Bull!
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20. “Former Money Manager Going to Prison,” Bloomberg News, 12 February 2003. For Bond’s story, see Chapter 18 (“The Last Bear Is Gored”).
21. Stacey L. Bradford, “Pundit Watch: Has a New Bull Market Begun?” SmartMoney.com, 2 June 2003.
22. “Happy Daze,” Barron’s, 23 June 2003.
23. Steve Leuthold, interview with the author. For Russell’s and Faber’s views on long-term investments, see Chapter 21 (“Looking Ahead: What Financial Cycles Mean for the 21st-Century Investor”).
24. Interview with the author.
25. Floyd Norris, “Bush, on Wall Street, Offers Tough Talk and Softer Plans,” The New York Times, 10 July 2002.
26. Michael Lewis, “In Praise of Corporate Corruption Boom,” Bloomberg News, 12 July 2002.
27. John Kenneth Galbraith, A Short History of Financial Euphoria (New York: Whittle Books in association with Penguin Books, 1993), 23.
28. See Chapter 16 (“Fully Deluded Earnings”).
29. The remark was made in a conversation between a mutual fund company executive and one of the firm’s portfolio managers, and was reported in an interview with the author.
30. Regarding the $450,000 offer if the analysts would remain silent, Laderman reported that a DLJ spokeswoman said ex-employees who ask for or get more than the typical two weeks’ severance package are always asked to sign a “nondisparagement” agreement. Jeffrey Laderman, “Who Can You Trust? Wall Street’s Spin Game: Stock Analysts Often Have a Hidden Agenda,” Business Week, 5 October 1998. See also Erick Schonfeld, “The High Price of Research; Caveat Investor: Stock and Research Analysts Covering Dot-Coms Aren’t as Independent as You Think,” Fortune, March 2000; “Bad Advice, Faith,” Bloomberg News, July 2000; and James Grant, “Talking Up the Market,” The Financial Times, 19 July 1999.
31. Gretchen Morgenson, “How Did So Many Get It So Wrong?” The New York Times, 31 December 2000.
32. In an interview with the author, Sloan shared a draft of his speech.
33. Charles Gasparino, “Ex-Analyst Blodget Is Barred by NASD, Will Pay $4 Million,” The Wall Street Journal, 28 April 2003.
34. See Prologue.
35. Harvey Eisen, interview with the author.
36. See, for example, Laurie P. Cohen and Dennis K. Berman, “How Analyst Grubman Helped Call Shots at Global Crossing,” The Wall Street Journal, 1 June 2002.
37. Andy Kessler, Wall Street Meat (Escape Velocity Press, 2003), 69.
38. Ann Davis, “Morgan Stanley’s Meeker Given Role in Broker’s New Reporting,” The Wall Street Journal, 29 July 2003.
39. Eliot Spitzer, interview with the author.
40. Michael Lewis, “The Dishonesty of Eliot Spitzer’s Inquisition,” Bloomberg News, 22 May 2002.
41. Eliot Spitzer, interview with the author.
42. Michael Lewis, “The Dishonesty of Eliot Spitzer’s Inquisition.”
43. Eliot Spitzer, interview with the author; John Cassidy, “The Investigation,” The New Yorker, 7 April 2003.
44. Eliot Spitzer, interview with the author.
45. John Cassidy, “The Investigation.”
46. Eliot Spitzer, interview with the author.
47. Eliot Spitzer, interview with the author.
48. Bill Moyers, commentary, “NOW with Bill Moyers,” 31 May 2002.
CHAPTER 21
1. Warren Buffett, 2002 Annual Report to Shareholders, Berkshire Hathaway, 21 February 2003.
2. See Maggie Mahar, “Three Wall Street Truths You Can’t Trust,” Bloomberg Personal Finance, November 2000.
3. Marc Faber provides compound annual rates of return on real assets in the seventies in Tomorrow’s Gold (Hong Kong: CLSA Books, 2002), citing Salomon Inc. as his source.
4. Marc Faber, Tomorrow’s Gold, 35.
5. Unless otherwise indicated, Faber’s remarks are based on interviews with the author. See also Maggie Mahar, “Seeing the Future,” Bloomberg Personal Finance, November 2001.
6. Maggie Mahar, “Seeing the Future.”
7. Marc Faber, Tomorrow’s Gold, 14.
8. Martin Barnes published the charts and analysis in The Bank Credit Analyst, March 2003. Kate Welling quoted Barnes’s research in welling@weeden, 11 April 2003.
9. Martin Barnes, interview with the author; Barnes, The Bank Credit Analyst, March 2003; and see welling@weeden, 11 April 2003.
10. Peter Bernstein, interview with the author.
11. welling@weeden, 28 February 2003.
12. Greg Ip, Nicholas Kulish, and Jacob M. Schlesinger, “New Model: This Economic Slump Is Shaping Up to Be a Different Downturn,” The Wall Street Journal, 5 January 2001. The Journal cited Bianco Research as its source for its numbers.
13. See Chapter 19 (“Insiders Sell; the Water Rises”) for a discussion of how easy money leads to excess capacity.
14. Ralph Wanger, interview with the author.
15. Craig Torres, “Feldstein, Unlike Greenspan, Says Weak Economy Needs Tax Cuts,” Bloomberg News, 13 March 2003.
16. Marc Faber quoted Richebächer in The Gloom, Boom and Doom Report, May 2003.
17. For a fuller explanation of Dow Theory, see Chapter 1 (“The Market’s Cycles”).
18. Ralph Wanger, interview with the author.
19. “Q&A with GMO’s Jeremy Grantham,” Business Week, 8 March 2002; “How Far Is Down?” Barron’s, 22 July 2002; Barrie Dunstan, “Grin and Bear It, Says Grantham,” Australian Financial Review, 13 June 2003, 35.
20. E. S. Browning, “Does Current Stock Rally Have More Room to Run?” The Wall Street Journal, 7 June 2003.
21. Richard Russell’s Dow Theory Letter, 11 June 2003.
22. Ned Davis, interview with the author. See also Sandra Ward, “Bear’s Pause—The Rally Is Just a Phase of a Long-Term Down Market, Researcher Says,” Barron’s, 16 June 2003.
23. Richard Russell, interview with the author; Richard Russell’s Dow Theory Letter, 21 October 1998. Russell cites John Schott, a psychoanalyst and pioneer in the study of investor’s emotions.
24. See Chapter 1 (“The Market’s Cycles”).
25. “Q&A with GMO’s Jeremy Grantham,” Business Week, 18 March 2002.
26. welling@weeden, 28 February 2003.
27. Richard Russell’s Dow Theory Letter, 23 July 2003.
28. Sandra Ward, “Bear’s Pause”; and Ned Davis, interview with the author.
29. Maggie Mahar, “Seeing the Future.”
30. Andy Engel and Steve Leuthold, “How Long to Catch Up?” The Leuthold Group, May 2000. As Leuthold pointed out, not too many investors plow dividends back in once they realize that they are trapped in a long bear market. Most would eventually sell.
31. Ralph Wanger, interview with the author.
32. Nassim Nicholas Taleb, interview with the author. See also Maggie Mahar, “No Such Thing,” Bloomberg Wealth Manager, June 2003; and Nassim Nicholas Taleb, Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life (Texere, 2001).
33. Peter Bernstein, interview with the author. See also Maggie Mahar, “No Such Thing”; and Robert Prechter’s Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression (New York: John Wiley & Sons, 2002).
34. Nassim Nicholas Taleb, Fooled by Randomness.
35. Peter Bernstein, interview with the author. See also Maggie Mahar, “No Such Thing.”
36. A columnist for Forbes, and later for The New York Times, Hulbert has written about Russell’s success in his columns. (See, for example, “The Dow Theory Still Lives,” Forbes, 6 April 1998, 153.) See also Chapter 1 (“The Market’s Cycles”).
In an interview with the author, Hulbert explained: “We measure Russell’s returns by keeping his subscriber in an index fund throughout those periods when Russell’s theory signals buy or hold, then putting him into T-bills when Russell’s Dow Theory sends a ‘sell’ signal,” Hulbert explained, “and that’s how we arrive at an average return of 11.9 percent.”
On paper, a theoretical investor who
bought and held the S&P 500 throughout that period would have done even better—earning 14.1 percent annually—though very, very few investors actually got into the market of June of 1980 and held, without wavering, over the next 21 years. Moreover, the success of the buy-and-hold strategy depended on making a correct guess as to how long the bull market would continue. “This is why,” Hulbert explained, “after adjusting for the risk involved in betting on the market’s long-term direction, Russell’s less risky advice actually beat a buy-and-hold strategy, on a risk-adjusted basis.”
For further evidence of the Dow Theory’s effectiveness, see Chapter 1 (“The Market’s Cycles”).
37. Mark Hulbert, interview with the author. See also Maggie Mahar, “‘Buy-and-Hold’ vs. ‘Market Timing,’” Bloomberg News, reprinted in The Journal Record, 15 September 1998.
38. Richard Russell’s Dow Theory Letter, 19 June 2002.
39. Jeremy Grantham, interview with the author. Grantham originally described his “feathers” analogy to Sandra Ward in a Barron’s Q&A, “After the Deluge: An Elegant Thinker Deconstructs the Stock Market’s Latest Bubble and Its Likely Aftermath,” 6 August 2001, 34.
40. Bob Farrell, interview with the author.
41. Sandra Ward, “How Far Is Down? A Money Manager Explains How to Discover When the Market Finally Reaches Fair Value,” Barron’s, 22 July 2002, 21.
42. For the full text of Di Tomasso’s commentary, see www.ditomassogroup.com.
43. Marc Faber, interview with the author. See also Maggie Mahar, “Seeing the Future.”
44. “Robert Greer Discusses the Benefits of Commodity Investing,” www.pimco.com, June 2003.
45. Michael R. Sesit, “Going Global: This Manager’s Tips Travel Well,” The Wall Street Journal, 11 April 2003 and “Mr. Rogers’ Far-flung Neighborhood,” The Financial Times, 29 May 2003.
46. Timothy Green, The World of Gold: The Inside Story of Who Mines, Who Markets, Who Buys Gold (London: Rosedale Press, 1993), 2–3.
47. For a full discussion on the Fed’s efforts—first to keep the bubble afloat, and then to reflate the economy—see Chapter 19 (“Insiders Sell; the Water Rises”).
48. Marc Faber, The Gloom, Boom and Doom Report.
49. On the debt that remained after the bubble burst, see Chapter 19 (“Insiders Sell; the Water Rises”).
50. Interview with the author. Marc Faber, Tomorrow’s Gold, 288. Gold mining shares do not necessarily track the price of gold, which is why investors such as Eveillard buy gold bullion as well as mining shares.
51. Marc Faber, interview with the author.
52. Gail Dudack, interview with the author.
53. Marc Faber, interview with the author.
54. Lee R. Thomas III, “Global Markets Watch,” www.pimco.com, June 2003.
55. Maureen Allyn, interview with the author.
56. See Timothy Aeppel, “Goodyear Eliminates Dividend, Helping Push Shares Down 17%,” The Wall Street Journal, 5 February 2003, for full description of Goodyear’s woes.
57. Peter Bernstein, as quoted in Richard Russell’s Dow Theory Letter, 2 January 2002.
58. Maggie Mahar, “Total Return,” Bloomberg Personal Finance, January/February 2002.
59. “Q&A with GMO’s Jeremy Grantham.”
60. Faber quoted Richebächer in The Boom, Gloom and Doom Report of May 2003, and, in an interview with the author, he noted that an independent economist had confirmed Richebächer’s numbers.
61. Richard Russell, “Rich Man, Poor Man (The Power of Compounding),” available at www.dowtheoryletters.com.
62. TIPS can present a tax problem. The inflation bonus is paid on the back end: when the bond matures it is added to the bond’s principal. Along the way, the investor receives only the fixed dividend as income. Nonethelesss, if an investor buys TIPS for a taxable account, he is taxed as if he received the inflation each year. So he must pay the taxes on the inflation bonus before he receives the bonus. The easy solution is to buy TIPS only for a 401(k), an IRA, a Keogh, or any other tax-deferred retirement account. In that case, the TIPS are sheltered, along with the rest of his investments: he pays taxes only when he retires and begins withdrawing his savings. Alternatively, an investor can buy “I bonds,” which are similar to TIPS but do not require him to pay taxes along the way.
EPILOGUE (2004–05)
1. Karen Gibbs, Wall $treet Week with Fortune, 16 January 2004.
2. Jonathan Fuerbringer, “Americans Pour Money into Stock Funds in Near Record Amounts,” The New York Times, 13 February 2004.
3. Gail Dudack, “Weekly Strategy Report,” SunGard Institutional Brokerage, 21 January 2004.
4. Sandra Ward, “A New Bull Market: Interview with Steve Leuthold,” Barron’s, December 2002. Within the interview, Leuthold made it clear that he was not forecasting a secular or “super bull market.”
5. “Russell Comment,” Richard Russell’s Dow Theory Letter, 16 January 2004.
6. “Chairman’s Letter,” Berkshire Hathaway Annual Report, 2003.
7. Gregg Wolper, “Why Legendary Investors Are Drowning in Cash,” Morningstar.com, 3 March 2004.
8. Bob Arnott, interview with the author.
9. Jim Chanos, interview with the author.
10. Jack LaPorte, manager of T. Rowe Price’s New Horizons Fund, as quoted by Chet Currier, in “A Year to Leave a Defeatist in Tears,” reprinted in The Salt Lake City Tribune, 14 December 2003.
11. “Russell Comment,” Richard Russell’s Dow Theory Letter, 7 April 2004.
12. Fred Hickey, The High-Tech Strategist, 6 February 2004.
13. “Russell Comment,” Richard Russell’s Dow Theory Letter, 25 March 2004.
14. Bill Fleckenstein is one of many commentators who have quoted the remark Greenspan made on January 7, 2003. See Richard Russell’s Dow Theory Letter, 16 March 2003.
15. Steve Leuthold, interview with the author.
16. The total of $1.7 trillion assumes that the Bush administration’s 2001, 2002, and 2003 tax cuts would become permanent, as the president had requested.
17. See Kate Welling’s interview with Steve Einhorn, “Flashing Caution, Omega Advisors’ Cooperman and Einhorn Are Buying, But Wary,” welling@weeden, 12 March 2004.
18. Marc Faber, The Gloom, Boom and Doom Report, December 2003.
19. Greg Ip, “Rising Stocks, Home Values Are Restoring Wealth: U.S. Households Are Aided by Recovery, but Could Fall Victim to Sudden Declines,” The Wall Street Journal, 16 January 2004. As the Journal noted, figures on household net worth are not adjusted for inflation and include the holdings of nonprofit organizations.
20. In his December 2003 Gloom, Boom and Doom Report, Marc Faber gives the number for 2003, quoting David Rosenberg, Merrill Lynch’s chief North American economist.
21. James Grant, Grant’s Interest Rate Observer, 16 January 2004.