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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Pardon Me

*** Uh-oh...the economy is not falling off a cliff...

*** Consumers are in terrible shape - but they're spending!

*** Rate cut rally may be over...but the "automatic 
recovery" continues...stocks set to produce 5% return over 
next 10 years...trains & planes...and more!

*** An alarming realization seems to have struck the market 
yesterday: the U.S. economy may not be falling off a cliff 
as expected.

*** Auto sales have been stronger than expected - so strong 
that DaimlerChrysler announced it would not be closing its 
Jeep and minivan plants after all.

*** And retail sales - which represent two-thirds of the economy - 
are rising. Last week, same store sales rose 2.4% over 
December and 3.4% over the same period a year ago.

*** Home sales are looking good too - with forecasts of 
5.14 million units expected to sell this year...up from a 
forecast in December of only 4.94 million. Housing starts 
are increasing more than expected too.

*** "U.S. Car Manufacturers Set for Growth," says a 
headline in the Financial Times. "Consumers more likely to 
open their wallets," notes another in the S.F. Gate. 
"Consumer confidence may be stronger than data suggest," 
adds the Boston Globe.

*** All this good news seemed to weigh on Nasdaq investors 
yesterday...along with a report that the Fed was 
considering a measly 25 basis point cut in rates next week, 
rather than the 50 points investors had expected. Plus, 
Greenspan testified before the Senate that he now favors a 
tax cut - further worrying investors that a big rate cut 
may be moved to the back burner.

*** Thus, the "rate cut rally" may have come to an end 
yesterday as the Nasdaq fell 104 points. Nasdaq investors 
have so much simpleminded confidence in rate cuts that 
anything that seems to stand in their way - even signs of 
economic growth - must be taken as a sell signal.

*** So, they took their money out of the techs and moved it 
over to the Dow, which rose 82 points. There were 1,589 
advancing issues on the NYSE exchange yesterday; 1,232 
declining ones. Breadth was positive for 12 of the 
last 13 days.

*** The euro slipped a little bit 92.25 cents.

*** Not much action in the gold market.

*** What happened to the bear market and the coming 
recession? All in good time, gentle reader, all in good 
time. "The great Dow theorist Robert Rhea," writes Richard 
Russell in yesterday's message, "said that the 'single 
surest action in the market is the automatic recovery, 
often 50%, following a crash.'" 

*** But the longer-term prospects for neither the stock 
market nor the economy look good. Russell: "When the S&P 
sells for over 22 times earnings, the median appreciation 
in stocks over the coming 10 years is 5%." Against that, he 
notes, is the yield on 10-year T-notes of 5.27% - 

*** And the economy still has to wash out trillions' worth 
of bad investments, hose down millions of greedy investors 
and debt-caked consumers, and mop up resulting mess. "The 
financial condition of the consumer," notes a report from 
Hoisington Investment Management of Austin, Texas, "is the 
worst in modern times due to 8 years of heavy spending 
relative to income." The same might be said for businesses.

*** "It still boggles my imagination," Barron's quoted 
Barton Biggs recently, "that everybody thinks we can come 
through the biggest bubble in the history of the world and 
certainly the longest boom that the U.S. has ever had and 
get out of it with a very, very mild recession. Is that the 
way it works?" No...I don't think it is.

*** And yet, even the junk bond market has revived: The 
L.A. Times reports that over $10 billion of high-yield bonds 
were issued already this month, more than twice the $4.16 
billion issued in all of the last quarter. Another $2.4 
billion is in the pipeline. More below...

*** Christopher Byron notes that a Salt Lake City company, 
InvestAmerica, got a boost in its share price the day 
BEFORE it announced it was planning "to buy '$675 million 
of optical networking equipment' from Nortel Network. "How 
will InvestAmerica pay for such a purchase?" asks Byron. 
"So what that InvestAmerica has exactly $70,533 of cash on 
hand, has no tangible net worth, and only $1.3 million in 
revenue and $4.8 million in losses last year. On the 
trading day prior to the announcement, the stock soared as 
high as $1.47 a share from 70 cents (funny how things seem 
to work that way on Wall Street, isn't it), then collapsed 
the next trading day as the early birds sold out, driving 
the price down to close at 74 cents." 

*** "Sanitizing and defanging are alive and well on CNBC," 
says Legg Mason's Ray Devoe, "as if the 54.6% decline in 
the NASDAQ from the March 10, 2000 high to the recent lows 
never took place. One recent feature presentation was based 
on the theme 'There's Money To Be Made In This Market' and 
featured some of the alternative power stocks that could 
benefit from California's electricity crisis. Plug Power 
was the apparent winner - the announcer stated that it 'was 
up 178% in about three weeks.' I have followed this 
controversial company as it rose from its IPO in 1999 at 
$15 to $156 a share on January 12, 2000. The stock crashed 
to $9 on December 21, 2000-a 94.2% loss in less than a 
year. Even after what could be a 'dead cat bounce' at $25 
the stock is still down 84.0% from where it was a year 
ago." (see: Defanging The Big Bad Bear)

*** "The TMT (Technology, Media, Telecom) bubble is eerily 
similar to the 1845-1846 mania," writes The Fleet Street 
Letter's Robert Miller. "There was a massive explosion of 
companies seeking to exploit every conceivable niche of 
newly opened markets, however bizarre. At the height of the 
boom in 1845, the capitalisation of railway shares was 
around 30% of British GDP compared to 50% for IT stocks as 
a percentage of US GDP in March last year. 

"But the true lesson of the 1845 railway mania is that the 
decline in TMT stocks is far from over. Some 1,500 miles of 
line that were authorised in the boom years were abandoned 
and numerous bubble railway companies collapsed. But 
equally, apparently well-established companies, with lines 
between important cities, saw their earnings and their 
share prices collapse. Likewise, the 1845 bubble...was 
followed by a major recession which savaged the earnings of 
even established companies..." (see: A Taste Of Things To 

*** Yesterday began badly when a strike by train workers 
stopped the regular service out to the airport. But the 
line of people waiting for a cab was so long - I realized 
that I could never make my flight to Miami. Fortunately, I 
heard an announcement explaining that I might get a train 
from another I rushed to the other station and 
finally got to CDG. At the airport, without a minute to 
spare, I was taken in hand by a bold and beautiful clerk 
who rushed me through I finally arrived on 
board on time and in style. 

*** "Strikes!" she said as we dashed through passport 
control. "It wouldn't be France without strikes."

*** Once on board, I discovered that my travel agent had 
managed to get me into first class. Normally, I use 
frequent-flier miles to upgrade to business class. But they 
have discovered an even better trick - which I will reveal 
in due course.

*** All the denizens of the first class compartment were 
middle-aged men (except for one woman in her 30s who 
looked middle aged) wearing blue jeans. The suit-and-tie 
merchants in Paris made nothing on these gentlemen. Once 
airborne, they all got out their DVD players and watched 
movies - which activity entertained them throughout the 10-
hour flight. On one screen to my left, Nicholas Cage was 
getting a rather serious looking face-lift. On the screen 
to my right Nicholas Cage was driving an ambulance, in 
desperate need of a shave, sleep and a career change. I 
felt like a party pooper when I pulled out my laptop 
computer and began answering my mail.

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Poor Michael Milken. Not only did he not get the 
presidential pardon he had hoped for...he must have found 
it particularly galling that another, shadier financier got 
the pardon that might have otherwise been his.

Marc Rich, on the lam in Spain for more than a decade, is 
now free to come back to the United States and get on with his life. 
Thanks to the efforts of his ex-wife, and his two law 
firms, which, coincidentally, were also those of President 
Clinton and his wife, Mr. Rich may now take a seat of his 
own at Democratic fundraising events.

The game is not over, of course...both men are still alive. 
And there is, of course, the Great Unknown of the afterlife 
too...but so far it does appear that these two men have not 
gotten justice. 

Milken ran afoul of the SEC for crimes that are impossible 
to describe to a sober man. "What exactly did he do wrong?" 
will come the which you will find no ready 
answer. But, prosecutors leaned on Milken so hard - 
threatening to destroy his life and that of other family 
members - that Milken crumpled, copped a plea and served 

Rich, on the other hand, was charged with two major crimes. 
He dummied up oil contracts in order to evade taxes...and he 
violated the "Trading with the Enemy Act" in his commercial 
dealings with Iraq. 

Then, faced with prosecution, Rich did the arguably smart 
thing: he fled the country and has lived in luxury ever 

Which man deserved the pardon? I will leave that for you 
to decide. 

What concerns us today is not really Mr. Milken's battle 
for justice, but the market of "high-yield" bonds that he 
helped create. My source for the following report, by the 
way, is Grant's Interest Rate Observer, which keeps an eye 
on such things.

As mentioned here a day or two ago, Mr. Milken's junk bonds 
harmed few investors. "By the close of 1991," explains 
Grant's, "high-yield securities (as junk bonds are 
designated in the up portion of the cycle) had generated a 
12-month return of 39%." Grant's quotes a high-yield 
strategist, with this curious elaboration: "1991 was the 
highest return year on record for high-yield and it was 
also the highest default year."

Defaults on junk bonds have been in the news lately. They 
are what you normally get on the down slope of the credit 
cycle. Since the upward side of the debt cycle saw an 
Everest of seems likely that the coming 
downside will be similarly steep and long - with an 
avalanche or two of bankruptcies and defaults to bury 
unsuspecting investors.

That may be reason enough to avoid junk bonds altogether. 
Or maybe not. Bonds are not equities. They lack the triple- 
digit dreams of profit. But so, too, do they lack the 
complete emptiness of a share in an unprofitable business. 
They come with a coupon, in other words, and investors may 
be able to earn a good return on their money - even if the 
company fails...and even if the stock market falls. Then 
again, they may not.

And here, dear reader, I offer you a bright flash of 
insight...If you have already thought of it, you can go on 
about your business, confident that you are not missing 
anything by not continuing:

When things are out of whack, they tend to get back into 
whack. Only God knows when...or how.

Junk bonds are out of whack - selling for far less, 
compared to T-bonds, than usual. If it were to get back 
into the average whack - say, the spread that prevailed 
between 1995 and 1997 - it would mean an increase of junk 
bond prices of 38%.

Is that enough to offset the risk of loss? I don't know. 
But the Grant's team also notes that not all junk bonds are 
issued by junk companies. Some of them are decent, Old 
Economy companies that just have taken on too much debt for 
the down cycle of the junk bond market. One, for example, 
leads the nation in the production of ice. Another is the 
dominant firm in a number of industrial equipment niches. 

These companies stocks don't have to soar to make money on 
their bonds. They just have to be able to pay their bills. 
And the junk bond market just has to return to at least as 
good a condition as it was when Michael Milken headed off 
to jail.

Then again, this credit contraction could turn out to be 
much worse than it was in the early '90s. 

More to come...I've got to run to catch another plane.

Your correspondent,

Bill Bonner

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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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