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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Epiphany

*** Rally fizzled...then collapsed... Does the Fed know 
something awful? Is the Bank of America hiding a 

*** Derivatization...soon to become a 4-letter word?

*** How long will tech investors keep the faith? World's 
top market last year...GE down 2%...and more!

*** What a week it was! Stocks began the week falling and 
ended it the same way. The Dow dropped 250 points on 
Friday. The Nasdaq went down 156 points. 

*** But between the beginning of the week and its end, Alan 
Greenspan, the main man of the Committee to Save the World, 
called his group to action. The Fed cut the Fed Funds rate 
by 50 basis points, which produced (in case you missed it) 
the most spectacular bear market rally in history.

*** It was also one of the shortest. The very next day, 
stocks began to slip again, and fell so far on Friday that 
many stocks had given up all they had gained from the Green 
Team's efforts.

*** Friday, Wall Street grappled with the same fears we 
discussed on Wednesday. "Does the fact that the Fed acted 
outside its normal timetable indicate that it knows 
something awful," asked the Financial Times. "Is there a 
financial crisis about to break...?"

*** Rumors flew at the end of the week that the Banc of 
America was in trouble. Of course, the bank denied it, but 
investors still took 7% off the stock price - worried that 
the bank had a huge derivative problem about to explode.

*** JP Morgan, the "Derivative King" of Wall Street, also 
suffered at investors' hands - losing 6% of its value.

*** "Derivativization," I recall myself writing, may soon 
take its place alongside securitization and globalization 
as a cause of the first major disaster of the 21st century - 
just as militarization, nationalization, and mobilization 
were blamed for the 20th century's first and decisive 
disaster, WWI.

*** "Derivatives," writes Prudent Bear, Doug Noland, "have 
been the key to what has been basically unlimited credit 
availability that has financed the leverage behind the 
great bull markets, as well as this protracted economic 
boom. As we have said before, the proliferation of 
derivatives has created truly frightening risk, not reduced 

*** "I remember back in the fall of 1998," Noland 
reminisces, "when two finance companies filed for 
bankruptcy without ever missing a Wall Street earnings 
estimate. An excellent recent example can be found with the 
troubled California utilities. Yesterday's Wall Street 
Journal ran a fine piece on PG&E by Rebecca Smith and John 
R. Emshwiller. The article began, 'In August, Bruce R. 
Worthington did something no PG&E Corp. executive had done 
in the utility's nearly 150-year history: He hired lawyers 
to prepare it for possible bankruptcy protection.' Well, 
isn't that interesting. PG&E reported Operating Earnings 
for the third-quarter of $629 million and Net Income of 
$225 million. Earnings per share were 68 cents, a 26% year-
over-year increase. Immediately after the earnings release, 
the bulls were in force. Merrill Lynch titled their 
research report 'Smooth Sailing...,' First Boston 'Strong 
Growth Continues...' and UBS Warburg 'Bullseye!...' All of 
this despite the fact that PG&E's 'uncollected deficit' had 
surpassed $2.2 billion by August 31st. Looking at the 
balance sheet, we see that liabilities jumped almost $2.7 
billion during the third-quarter. All the same, a 
consortium led by Bank of America provided a $1 billion 
line of credit."

*** PG&E and Edison International had their ratings cut 
last week. Edison's stock split, the hard way, from 
Wednesday to Friday - giving it a market value of $2 
billion, down from $6.5 billion in July.

*** Another explanation for the hasty rate cut was offered 
in the NYTimes. "Greenspan Determined to Avoid Repeating 
the Mistakes of 1990" says the headline. The article 
maintains that Greenspan is eager to avoid the criticism he 
took in the early 90s - for not acting quickly or 
aggressively enough to counter a business slowdown. 

*** "Importantly," Doug Noland continues, "lower interest 
rates from the Federal Reserve will only exacerbate 
financial and economic distortions. We certainly see the 
possibility of catastrophic consequences in the interest 
rate and currency derivatives marketplace to lower interest 
rates. In the past, leading bulls have referred to the 
'Supertanker U.S. Economy.' Well, there is some truth to 
this analogy, but it's the Exxon Valdez heading for the 
rocks. Granted, in the past the Fed was able to 'reliquefy' 
and give new life to the bubble, but it won't work this 
time around." (see: 50 Basis Points To Sustain The 

*** Why won't it work? Because this time, it's not just a 
financial problem. It's an economic one. Years of loose 
credit caused people to borrow, spend and invest as 
imprudently as the Bank of America. These loans have to be 
written off. Companies have to go through 'chapter'. The 
workout specialists, bankruptcy courts, and vulture 
investors have to have an opportunity to ply their trades. 
In short, this time - It's the Economy, Stupid. The 
economic messes have to be cleaned up before lower interest 
rates can produce the desired effects.

*** After making 30% per year on gold in the 12 years 
running up to 1980 - gold investors couldn't believe that 
an entirely new cycle was running its course. Every 
financial crisis was a cause for hope. And every hope was 
crushed by the 20-year bear market.

*** Will technology investors be any different. I don't 
know. But they are getting crushed. The Nasdaq 100 lost 3% 
of its value last week - even with the biggest one-day 
rally in history. On Friday, the Big Techs were clearly 
back in 'sell' mode, with Cisco -12%, JDS Uniphase -12.8% 
and Oracle -7.3%. 

*** "...after the 1845 bubble burst [in railroad stocks] 
share prices did not recover for decades," writes the Fleet 
Street Letter's Robert Miller. "The same is true of 
earnings. Fierce competition between the major companies 
meant that earnings took a very long time to recover. All 
this suggests strongly that the Internet and telecom stocks 
are still probably significantly over-valued and that the 
earnings expectations of even the best well-established 
companies are over-optimistic."

*** Labor costs are mounting. The latest figures show an 
average hourly increase of 4.2% for 2,000, compared with 
3.5% for '99.

*** And in California, at least, housing costs are still 
going up. The LA Times reports that the percentage of 
people who can afford a median-priced home is falling - to 
23% in San Diego county...and only 10% in SF.

*** Oil fell slightly on Friday. Gold rose 60 cents. And 
the dollar continued to fall. The euro is now about 96 
cents - and climbing. You might want to think again about 
buying euro bonds. U.S. Treasury bonds have done very well 
- but they are vulnerable to the falling dollar.

*** GE fell 2% on Friday. My advice: get out of GE while 
you can.

*** Of the 70+ world markets covered by Morgan Stanley in 
the year 2000, here are the top 12... brought to my 
attention by Steve Sjuggerud:

Country and Gain (US$)

Ecuador - 158.39%
Ukraine - 74.26%
Jamaica - 45.17%
Latvia - 41.19%
Bangladesh - 30.42%
Israel - 24.75%
Croatia - 10.90%
Trinidad & Tobago - 8.53%
Lithuania - 5.17%
Switzerland - 4.88%
Tunisia - 4.84%
Estonia - 4.47%

Great Britain and the U.S. ranked 22 and 23, respectively. 

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

The Shocking Final Stage of the Internet Revolution

Strap on your seat belt. It's going to be a bumpy ride. The 
financial markets have entered an entirely new phase. In 

The New Era ended on May 4th, 2000. 

That's the day the Bureau of Labor Statistics officially 
reported that U.S. productivity growth was much lower than 
expected. The whole premise of an economy that could borrow 
and spend its way to "inflation free" growth forever was 
finally revealed for what it is - a complete and total 
sham. Now, the smart money has moved here to 

The Seven Best Investments for the Next Ten Years:

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"Today marks the day when the three wise men visited 
Bethlehem where the bright star in the East had directed 
them and saw for themselves what the scriptures had 
foretold...that a savior had been born.

"The three kings told King Herod that they would report 
back to him. But they suspected Herod was up to no 
good...and so they took another route home to avoid him. 
That's why they were called wise men."

Father Marchand
From Sunday's sermon

"Tomorrow I am switching religions," Paul announced. "In 
France, we have the right to take all our religious 
holidays off from work," Paul told us. "So I switch 
religions every 6 weeks. I have been a Christian for the 
last 6 get in Christmas and Epiphany. But 
tomorrow I am becoming Hindu...or maybe Confuscian. I have 
to check my calendar." 

We sat around the big dining room table on Saturday night - 
12 of us at a dinner party Elizabeth had organized. 

"With the new 35-hour work week, and all my religious 
holidays," Paul explained, "I may never have to work 

Paul is a middle-aged raconteur and provocateur. "I used to 
love the Voice of America radio," he announced. "It is what 
turned me into a Liberal." Liberal, outside of America, 
means free-market conservative. I wanted to ask how the VOA 
had done such a thing. It could only have been an accident 
- since the Voice of America was a government-sponsored 
propaganda outlet. But the conversation quickly moved on.

Annick, a small woman with a bird-like face and the 
movements of a sparrow, was seated to my right. I may have 
already mentioned her to you. This was not the first time 
she has been my dinner companion. She is a financial 
analyst with a big Paris bank. People who plan dinners try 
to seat their guests near others whose conversation they 
might find interesting. Elizabeth thought we would have 
something to talk about. Unfortunately, when she spoke, she 
talked faster than I could listen. I caught the beginnings 
of her sentences and the ends - and had to guess about what 
lay in the middle.

To my left, however, was seated an even smaller woman with 
dark hair. While she knew nothing about investments, 
economics, or anything else that I labor over, she was 
prettier, and spoke more slowly. My head more often turned 
to the left than the right. 

"The nice thing about the VOA," her husband continued, "was 
that you knew it was propaganda. It told you so. So you 
could take that into account when listening to it. But they 
shut it down a few years ago; maybe the American taxpayers 
got tired of paying for it."

"Journalism used to be completely different. Le Monde, for 
example," Paul cited France's leading newspaper, "used to 
describe itself as a 'journal of opinion'. Even the news 
items were referred to as the 'opinions' of the reporter - 
not actual fact."

"But in the 60s, I think," he went on, "they dropped the 
'opinion' word from the news pages. Now, it is pure 

Montmorillon's mayor was less cynical. He is accustomed to 
giving long uplifting speeches in praise of municipal 
sewage treatment systems or the new fire brigade hoses. He 
came readily to the defense of Le Monde and modern 

"There is a place for opinion," he said, "on the opinion 
page. But reporters are not supposed to be giving opinions. 
They're supposed to be reporting the facts."

"Facts?" Paul shot back. "They report the 'facts' as they 
see them...and then, only the 'facts' that serve their 
purpose. People are not like video cameras merely recording 
what happens in front of them. Everything is subject to 
interpretation. At least in the old days they admitted that 
they were interpreting events, not merely recording them. 
And there were dozens of papers - each with its own bias - 
from which you could choose."

"Well, you have a good point," conceded the politician, to 
whom all points are good ones.

"Thank you," was Paul's reply, "I would vote for you...but 
I am a resident of Paris, not Montmorillon." 

"In that case, vote twice. But seriously, I think people 
understand that the reporter has his own point of view. You 
know, they do these polls, asking people how they rate the 
credibility of the media. People always say they don't 
believe a word of it. They are very capable of 
understanding a point of view...and decrypting the messages 
they receive."

At this point, Paul's wife added a comment that triggered a 
series of thoughts. We had already upended several bottles 
of wine by this time...and Anne, with the glow of the 
candlelight on her delicate features, was becoming ever 
more profound and entertaining:

"Yes, they say they don't believe...but in fact, it is all 
they believe. They have nothing else to believe. They say 
they don't believe because it is fashionable to say that. 
No one wants to admit that he does not think for himself. 
But that is the case. What people read in the papers and 
see on television is all there is."

At the heart of the New Era discussion was the idea that 
information - delivered in bulk at low prices - would make 
people more productive, richer...and even happier. 

James Tobin, creator of the q ratio, which compares the 
price of a stock to the cost of the assets behind it, even 
came to think that his indicator had lost its validity. In 
the digital age, he thought, new technology and new 
communications greatly increased companies' 'intellectual 
capital' - which didn't show up on their balance sheets. 

More tomorrow...on why James Tobin was right about q and 
wrong about 'intellectual capital'...

Your correspondent...

Bill Bonner

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

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About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor"

"It is actually better than some of the newsletters that I pay to

"Your statements and philosophy have kept me from storming into the market and in fact [I'm] making some money in put options" (Frank)

Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

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Last modified: April 01, 2001

Published By Tulips and Bears LLC