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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
WEDNESDAY, 23 MAY 2001 

 

Today:  How To Create An Energy Crisis

*** Dow down...Nasdaq rises for 6th straight session...

*** E-commerce companies are doing okay...but poor Jeff 
Bezos!

*** Small companies beat big ones...gold steady despite 
dollar rise...and another pretty darned cheap stock...

*** Like kernels of corn on a hot stove, individual stocks 
and stock sectors are "popping" higher one-by-one. First 
pharmaceuticals, then financials and now, technology stocks 
of all stripes.

*** Indeed, the technology stocks have taken the lead, just 
like old times. Cisco showed the way by adding almost 3% to 
its 13% advance on Monday. For its part, the NASDAQ ended a 
sixth straight day in the plus column by gaining eight 
points... just like old times...

*** The Old Economy couldn't seem to keep pace however, as 
the Dow closed more than 80 points lower.

*** What about Old Man Gold? He managed to hang in there, 
finishing unchanged on the day. Gold stocks did not fare as 
well, however, as most fell more than 5%. Despite today's 
retrenchment, gold mining shares remain one of the market's 
strongest sectors.

*** "Last year, bankers were greeted at the opening night 
party by semi-naked women, nipples visible and dabbed in 
gold paint, daintily pretending to be fairies," the 
Financial Times reported. No, the gala event being 
described was not last year's Agora Wealth Symposium (nor 
is any such festivity anticipated for this year's Symposium 
in Las Vegas, although we have not yet ruled it out). 
Rather, it was the European Technology conference in 
Barcelona, Spain.

*** This made me think I should take a trip there and check 
it out for myself. Alas, eyewitnesses report that at this 
year's conference no scantily clad "fairies" appeared. 
Instead, as befits the less exuberant post-bubble era, 
fully clothed flamenco dancers provided the entertainment. 
Then, as if orchestrating a self-parody, guests to this 
year's event were given "a tiny stainless steel champagne 
bottle filled with detergent and a delicate bubble blower. 
Within minutes, the hall was filled with bursting bubbles." 

*** It's not all bursting bubbles out there in cyberspace. 
The new "e-performance" report by McKinsey & Co. states 
that one in five dot.com companies is a profitable 
enterprise.

Similarly, ActivMedia Research's recent report, "The E-
Commerce Shakeout: Surviving the Maturing Web," observes: 
"There are a solid core of profitable Web businesses 
continuing to thrive online." By the research firm's 
estimation, a solid 58% of all "dedicated profit centers" 
online are profitable.

*** I can report to you dear reader, that our own e-
commerce efforts are profitable. And thank God! I have 5 
more children to put through college.

*** But poor Jeff Bezos. Once TIME magazine's Person of the 
Year...once the wunderkind of e-commerce...once nearly as 
rich as Bill Gates...the poor man is now the target of 
jokes and lawsuits. He's been named in 3 federal cases. And 
now he's being investigated for selling a measly $12 
million of his own stock. But it wasn't the amount that 
rubbed the SEC the wrong way. It was the timing. Bezos 
allegedly sold days before a negative report was released.

*** Fred Hickey's High Tech Strategist observes, "Power 
One, which does approximately one of its business with 
Cisco, said that its net new orders were negative in the 
first quarter due to cancellations by several top 
customers."

*** Likewise, "Cypress Semiconductor admitted that order 
cancellations in the first quarter (mostly from cell phone 
manufacturers) virtually offset every new order it received 
in the period."

*** The macro-economic news is not much better. "With 
profits down from $192 billion to $152 billion, [in the 4th 
quarter of 2000]," writes Dr. Kurt Richebacher, "U.S. 
manufacturing has been earning substantially less than the 
$166 billion in 1995. Listening to proliferating CEO 
warnings about revenues and profits, it's clear that the 
worst has hardly started." (see: The American Profit Myth)

*** Bad news, schmad news. Investors are not about to let 
reality get in the way of their investment hopes and 
dreams. Since April 4, Cypress Semi shares have climbed 
58%, while Power One stock has soared 91%.

*** Investors seem to be singing along with Bob Marley and 
the Whalers, "Don't worry about a thing. Every little thing 
is gonna be alright. Singin' don't worry about a thing..."

*** The New York Times: "FISHER SAYS PRICES OF STOCKS ARE 
LOW... Quotations Have Not Caught Up With Real Values As 
Yet, He Declares"

The Fisher responsible for this ill-timed headline was the 
Yale economist, Irving Fisher, America's leading economist 
of the era. And the year of publication was 1929. Most 
folks know Fisher for his epically ill-timed pronouncement: 
"The nation is marching along a permanently high plateau of 
prosperity." Five days later the market crashed.

With the benefit of hindsight, we may chuckle smugly at 
Fisher's folly. Now, it's not so easy. Since WWII, the 
average P/E of the S&P has been about 14. It is 25 today. 
And yet, nearly every financial commentator swears that 
stocks are cheap. 

*** Says Fred Hickey, "You have to believe that stock 
prices can be held at grossly inflated prices through the 
magic of rate cuts and money supply growth indefinitely."

*** David keeps beating up on Goliath. "Tiny companies with 
market capitalizations below $250 million are up 24% on 
average this year," USA Today observes, citing a report by 
Salomon Smith Barney. "[Meanwhile] corporate giants with 
market caps above $20 billion are down 7%."

*** Here's a tiny company that has the additional virtue of 
being pretty darned cheap. Grant's Interest Rate Observer 
introduces us to the Zapata Corporation, a company with 
interests in food packaging and fish meal. The remarkable 
thing about the company is the share price - recently 
around $16 a share. It is remarkable because the company 
has $29 in cash for each share. And it has another $21 in 
other realizable assets. 

Dot.coms or asbestos businesses will sometimes trade at 
prices far below the value of their short term assets. But 
Zapata is neither. Still, management was able to lose 
nearly $10 million on a dot-com venture called ZapNetwork. 
That business was dropped, but as Grants warns, there is no 
telling what other bad ideas lurk in management's 
ambitions.

* * * * * * * * * * * Advertisement * * * * * * * * *

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With Lynn Carpenter's F-O-X system, you'll be alerted to 
early price volatility in stocks like American Express. 
Lynn's readers bought bargain call options when the stock 
was at $54.38...and sold them the next day for 91% gains. 
Follow this link - and get in on her next trade: 

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http://www.agora-inc.com/reports/AGTD/BuildWealth
* * * * * * * * * * * * * * * * * * * * * * * * * 


Does government really make a mess of everything? In 
today's guest letter, professor Hans Sennsholz shows how 
bureaucrats engineered an energy crisis:


HOW TO CREATE AN ENERGY CRISIS
By Hans Sennholz

It was not until the middle of the eighteenth century that 
economic knowledge emerged as a new discipline worthy of 
any attention. Heretofore, some economic thought had been 
gleaned from writings on religion, politics, and 
jurisprudence. In California, this may still be true today. 

The work of the Scotsman, Adam Smith, was truly epoch-
making in the development of economic thought. In his An 
Inquiry into the Nature and Causes of the Wealth of 
Nations, which appeared in 1776, he explained the law of 
supply and demand: "The market price of every particular 
commodity is regulated by the proportion between the 
quantity which is actually brought to market and the demand 
of those who are willing to pay the natural price of the 
commodity, or the whole value of the rent, labour, and 
profit, which must be paid in order to bring it thither." 

In the halls of the state government of California this 
simple principle apparently is as yet unknown.

The supply-and-demand principle points to three ways of 
creating an energy crisis. One, legislators and regulators 
fix energy rates that do not allow for rent, labor, and 
profit to bring it thither. In modern terminology they set 
energy prices below market prices. Two, legislators and 
regulators do not set rates but prevent producers from 
meeting a growing demand through stringent emissions and 
zoning rules, which causes the rates to soar until there 
will be a "rate crisis." Third, legislators and regulators 
may do both, fix rates below the market and prevent the 
supply from adjusting to the demand, which is bound to 
create a double-prong crisis. 

California political leaders chose the double-prong 
approach. In 1996 California legislators unanimously passed 
a 67-page electricity-restructuring law. They called it 
"deregulation" by which, in typical political duplicity, 
they meant re-regulation. 

It contained something for all the different players. The 
number of regulators was increased with the addition of two 
new quasi-governmental organizations - the Power Exchange, 
which controls all transactions between utilities and 
electricity generators, and the Independent System 
Operator, which operates the electricity grid, purchases 
the needed power and charges the utilities. 

Consumer groups got an immediate 10 percent rate cut and 
price caps at roughly the 1995 level. Powerful 
environmental groups were reassured of stringent 
environmental rules and zoning restrictions. The utilities, 
finally, were given strong financial incentives to sell 
their fossil fuel-fired power plants. They subsequently 
reduced the self-generated power from 72 percent to just 20 
percent, purchasing the balance on the market.

Fearing corporate collusion, the law prohibited long-term 
power contracts and made the spot market - the most 
volatile of all - the only market. While consumer rates 
were set by the government, wholesale prices were to be 
negotiated from minute to minute at the PX. With retail 
prices fixed at roughly 12.5 cents per kilowatt-hour and 
wholesale prices soon soaring to 40 cents or higher, the 
utilities' losses mounted, approaching $15 billion, forcing 
Pacific Gas & Electric (PG&E) to file for Chapter 11 
protection on April 6.

Adam Smith's simple principle of "bringing it thither" 
would solve the crisis immediately. But it is unlikely that 
the politicos who created it are willing and ready to solve 
it. Their economic understanding obviously is gleaned from 
politics itself, that is, the plotting and scheming of 
those seeking personal power and position. Facing a crisis, 
their primary concern is political survival; to admit their 
culpability and liability would be committing political 
suicide. 

They rant and rave, always pointing toward the producers of 
energy. It is they who heartlessly, scandalously, 
viciously, and immorally conspire to create energy 
shortages in order to reap exorbitant profits.

Every utility law the California legislature passes and 
every decision the governor makes seems to compound the 
problem. With the utility companies in or near bankruptcy 
the State now purchases electricity in the wholesale market 
for delivery to customers. To pay for the power which it 
has already purchased and to keep the lights on during the 
summer, it is authorized to sell up to $12 billion in 
revenue-backed bonds. 

Future taxpayers will cover present losses. 

The legislature also created another power authority: the 
California Consumer Power and Conservation Financing 
Authority which may issue bonds to build state power 
plants. Moreover, it is preparing legislation authorizing 
the State to issue more bonds to buy the transmission lines 
from the utilities. If they refuse to sell, the governor 
threatened to use the power of eminent domain. In short, 
the State is taking over the electricity industry.

Whenever a food shortage descends on Cuba, Fidel Castro 
invariably raves about profiteers and laments about the 
weather. In the coming months the governor of California 
may sound like Fidel, holding forth about evil 
industrialists and bewailing the unbearably hot summer.

Yours truly,

Hans F. Sennholz

From 1992-1997, Prof. Sennholz served as the President of 
The Foundation for Economic Education. He can be reached 
via his website: www.sennholz.com

* * * * * * * * * * * Advertisement * * * * * * * * *

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* * * * * * * * * * * * * * * * * * * * * * * * * * *






 
About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.

 

 
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Last modified: May 23, 2001

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