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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
MONDAY, 15 JANUARY 2001 

 

Today:  No Magic

*** Why the panic? Inquiring minds want to know...

*** Look for more rate cuts...will the Internets continue 
to rise? Or will gold?

*** Bill Clinton could become President of the Republique 
Francaise...salacious gossip...and more!

*** The sales figures for December came out; they were down 
just 0.1%. Not a big deal. Other economic figures reported 
recently show the same picture - a softening economy, but 
not a collapsing one.

*** So, why the hurried 50 basis point rate cut by the Fed 
on Jan. 3rd? Even Alan Greenspan's colleagues on the 
Federal Open Market Committee were surprised. It is rare to 
change rates between meetings - and practically unheard of 
to reverse the previous direction of changes.

*** "Speculation is rife throughout the Fed," reports the 
Washington Post, "as well as throughout the market, as to 
what caused Greenspan to decide a big rate cut was needed 
so urgently."

*** But Charles Peabody has a hypothesis: A record $600 
billion of commercial paper - loans held by banks - needed 
to be refinanced in the first 3 weeks of January. The Fed 
may be concerned with the health of the stock market...as 
well as the health of the economy...but what really keeps 
the bankers awake at night is the health of their own 
businesses. 

*** "Bank of America had to honor a $1 billion line of 
credit to PG&E last October," writes Dr. Gary North. "This 
is a continuing problem for large U.S. banks in general. 
They have made credit lines available to companies that, in 
a credit squeeze, would not otherwise qualify for loans. We 
are not talking about a few billions; we are talking 
trillions... The banks can easily get saddled with new 
loans issued to firms to which they would not otherwise 
make loans." (see: Reading The Tea Leaves)

*** Few banks have actually cut interest rates - despite 
being able to get money more cheaply from the Fed. My 
guess: they're using their fatter margins to offset rising 
defaults.

*** So far, the economy is deteriorating...but maybe not as 
rapidly as it first appeared. Consumers and investors are 
anxious, worried - but not really negative. They expect 
Greenspan to save the day.

*** Those that need to borrow money are doing so. Most 
people are hesitating - either because they expect lower 
rates or because they are already "spent out" and/or are 
becoming uncomfortable with so much debt.

*** As the year moves forward, the economy will probably 
continue to weaken. Stephen Roach may be right - we may see 
negative GDP growth in the first half of the year.

*** Wall Street is closed today, for Martin Luther King 
day. But tomorrow, GE will come forward and make its 
earnings announcement. Will this be the year GE finally 
misses its numbers...or has to guide analysts to lower 
numbers? Maybe... GE fell another 2% on Friday.

*** The Dow dropped 1.3% last week. But the Nasdaq, though 
it fell 14 points on Friday, realized its biggest weekly 
gain since September - up 9%.

*** The big winners again on Friday were the Internets. The 
INX rose 5%.

*** Losers were the Big Techs - Gateway lost 8%, Intel was 
down 4%...and Hewlett-Packard lost 5%. Gateway says it will 
cut 10% of its staff. William Hewlett, founder of HPI and 
Silicon Valley, moved on, too. He shed his mortal coil 
Friday morning.

*** Oil is back over $30. 

*** People who hope for another rate cut are likely to get 
their wish. Why? Because the underlying problem is that 
there were too many bad investments and bad loans made 
during the boom period. Those have to be written off, 
worked out, and picked over. Lower rates can help get the 
economy moving again - but only after the mess has been 
cleaned up. Until then, lower rates get adversely selected 
by the worst credit risks...and make the final reckoning 
even more difficult. 

*** But since lower rates are the only trick Greenspan 
knows - it's one he will perform over and over. Rates will 
fall...and fall...and fall. The dollar will fall too - as 
it becomes relatively more attractive to hold European or 
Asian investments. 

*** And who knows, gold could rise...

*** Today is Maria's birthday. She turns 15.

*** Henry, 10, and Jules, 13, took part in a series of 
skits put on by the local scouts. The 'scouts' in France 
are very different from those in America. "Scoutism," a 
young man explained to parents, "is a form of 
Catholicism...for young people...to instill in them a sense 
of devotion, faith, and obedience." 

*** Just as he spoke these words, barely audible over the 
roar of boys playing in the background, Henry came running 
around the corner, chasing another fellow, and knocked over 
two metal chairs.

*** But at least Henry had a good role in one of the skits 
- he played Jacques Chirac, President of France, while a 
very pretty young girl took the part of 'Miss France'. The 
point of the skit I didn't quite get - but it looked like 
the actors, if not the audience, were having a good time. 
And Henry played his role with such confidence, I thought 
he was right for the role.

*** But I read in the Figaro over the weekend that Henry 
may have competition. Public Law 1284 gives any citizen of 
a former French colony or possession the right to run for 
President. Arkansas was once owned by France. So, says the 
Figaro, Bill Clinton could run for Jacque Chirac's job if 
he wants to.

*** And now I will let you in on some course and salacious 
small town gossip. It is said that a certain young woman in 
our burg has been cursed (or blessed, depending on your 
point of view) with nymphomania. She has "the fire 
derriere" as the disapproving farm matrons put it. (I am 
just reporting what I hear.) 

*** Well, I saw the thin, blonde woman -looking a little 
pale and perhaps exhausted, at the scout show, sitting by 
herself as her younger sister performed. It might have been 
my imagination, but she seemed a little out-of-place. So, I 
decided to sit down and keep her company, in proper 
Christian scout spirit. Besides, it was a cold night and I 
need the extra warmth.

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NO MAGIC

"Have you found another company such as W.R. Grace," Benoit 
asked me again on Saturday. We were pouring concrete into a 
stone wall, in a technique that seems almost foolproof.

It had better be foolproof, I thought to myself. Neither 
Benoit nor I have any experience in stonemasonry. But it 
seems simple enough. We lay up the stones on the outside 
surfaces of the wall we are building - using mortar to hold 
the stones in place. We run the walls up two feet or 
so...then, when the mortar hardens, we go back and pour 
concrete between the two stone surfaces - giving us a 
single, very solid wall. As long as we keep them reasonably 
straight - using a mason's line to guide us - the walls 
should be okay.

But Benoit is not impressed by physical work. He's seen 
enough of that already. He knows what you can get from hard 
work. What interests him is the stock market - that is, the 
money you can earn without working.

I had told him about W.R.Grace a few weeks ago - after I 
discovered that the stock had fallen so low it was trading 
below 1 times earnings...and at a fraction of book value. 
The company faced more than 100,000 lawsuits from its 
asbestos-era work. Still, I was willing to bet that the 
price of the stock was more likely to go up at that point 
then down.

So, I mentioned this to Benoit...and he began to follow the 
stock. When it rose sharply he began to think that I might 
have the magic touch...that I could find stocks that were 
about to begin a rising trend.

I warned him that no one could really do so. 

"Stocks move up and down almost at random," I explained. 
"You cannot predict whether they will go up or down in any 
period of time. The market is extremely efficient. At the 
margin, it is unbeatable."

"That said," I continued, "there are occasions when stocks 
are so extremely underpriced or overpriced that they should 
correct to the mean. You still don't know when...or 
how...but the farther they get away from ordinary 
valuations...the more likely it is that they will come back 
quickly. It is as if they were attached to ordinary levels 
by bungee cords. They can go a long way from where they 
ought to be...but the further away they get, the more 
tension on them to return."

W.R.Grace was stretched so far on the downside that the 
cord almost snapped. And maybe it will snap. But, at least 
for now, it has pulled the shares back towards the 'normal' 
range (with a lot farther to go).

The Big Tech and Internets, on the other hand, were an 
example of tension in the opposite direction. They had 
become outrageous - and exerted such a tug on the bungee 
cord of reasonable value that it had to spring back. 

But apart from that small insight, I confessed to Benoit, I 
have no magic.

Still, I sensed that Benoit doesn't quite believe me. "Once 
a pig learns how to hunt for truffles," his father said to 
me one day, "you can't stop him." Anyone who can pick one 
good stock, Benoit must be thinking to himself, can pick 
another.

So, in the interest of full disclosure, for Benoit's sake 
as well as yours, dear reader, I went back and looked at 
the recommendations, suggestions and gratuitous investment 
comments I made over the course of the last year. You may 
come to your own conclusion.

First, I suggested that you "sell the dollar." This advice 
was proffered on the 4th of January, 2000, when the dollar 
index was at 100, and a euro was worth $1.03. Alas, a year 
later, the index had climbed to 110. And the euro could be 
bought for just 94 cents.

Perhaps I was not wrong. Maybe I was just premature. But 
whatever truffle lay buried in this recommendation must 
still be there. I will keep digging...

Then, on January 6th, I recommended Philip Morris and GM. 
The cigarette maker nearly doubled, from $23 to $43. But 
the automaker? The stock did rise during the first 5 months 
of the year. But if it had been a bargain at the beginning 
of the year, it was an even bigger bargain at year end - 
losing about 40% of its value.

The next day was a good one for DR readers. I said that 
Amazon.com was doomed. The stock, then $66, is about $16 
today.

In like manner, I suggested that you might want to sell 
Ameritrade and drkoop.com. The former has fallen from $21 
to $8 since then; drkoop has fallen even further - down 
from $11 to 44 cents.

Similar profits could have been made on AOL or Etoys, both 
mentioned negatively on the 18th of Jan., 2000. AOL fell 
from $61 down to $44. Etoys got smashed - from $20 down to 
18 cents.

Of course, the whole Internet/Big Tech sector went down. 
Among those I mentioned:

Cisco fell from $72 to $36
MicroStrategy fell from $21 to $11
Intel dropped from $73 to $33
Micron slumped from $89 to $38
IVillage sank from $6 to $1

And so on...

But what about the non-techs? Let me see...

Hmmm...

While I suggested you go long on GM, I recommended the 
opposite side of the trade with regard to the other big G 
in the Dow: GE. On January 31st, sober and not under any 
extreme stress, I said that I thought the world's biggest 
and most widely admired corporation was overpriced. The 
stock, $44 a year ago, rose to $54 on the ides of 
March...but then, Oh ye of little faith, it fell to where 
it stands today - about $43. 

I recommended Raytheon on Feb. 22nd. It went from $21 to 
$30. But I also recommended mobile home maker Fleetwood and 
Newmont Mining - both of which went down.

Procter and Gamble, recommended March 8th, rose from $58 to 
$72. But Tenneco fell; and so did American Woodmark. 

On the other hand, First American Financial nearly tripled, 
from $10.94 to $31. So did RJ Reynolds (a recommendation 
from the Fleet Street Letter) - from $18 to $49.

GPC, Pohang, Midland, Visteon, Northrop Grumman - some went 
down and some went up. Still, not a bad performance...with 
most selections up. 

There were also a number of energy companies - mostly 
suggested by Dan Ferris, then of the Real Asset Investor - 
which also went up. 

And the record shows a motley crew of foreign stocks that I 
haven't yet checked.

Without putting too fine a point on it, it looks like year 
2000 was a good one for DR readers. But there was no magic.

I hope we do as well this year.

Your correspondent, still searching for the magic...


Bill Bonner

P.S. It was so cold on Sunday afternoon, Benoit and I 
retreated into the house to hang pictures. Alas, picture 
hanging was not foolproof. We propped a large gilt-framed 
painting against a wall so we could drill holes in the 
wall. While doing so, somehow a piece of cardboard poked 
through the century-old canvas. You know the old saying: 
Three moves equal one fire. (Psst...don't tell Elizabeth; 
maybe she won't notice.)

For more on the Daily Reckoning please visit:
http://www.dailyreckoning.com

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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: April 01, 2001

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