutely a scam and they know it, or categorically say it is the 1 in 10,000 that will make everyone rich and they know it is patently in error. There is just enough information out there that either one has to speculate and choose a side. Only the insiders absolutely know the truth, and they have not chosen to share that in a verifiable way yet.
I remain,
SOROS
ps Please don't remind me I said "last post" before. I realize that. Only hoped to share some insight. I'm sure by the responses I get it will be obvious who falls in which category on this board.
I already took everything I had in SLJB and moved it here. Too many unanswered questions, too many weird circumstances, too many "facts" impossible to confirm, 4 different KPMG offices telling me they have no relationship with SLJB (and anyone who says they cannot or will not give out this information is full of baloney -- the last two I even said that others had said they spoke to KPMG NY or KPMG attorney, etc. and were told that no office could or would confirm if a public company was a client, and they told me that was pure crap -- they were ALL very nice and extremely willing to search for a connection), and lastly, just that nagging "if it sounds too good to be true" thing. That one has ALWAYS been right for me. I've never had something that was so strange but with so many outlandish promises that was anything but deception. Just try to speak to anyone credible at ANY of the companies they throw around, and let me know how far you get. The only credible one is KPMG, and I know what they have said. Just because, I have contacted several other entities who have connections to a couple of the other "related" firms. If one of them replies, I will post it here. The SLJB board is littered with 98% mindless cheerleaders, which is another good warning sign, IMO.
With LBWR, I feel extremely comfortable in almost everything being able to be 100% confirmed. The head guy is everything the ones running SLJB are not, IMO. Any of the people I have gotten on the phone related to SLJB and the conversations were uncomfortable, to say the least -- just the opposite with LBWR. Anyone with an IQ above 105 who has taken the time to call on both companies can confirm what I am saying.
If SLJB turns out to be that 1 in 100,000 then I'll be irritated, to say the least, however, I feel like LBWR will deliver amazing returns in the final analysis, and I can sleep at night without wondering if I own a complete scam.
I remain,
SOROS
Last post. Have any of you bothered to call KPMG in Egypt and ask if they are auditing for SLJB or Emaar? Tell them you have your mother's money in it and you are worried and this public company is issuing press releases claiming KPMG is doing audit work and the US KPMG told you to call them. Check the time difference. Make the call. It might be worth the LD charges. Just a suggestion. Don't bother replying or asking me squat. The last time I offered anything, all I got was a bunch of yelling and insults.
I remain,
SOROS
Main Entry: be·lief
Function: noun
: a degree of conviction of the truth of something esp. based on a consideration or examination of the evidence
If I'm wrong, I'm going to be sick because I sold. I suppose playing the odds as you see them results in missing a big one once in a great while, but from what I have been able to tell on the pinks, with only about 3-4 a year making it off the pinks, the odds are about 99.9% against you even with no red flags. When a company has several, I'd guess the odds are almost nil.
I remain,
SOROS
Amazing. I clicked on your profile and saw "16" and thought it must be your age. I could care less if anyone listens to me. It's hard not to respond to such ridiculous words, but banging one's head on a wall eventually gets old.
I remain,
SOROS
I can't even come up with a response to that. Anyone who understands what you said and thinks like you is right where they should be.
I remain,
SOROS
Fine. I did not call NY. Call Toronto. Call Texas. Call Windsor. I have posted no lies or misinformation. I did not ask if they could give out client information. That is obvious. I said, "there is a public company called Sulja Brohers, symbol SLJB, who has put out in press releases that KPMG is handling an audit for them. Can you tell me if SLJB is a client of KPMG?" Three times, answer was "no." I even got more specific regarding the work done 3 years earlier. I'm tired of telling this over and over. I've received several PMs now from people telling me to stop wasting my breath because this is a bull board and ruled by many unintelligent people who are easily manipulated. I won't get into that, but by the outlandish statements, I've had enough. If anyone can't do their own calling, then they deserve whatever happens. I haven't even said this is a scam. I only said there were so many red flags and unverifiable statements SLJB has released, combined with KPMG denying an association, I decided to sell. Amazing how the accusations fly for no good reasons. Do what you want, but stop implying I have posted any lies. The truth will come out you know.
I remain,
SOROS
I did give them out in private and public. I'd just say, do your own checking. Don't take my word or anyone else's no matter how much "credibility" you think they have or how long they have been posting.
I remain,
SOROS
You don't really believe that a company like KPMG would play that game and purposely deceive with direct questions and clear statements they made? If you do, then I'm sure you will not do some DD on your own, but rather rely on someone else to tell you what you want to hear.
I remain,
SOROS
A palindrome and one of my likes.
http://www.palindromelist.com/
I remain,
SOROS
Spoke to a major office, and they flat-out said SLJB was not a current client. I pushed further and got the names of CPAs who did work on something for Sulja Brothers, the non-public entity 3 years ago. They gave me no private information other than the names to call. The office where they worked flat-out denied any current work for SLJB. Called another office and gave the names of the CPAs and received confirmation again that these names did, in fact, work on Sulja stuff (never said an actual audit) and it was 3 or so years ago. They checked their complete world data base and once again confirmed that SLJB was NOT a client of KPMG anywhere in the world. They said the poor CPAs that did the work 3 years ago were getting bothered by many phone calls so they were probably not taking calls anymore. They did sound like this was becoming an irritation at multiple KPMG locations. I did not inquire about possible legal stuff KPMG might pursue, but one of them did make a comment about "how do people who make false claims stay out of jail" so I would not be surprised if this does result in some action based on the telephone problems it is causing.
I will not answer these questions again. I did NOT have to give this information out at all. I have nothing to gain. Everyone can believe either side they choose no matter how ridiculous or blindly that belief requires them to be. Everyone has an agenda. Sometimes it's just to make themselves feel better, but you can be certain that there are people with lots of money invested both ways on most stocks in the pinks that have this much attention, and they will do anything to get you to just be frozen rather than doing your own DD. It's not that hard. If you are honest, a few phone calls will at least give you the assurance the information you have is your own and not some board poster's BS.
I remain,
SOROS
I've been out all day. I return. Check to see what SLJB is doing because I did just sell today. I see a couple of messages posted to me. I answer one. What is abnormal about this? I can tell you, if I still held, I'd be calling KPMG and asking if Consultech or whatever other names you might know were clients, because now that so many are calling this to KPMG's attention, they might just do something about it rather than ignoring if there is some fraud involved. I would guess that very large companies usually just ignore these types of things unless the noise gets very loud and begins to upset their offices with calls as this appears to be doing now.
What I don't understand is why someone who had their money in this would not want to do everything they could to be sure of the truth? Let me ask you, if this was a fraud, as I'm sure everyone would agree there are a lot of them in the pinks, don't you think the message boards would be loaded with placed posters just as much as bashers who were trying to get a company to go down? Why would you take ANYONE'S opinion, pro or con, here as law rather than calling yourself to check on those things that are verifiable?
I remain,
SOROS
I can't answer for others. I spoke to 3 different offices. I even got the names of the KPMG CPAs who did the work for Sulja 3 years ago and confirmed this with another office. Perhaps I am more persuasive, but that is a fact, and that is why I sold. I know there must be "bashers" who bet against stocks and therefore talk them down, but I am not one of them. On the other hand, I also know there are the opposite of bashers who ask people to blindly ignore red flags and claim anyone saying anything perceived as negative is a basher and not to be trusted. I understand this too. When you have your own hard-earned money in something, you do not want anything to negatively affect that. All I can say is, if anyone says the information I gave is false or made-up in ANY way, they are 100% lying or just don't know and are saying what makes them feel better. The only thing I have read which could be a legitimate excuse for this ONE issue is if a private company held SLJB and that is where the audit is, but I find that highly unlikely because of how clear and precise they were about when they did work for Sulja in the past and how definite they were about them not being a client now. I guess the truth will come out soon.
I remain,
SOROS
Private companies have CPA work done everyday. They were clear on that point -- that when they actually did work, it was on Sulja Brothers, not a public company.
I remain,
SOROS
Just start here:
Toronto
Suite 3300
Commerce Court West
199 Bay Street
Toronto Ontario
M5L 1B2
Telephone: (416) 777-8500
KPMG, LLP
111 Congress, Suite 1100
Austin, Texas 78701
Phone: 512.320.5200
Just start here:
Toronto
Suite 3300
Commerce Court West
199 Bay Street
Toronto Ontario
M5L 1B2
Telephone: (416) 777-8500
KPMG, LLP
111 Congress, Suite 1100
Austin, Texas 78701
Phone: 512.320.5200
I've been on SI for ten years and many know me. I just took out a quarterly subscription on IH only to follow and dig on SLJB because I had a lot of money in it. Do what you want. I'm not telling anyone what to do. I don't even know if I'm missing something. I said that. I just can't figure out a way to get around the false KPMG claim. If you or anyone else can, please let me know. I've been trying for several days of phone calls to do just that.
I remain,
SOROS
All those who dismiss anything potentially negative can easily call KPMG and verify. Call any of the major centers and ask to speak to the person who can verify if a public company is a client of KPMGs. Be very direct and ask them if they are definitely telling you SLJB is not a client in any way or any office in the world. They would not lie about this, would they? Just make a few calls. Then if you still believe it's a good investment, fine. Why would you not do the checking? When a public company claims something as certain as KPMG is finishing up an audit for them, why would you not check this out?
I remain,
SOROS
I've had all those same thoughts. I have made a conclusion. It may be incorrect if I am missing something. I don't see how, however, but I am only giving out the information I know I have. Any one of you can call and do the same. I just sold my shares. I hope I don't regret it. I did it based on speaking to 3 different KPMG people in three different major offices. I was told that KPMG did some work (they did not say audit) for Sulja Brothers before they were a public company about 3 years ago, but if they were claiming that any office of KPMG was doing work for them now, then that was erroneous information. They were very clear on this that the last time KPMG did work for Sulja Brothers was 3 years ago. They said even offices in Dubai or Egypt or wherever would show up in their databases. These were not receptionists. I went through several departments to make sure I had someone in authority. They all said they have been getting several calls, so I'm sure others have the same information.
Based on this, I sold. Like you said, if it's a scam, it has been handled with complete ineptness, however, if you go back and try and verify anything they have claimed from the beginning in terms of money earned or contracts or deals -- I cannot verify one thing. The public relations site looks like a high school student put it together and listed all the email addresses they thought would look impressive. I've tried to speak to them on several occasions and can never get through. I've called their two canadian places of business and got employees on the line only to be told that they don't have anything to do with that stock stuff and that I'd have to call Marquee.
Like I said, I'm not a trader or an experienced stock investigator, but I'm not an idiot either. My common sense tells me something is not right here, so I sold. I bought at nearly 8 cents, so I got out okay but didn't make much. Sure wish I had bought below a penny like many did.
Do your own checking and don't make a decision based on my thoughts. I'm posting this because I'm just irritated that people get away with this kind of thing -- if that is what has happened. For several days I have been exploring every angle I can to get around the KPMG claim and I cannot. I've been excusing lots of red flags because I really needed to have a big winner after getting taken once already on a stock, but I can't anymore. These are just my 2 cents for what they're worth.
I remain,
SOROS
Thursday, Oct 24, 2002 10:53 AM ET
To: KevinMark who wrote (12068)
From: SOROS
"This market is driven by sentiment, period!"
I see I do have you pegged pretty clearly. This is similar to Voltaire's views. It works like a charm in a mania environment, but I've noticed those with this view tend to have a very hard time accepting (or they are at least very late in accepting) a firm change in sentiment. CNBC is a classic example of this type of thinking. I have also noticed (myself included), that those who tend to be bearish, have the opposite problem of accepting when sentiment turns to the bullish side. That said, having just had a 17 year bull market, looking at the US and world economic indicators, examining the current state of affairs, I feel the odds heavily favor following fundamentals right now. Fundamentals, IMO, determine the main market direction for the next long-term. Sentiment only comes into play (remember we are talking next long-term direction) initially and then finally for the end of the next medium period. Right now, people like you are accepting the initial sentiment mistakenly for the next long-term direction. It is the CNBC indicator -- always bullish no matter what the fundamentals point to. This early sentiment in a new long-term direction will be overcome by FUNDAMENTALS. Fundamentals will determine the next medium-term direction. Fundamentals will take over the early sentiment at some point, and then you will see fundamentals bring the market averages back to slightly higher figures than the long-term averages (about an S & P PE of 20, or about 30% lower than current). At that point, your sentiment tool will once again be useful, but the sentiment is what will cause the fundamentals to not be so important on the downside, just as in a mania, fundamentals are not what give you the blowoff tops. Fundamentals get you a little above the averages in a long-term bear (after coming off a long-term bull), and they get you to a little below the averages (after coming off a long-term bear) in a long-term bull. Sentiment is what comes into play in a major way near the final stages of a long-term bull or a long-term bear. So you have:
A. Sentiment in reverse direction at the start of a long-term trend with volatility
B. Fundamentals to bring averages a little above (in a bear) or below (in a bull) the next long-term direction
C. Fundamentals to keep market moving in the correct direction
D. Sentiment to overdrive a long-term bull higher than it should be or a long-term bear lower than it should be
E. Fundamentals to reverse the averages in the direction of the next long-term trend, and then back to A. to start again.
The difference between you and I -- I see us at A. whereas you see us just switching between good and bad sentiment. So I think you will see the average PE's brought down to the low 20's, a continuation of fundamentals being poor and slowly lowering those PE's further, sentiment taking over at some point (probably Dow 7000 or so), PE's being driven to oversold lows (below the 14 averages of the last 100 years), and then fundamentals change for the better and set the next long-term bullish trend.
There are, of course, many mini trends during this whole long-term process, but that is the overall direction. Look at Japan's chart from 1990 forward, and you will get an idea of what the US markets are now facing. We are in about the 3rd inning of a long-term bear trend which started in April, 2000 at my E. above.
Before this is over, you will see CNBC be replaced as the channel of choice at motels, exercise places, and in family homes.
I remain,
SOROS
I have not researched it in detail, but I surmise you are correct in the split scenario. There are laws in place (states vary in this) concerning insurance companies that go broke, and how other insurance companies must assimilate those policy holders in this event. I do not know about brokerage firms, but I suspect you get a big fat zero back on these monies.
Here is a response I gave on SI. Why I even bother sometimes I don't know.
To:Jeff who wrote (12053)
From: KevinMark Wednesday, Oct 23, 2002 10:44 PM
View Replies (2) / Respond to of 12060
>>>and yes doc....you still haven't posted anything useful to back up your new bull claim.....still waiting....<<<
No need, I posted all the reasons for a major rally several weeks ago while everyone was so ready to short this thing down to 1000.
I'm still waiting for a 1000(maybe next year, not this year). BTW...there's only one indicator that is even close to getting overbought, and I do mean "only" close. Therefore, we're going higher.
.
.
.
.
To:KevinMark who wrote (12057)
From: SOROS Thursday, Oct 24, 2002 12:07 AM
Respond to of 12060
Exactly, what is the PE ratio on the semi's now? Do you see this group of stocks as raging values right here? Do you see this segment of industry in a ramp-up phase with business going through the roof from now through all of next year? What indicators do you use for determining when the semi's are "overbought"? Do you view bad economic news always as good news based only on the perception of what Greenspan "might" be able to do to help the bad situation? Do you think if something does not work 10 times, that means the "odds" are really better that the next time it will -- i.e. if you wrongly call heads or tails ten times, that your odds of being correct the 11th time are actually better than the first ten times? I'm really interested in your answers and stand to be corrected in my perception of you. You just seem to be a "new era" economist who bases everything on "pro-forma" data. The entire market and CNBC-type thinking has evolved just as the education system for the children has. That is, there is no right and wrong, only perception, and that can be changed at the drop of a hat. The problem with this type of reasoning is that some laws are immutable. They can be bent for only so long, and then they snap back quickly and severely, rather than gradually and comfortably as nature intended.
I remain,
SOROS
I just saw this headline and got a chill thinking how everyone will feel when this refers to a brokerage house and not an airline:
"Vanguard Says Will Likely Liquidate"
Others would laugh at this suggestion, but those same would have laughed a few years ago if you had put forth the Enron, WCOM, etc. etc. etc. stories. As JW says, we'll know the washout is complete when several brokerage firms go under and CNBC is off the air.
I remain,
SOROS
p.s. Should I break out the party hats and pain killers for tomorrow on SI?
Don't have the nerves for shorting. Closed it out. I'm too old for this trading stuff.
I remain,
SOROS
I NEVER short, but I just shorted GS at $74.20
I remain,
SOROS
"I laugh at these shallow pointed fingers
but the public will often believe them, since largely illiterate
when Dow/S&P is 30% lower, they will find a similar off-mark excuse"
Only problem is, if they catch or or a catch of any more snipers, or a football team scores a certain number of points, or Abby wears a mini-skirt, or Greenspasm drops his briefcase, or Saddam has a loose bowel movement, or Elvis is spotted in Washington . . . or, or, or . . . They may have the Dow above 9000 again befor a drop, and then we just go back to where we were. In other words, we may need a 50% drop. The flip side of that is, NOTHING has changed, and the higher they tweek this thing, the more painful the next major drop wil be. It just might cause that capitulation that everyone seems to think cannot happen in this new era where all stock market participants are mega-educated by CNBC and can't be scared into selling something which always bounces right back. I still think the key will be related to foreign investment in the USA and how that dwindles (and even begins to be pulled) with an eventual coordination of a rise in the EURO and a decline in the dollar. ism (I thought) would be a logical catalyst to set off this gradual shift of power, but it has not yet gone that way. Of course, there is always the JPM shenanigans that could come home to roost eventually and without much warning.
I remain,
SOROS
The Grandfather of Bear Markets
http://www.2000wave.com/index.asp
By John Mauldin
Today we return to our assigned task of trying to find some patterns in the data to help us determine the direction of the economy and the markets. There are lots of bread crumbs on this trail, so let's see what conclusions they lead us to.
First, the evidence mounts that we are still in what I call the Muddle Through Economy - a slow growth, no-new-jobs type of recovery that seems to be alternately teasing us with potential for growth and frustrating us with weakness. Weakness is winning.
Richard Russell of the Dow Theory Letter says we are in the Grandfather of Bear Markets, with which I agree, and then asks how I can predict a Muddle Through Economy? This is a fair question, and one many readers have asked. I will attempt to answer it today.
For new readers, let me once again make an important point: there is no long-term connection between the growth of the stock market and the growth of the economy. As a recent example, the economy grew 373% in the 17 years from the beginning of 1965 to the end of 1981, while the Dow was absolutely flat. From 1981 through 1998 the economy "only" grew 177%, while the Dow surged over 1000%, or ten times in just 17 years. If you go all the way to the end of 1999, it was up 13 times with a growth less than half that of 1965 through 1981, when the market was flat!
The difference was the willingness of the investing public to "discount" the future. In the recent bubble, investors assumed that stocks and earnings would grow 15% a year forever, and thus were willing to "invest for the long term." If a stock was currently expensive in terms of its actual earnings, then it would only be a few years before the earnings of the company grew and made that stock a reasonable buy.
It is the willingness of investors to project their optimistic feelings into the future that allow cyclical or secular bull markets to go to an extreme. We had three of them last century, and they all ended badly.
I will not again make the case that we are in a secular bear market, much to the relief of long term readers. New readers can see the conclusive case that we are in such a cycle by going to my book-in- progress website: www.absolutereturns.net.
Today, we will look at the emotional dynamic which powers a secular bear market, and see if this bear is at an end, or is just teasing us with a powerful bear market rally. I believe this to be a bear market rally, and one which could be powerful. I hope it is. But ultimately it will fail, although it might last for months. Traders should have fun, but investors should see this as an opportunity to eventually get out. Let's examine why.
Secular bear market cycles are characterized by more frequent and more serious recessions than their bullish cousins. With each recession, investors become more disillusioned and more conservative. They become less willing to project earnings growth into the far future. By the end of the cycle, rather than looking out ten years, they are barely willing to look out ten months.
Typically, the bull cycles are driven by some innovation like railroads, electricity, computers, etc. which foster great optimism. "This time," investors think, "things are truly different." A period of growth and seeming stability becomes the order of the day. Normally sane men project this economic climate into the far future. Business builds too much capacity, then prices and profits drop, employment sags, and it takes a decade or two to work through the excesses of the boom. But those excesses always get worked through. There is no new bull market until the excesses are dealt with. When that happens, the base is formed for a new cycle that we call a secular bull market.
This boom-bust cycle has been occurring and recurring since the Medes were trading with the Persians. This optimism-depression syndrome seems to be part of our human genetic make-up.
With that background, let me posit the following scenario:
I believe we are in a Muddle Through Economy. This economy is currently dependent upon housing and consumer spending. That is not a bad thing, but it is not the engine of economic growth. Growth comes from (among other things) business investment and new jobs. We are seeing little (or no) growth in business investment and no (or negative) growth in jobs. (See below.)
Growth will be quite slow for some time, until some problem occurs, and then we slip into recession. What could be the trigger? It could be that housing slows down. We could see housing prices fall. Consumers could start saving and spending less. Consumers could decide they need to start paying down their debt and thus spend less. Consumers could come to the end of their ability to incur debt, and thus spend less. Unemployment could rise, as businesses increase lay-offs in an effort to increase earnings. Mortgage rates could stop falling or (gasp) even rise, thus killing a major stimulus to the economy. Deflation could rear its ugly head. The list of triggers is long.
Why then, with all these problems, do I see a Muddle Through Economy for our near future? Because we have had huge stimulus from a number of areas.
The Fed has been accommodating with lower rates and easy money. Foreign investors have been willing to buy our bonds and stocks with a very high dollar. The Bush tax cut has come at a very opportune time. Mortgage rates have in effect acted like another tax cut, as people pay less for their homes, and/or have taken equity out of their homes and spent it.
Thus, the two areas which are holding up the economy -housing and consumer spending-have had a lot of stimulus. The problem is that the patient is now hooked on these stimulus drugs. Housing needs ever lower rates, but I agree with Bill Gross of Pimco that there is only so much lower mortgage rates can go. 5% is probably close to the lower limit. Eventually, that stimulus goes away.
Eventually, the stimulus fails to work, and we slip into recession. Is that next year or 2004? I can make a cogent argument for either year. I have trouble thinking of how we can avoid another recession through 2004. The next one will take consumer spending, if not housing, with it and thus will be a serious recession, unlike the recent mild recession we had.
Many look at the economic pressures we face, and wonder why we do not slip into recession next week? I agree that we cannot avoid another recession. We will have to deal with our major debt problem, both corporate and consumer. The high dollar will have to come down. Housing will come back to trend, etc.
But the US economy and free market capitalism is much stronger than most stock market bears imagine. Just as we must remind ourselves that there is no connection between the value of the stock market and the economy, we must remember to do the reverse. Just because I think we are in a secular bear market and the Dow will be lucky to bottom out at 5,000 does not mean the economy will go into the tank and another Depression is around the corner.
The mistake most bulls make is to project the performance of the economy onto the stock market. The mistake many bears make is to project the performance of the stock market onto the economy. It is quite possible for the stock market to drop 50% and for the economy to muddle through.
While it is possible we could see a depression (primarily through government ineptness like increasing taxes or raising rates), it is far more likely we see a period like 1966-1982. We experienced four recessions and an ugly bear market in stocks, stagflation, a debacle in bond prices and much more. At the end of that period the US economy was far larger than at the beginning. Even in real, inflation adjusted terms it had doubled.
I noted at the beginning of this letter that there is no long-term connection between a growing economy and a growing stock market. There is, however, a connection between recessions and a falling stock market. The average recession drives the stock market down 43%.
It is my opinion that we will experience one and probably two recessions in the remainder of this decade. Historically, the bottom in the stock market will come after the latter one. But even with all that, the US economy will still be larger in 2010 than it was in 2000. While we will not grow anywhere near the pace we grew during the last 50 years, due to deflationary and global competitive pressures, we will still grow. It just won't feel like the 90's.
And that is why, Richard, I think it is perfectly reasonable to predict a Muddle Through Economy for the near future (and even for the overall decade, albeit with some serious bumps), and to also agree with you that we are in the Grandfather of all secular bear markets. (Richard Russell can be read at www.dowtheoryletters.com )
Where is the Economy Headed?
While we may be in a muddle at the moment, the news is not particularly encouraging that we will remain so. Today I am going to come off the fence and begin to suggest we are in for a recession next year. Let's look at some of this week's economic data.
Today we read US housing starts were strong in September. This strength should continue until mortgage rates start to climb or unemployment starts to rise again. Since, as we will detail below, the rest of the economy is weak, it is likely the recent (and vicious) rise in interest rates will not stick, and thus I expect rates will eventually resume their downward trek. If they do not, then a recession will come sooner rather than the later I predict.
Inflation remains quite tame at 1.5%. The risk is that we slip into deflation. This is underscored by today's trade deficit numbers, which were (again) a record $38.5 billion. Imports rose by 2% to $120 billion and exports fell 1.3% to $81.9 billion. Because of the strong dollar, we are getting cheaper goods from abroad, and are having trouble selling our products. That is why so much of US business is showing decreasing earnings. They simply cannot sell their products at high enough prices in a global economy where the dollar is king.
China is Exhibit #1. There is no growth problem in China. Foreign businesses spent almost $50 billion in China in 2001 and are on pace to beat that in 2002. That is why Chinese exports grew at 25% over the last year. They (or their foreign partners) are building the factories to sell products to the rest of the world.
Here is the problem from a deflation point of view. China has a fixed exchange rate with the dollar. Because they can produce products at far lower prices (due primarily to labor costs), the US and the rest of the world has trouble competing on price. China has increased its share of Asian exports by 50% in just the last year. They are putting downward pressure on prices not just for US businesses, but for all businesses worldwide.
I just won a new putter at a golf tournament yesterday. (It was a raffle and not my golf prowess, I sadly admit.) It is the #1 putter on the ladies and senior PGA tours. It was made in China.
Until China begins to float its currency (let the market determine the price) rather than fix the exchange rate, this downward pricing pressure will continue unchecked. Since over 1/3 of our economy is global, then much of what we do has a downward price pressure.
But it is not just China. Japan is clearly creating a deflationary wind across the world. Hong Kong, Taiwan, Singapore and much of the rest of Asia is in deflation. Europe is slowing down. It is the result of too much production capacity and an addiction to the US consumer.
So what does business do to answer the problem? "If we cannot compete with Chinese products coming from Chinese factories, then we will build our own Chinese factories" seems to be the answer. In a perverse world, too much capacity has created a situation where only the low cost producer can survive. The only answer seems to be to create more capacity in the world's low cost producer to put even more pressure on prices on competitors elsewhere.
This forces country after country to devalue their currency against the dollar, so that they can compete for the American consumer. This keeps the dollar strong, just at a time when it would be convenient for it to weaken. This puts more pressure on American business, which must cuts costs (read lay-offs and less capital spending in the US - see below) in order to remain profitable. This causes deflation.
The trade deficit is now approaching 5% of GDP. As I have written before, this is historically when a currency begins to drop, sometimes rapidly. If the rest of the world continues to devalue their currency to keep attracting the American consumer, then we are in for deflation in the US, unless the Fed begins to seriously increase the money supply, which will create future problems of its own.
Consumer spending was up in August, and down in September. Wal-Mart tells us they are on track for a 2-4% sales growth, which looks impressive until you see that their numbers from last October were dismal. A trade organization for the office furniture industry predicts shipments will decline 20% this year to their lowest levels since 1993.
The Philadelphia Fed manufacturing survey fell through the floor this week. Their main index shows a negative number for manufacturing activity for October, for the second time in three months. Prices for finished goods fell (see above comments on China and deflation), inventories fell and back-orders fell.
In what Reuters characterized as a downbeat speech (no kidding!), Boston Federal Reserve Bank President Cathy Minehan said on Friday the U.S. economy remains fragile even without any new shocks, and consumer spending may be starting to wobble. "... how long can the consumer hold out? The risks here seem firmly on the downside," she
said.
U.S. industrial output fell in September for the second month in a row, the Federal Reserve said on Thursday in a report underscoring the fragility of the manufacturing sector in the uneven U.S. recovery. Capacity Utilization is down to 75.9%. Experts normally say when capacity utilization is below 80% that companies are unable to increase prices or profits.
Honeywell, Sun, Motorola and scores of tech companies announced lay- offs this week, as they have too much capacity. Even the world of utilities is in trouble. S&P has downgraded 135 energy companies this year, almost 50% since July, and with nearly one-third of the major companies in the sector on watch for future downgrades, it appears the industry hasn't yet hit bottom.
And finally, as I wrote about early this year, the under funded pension problem is becoming a crisis. Last month, Merrill Lynch said that 98% of the 346 companies in the S&P 500 that offer defined benefit pension plans will find their plans under funded by the end of this year.
Fitch said the pension-funding gap for U.S. auto employers alone will rise to more than $30 billion at year's end, from $13.9 billion at the start of the year, with no immediate remedy in sight. When looking up the financials for GM and Ford on Yahoo I note that GM made almost $1.4 billion and Ford lost over $6 billion in the last 12 months. It will take them a few years of lower earnings to make up their part of that $30 billion.
Europe is a Sick Puppy
As one commentator put it, the whole of the European continent is sick. Instead of rebounding on the strength of cheap loans, low inflation and the combined spending power of 370 million people, Europe has seen its hopes of economic recovery unraveled by mass layoffs, chronically high unemployment, slumping stock markets and sky high tariffs. First France and then Germany announced that the agreement all the members of the European Union signed when they formed the EU must be ignored. Now even the head of the European Union, just a few years after the signing, today says the agreement is "stupid." This does not bode well for the euro (or the ability of the European governments to see the consequences of their actions) again at precisely the time when the world needs a strong euro.
The European Central Bank remains clueless. As if to perversely prove their independence, they refuse to lower rates or ease the money supply, even as the European economy slips ever closer into recession. Germany is complaining about deflation.
As I have written on Japan at length in past letters, let me simply say that recent reports from the Land of the Hidden Sun are in keeping with their being the most mismanaged government in the world. One of the great problems of Japan is that companies which are insolvent are kept on life support, selling products below cost and thus keeping all their competitors from being able to make reasonable profits. Japan simply has refused to deal with their huge bad loan problem
Michael Hewitt of HCM Capital calls it the vampire economy, as the undead prey upon the living, creating ever more undead. He tells us, "Goldman Sachs analyst David Atkinson's estimate [is that bad loans are] $1,957 billion, or approximately 40% of GDP." New loans are being created faster than they can write off the old loans.
As I reported a few weeks ago, this is approaching a crisis of biblical proportions. Even the Bank of Japan seems to finally be alarmed, as they announce they intend to "do something" about bad loans. Just as the world begins to get a hope they will finally drive a stake through their vampire companies, I read that the government is authorizing yet another ministry to make loans to defunct companies to help them survive. Which companies will get these loans? You can bet it will be the same ones who have gotten government loans in the past, and who make large "contributions" to the politicians.
Normally, one would not care what another country does, but the bad policy in the world's second largest economy - Japan - is severely hurting the rest of the world, and creating deflationary forces that are causing major problems both in Japan and elsewhere. Their recently announced "solution" will not solve the problem, but serve to make them worse. But it postpones the pain, which seems to be the only thing Japan can summon the political will to do.
And All This Means?
The US economy will probably grow less than 1% this quarter, barring some resurgence in business investing that is not now on the horizon. There is no help coming from the rest of the world. Lower interest rates from the Fed will not be any more stimulus to the economy, although it might help lower the dollar, and thus they should lower rates. It is unlikely we will get a tax cut, so that stimulus is out. When mortgage rates bottom out, that will be the last of stimulus from that source. We are running out of silver bullets.
With such slow growth, we find ourselves on the cusp of recession. It won't take much, as the Fed governor noted, to push us over. We can probably avoid an actual recession (Muddle Through) for another few quarters as long as we get no serious shocks in the meantime. But over time, a profitless recovery will take its toll. More and more companies will seek to increase earnings by lay-offs and holding the line on spending for new equipment and capacity, except where direct competitive pressure demands they do so. This means fewer new jobs at manufacturing companies and technology firms. This will all have a direct affect on consumer spending, and we will slowly roll over into recession.
The next recession will mean one more major leg down in the secular bear (stock) market. The Index that will get hit the most is the index that has already suffered the most, and that is the NASDAQ. You will see the NASDAQ fall below the S&P 500. You heard it here first. When the new accounting standards (expensing stock options, which will happen) are applied to technology companies, we will find that many of the NASDAQ 100 have no earnings.
My best guess, and it is just that, is that we will see an outright recession in the latter half of 2003.Given that the stock market is still at valuation levels higher than at the end of any previous bull market, this does not bode well. Could we see another 40% drop? Absolutely. Historically, that is the average drop in a recession. Since we have come from the biggest bubble in history, it makes a certain symmetry that we could see the biggest bear in history.
At the end of this year, you are going to hear a lot of cheerleaders telling you to buy stocks, because at no time has the stock market ever fallen four years in a row. "This year," you will be told, "is a lock for an up year."
If we enter recession, the only lock is for a fourth straight down year. Given the state of the economy above, I see no way we will go into a boom economy.
Absolute Returns
Are there any places that have the potential to make reasonable returns in this environment? Absolutely, in my opinion. I write a free monthly e-letter for accredited investors on hedge funds and private offerings, where I think there are pockets of solid opportunities. If you are an accredited investor (typically that means a net worth of at least $1,000,000), you can go to www.accreditedinvestor.ws and sign up for the free letter. For current readers, the October letter is (finally) out.
Additionally, there are certain styles of investing that have the potential to do well. One doesn't have to go into a cave or into money markets for the remainder of the decade. Secular bear markets require a different strategy for success. Doing nothing is not a strategy.
New readers can go to www.johnmauldin.com to access all my web sites, including the web site for my book-in-progress called Absolute Returns, where I will offer my opinions on what investors should be doing this decade.
Last week, I was in New York, and stayed 100 yards from the World Trade Center site. It was my first visit back to the site, and it hit me pretty hard. Then I traveled to Washington DC, where you could feel the palpable tensions in the air from the fears of the snipers. It was very sad to listen to parents talk about the distress it is causing upon children.
All in all, I was glad to get back to Texas and my family and own bed. I will be staying home for a few weeks, and then will be in Santa Monica November 3-5 for the Endowments and Foundations Symposium, where I will be talking on the economy and leading sessions on investing in hedge funds. I will also be in New Orleans for the 29th annual New Orleans Investment conference (www.neworleansconference.com) on November 7-10. I will be glad to meet with clients and potential clients in both cities, and have some time available.
And with all the above gloomy news, don't forget that the source of your well-being is the grace of God, and that you get to work out your own future in a free world with lots of opportunities. Concentrate on what you can do and not on what you can't.
Your always seeing a boom around his corner analyst,
John Mauldin
John@2000wave.com
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It's all SIMPLE
Robert Shiller, of Yale University, wrote a book before the early 2000 bubble reached its peak. In "Irrational Exuberance", Shiller warned and documented the case that stocks were overvalued, and the bubble was ready to burst. He decided that in order to make some sense out of studying all the data, you had to have some constant to measure value, and he decided to use the PE ratio and the dividend yield. Contrary to some "new economy" nitwits today, who only are used car salesmen in disguise, the PE and dividend have always and WILL always matter. His highly-detailed data showed that the average historical P/E ratio for the S & P from 1895-1995 was 14.6 times earnings. A P/E of 14 roughly equals a simple annual return of about 7%. It just so happens that the long-term historical return for the stock market averages near 7%. It all makes sense.
His data also showed that the average dividend yield for the stock markets was 4.6% from 1895-1995.
Using this logic, if the P/E ratios are around 14, they are fairly-valued, neither a buy nor a sell. If they are cut in half -- 7 times earnings -- they are a buy and stocks are cheap. If they are 50% higher than fair-value -- at 21 times earnings -- they are expensive and indicate they should be sold. If they get to twice fair-value -- 28 times earnings -- it shows a speculative bubble. Stocks (remember we're talking averages now) should be sold quickly during a bubble environment.
You can apply the same type formula to dividend yields. They have an inverse relationship to P/E ratios, so high dividend yields show stocks are undervalued and should be bought. Of course there are specific examples where companies debt ratings, etc. are poor and this is not a reliable indicator on a specific basis, but we are talking averages. Low dividend yields relate to overvaluation and should be sold historically.
Shiller's message was simple. If you buy stocks (averages) when they are very undervalued -- a P/E near 7 -- chances are you will have a great return on your investments over time. If, however, you buy stocks when they are overvalued -- a P/E above 21 - the chances are great you will lose money or have no gains at all over a long period of time -- perhaps even a 20 year period.
In the early 1920's stocks had very low PE's (under 5) and very good yields (about 7.5%). By the late 1920's, a bubble had developed. In the 1940's this opportunity came again with stocks peaking in the mid 1960's. In the early 1980's, this low PE presented itself again with a bubble developing and peaking in early 2000.
So you have about a 10-year period after 1929 for the bubble to unwind and valuations to get cheap again. From the 1960's peak you have about a 20-year period for valuations to get historically low again. Now, we are near the 3rd year mark in waiting for stocks on average to get historically low in valuation again so the next long-term buy and hold period will begin.
Where is the PE on average for the S & P now? Estimates seem to range from 25-30. We are not near a level that should be bought by long-term investors. Slider speaks of "low-risk/high-return" situations as all that interests him. PATIENCE is the key here. Everyone will suffer the volatility UNTIL we get to another historical low valuation period which should be bought. They will also set themselves up for ZERO return by buying now. Even if they buy more at the lows, their averages will be net zero over a long period of time. No one will find the exact bottom, but I'd say a good plan is to pull all your money out of the markets and make it safe -- even if it's only earning 1.5%. WAIT until the averages at least get to fair-value (PE of 14), and then begin dollar-cost-averaging back in.
Sure, there are always "trades" that can be made during ANY given time period -- just look at QCOM the past 10 days. But you have to have volatility, risk, and great ability to profit much. For the average person, it is much more profitable to only have your money at work in the stock market when the low-valuation opportunities exists.
This rally may go a little more, but if you look at the historical perspective, you can see where it is going to end up before the next long, bull run. And that is somewhere between 40-80% lower. The average person who is within 10 years of retirement and is fully invested because they ar buying the garbage being sent to them from totally-biased people (TV, brokers, bankers, analysts) will be severely hurt before this is over. Many will have to work another 10 years for which they did not plan.
Wait for Slider's "low risk/high return" opportunity if you only want your money in the stock market. I could go on about why gold investments should prosper extremely well during the time the stock markets eventually reach this "once in 20 year buying opportunity level", but this old man is tired. Back to pain killers.
I remain,
SOROS
The key word is Bond "funds". If it is a fund, its individual components can be "traded". Therefore, if interest rates rise, a bond's net asset value can decline. If it is not held to maturity, you can lose money. Also, corporate bonds have some of the same risks as stocks -- just ask WCOM and ENRON bond holders. If you buy US bonds or treasuries individually, and you hold them to maturity (1, 3, 5, 10, years, etc.), then theoretically, you cannot lose money. Of course, if you lock in a 4% interest rate for 30 years, and interest rates rise, you will be effectively losing money because every one else wil be making a higher interest rate than you, and in the worst of circumstances, if your rate of return is ever less than inflation, you are really losing money. Still, it is not quite the same as holding a stock as it declines. Analysts and TV idiots are fond of saying, "you only lose if you sell." But there are no guarantees that a stock price will come back in a reasonable time frame, if ever. A government bond, on the other hand, does have a fixed time frame in which your original amount invested will have no theoretical risk. You will always (barring a complete breakdown of the US government, etc.) get your original amount plus interest back. Just keep in mind that the track record of the buying power of the dollars you get back is pitiful, whereas an ounce of gold today will still buy about the same amount of goods that it did when gold was $35 an ounce -- but that is another story which Jim is better at relating.
I remain,
SOROS