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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Grand Illusion

*** Mr. Bear backs off...for now! Is this the big 
bottom...or another little bottom?

*** America doesn't rig its markets, does it?

*** One of America's ugliest companies...foot and mouth 
disease confirmed in France...Marc Rich... and more!

*** Mr. Bear must have had the same idea I had yesterday don't want to spook the campers too much or they'll 
pack up and go home.

*** So, he backed off. The Dow recovered 82 points. The 
Nasdaq rallied 91. 

*** The big winners yesterday were the Internets. The big 
losers, wouldn't you know it, were gold mining companies.

*** Dell and Cisco were both up about 12% each. GE CEO Jack 
Welch assured Wall Street that the company would meet its 
earnings estimates and will continue to grow "in any 
foreseeable economic scenario." You can recognize nonsense 
when you see it, so I will not call attention to it. But 
most investors, apparently, cannot. GE rose 7%. Sell the 

*** And once again, investors think they can see the 'big 
bottom' they've been looking for. But stocks are no 

*** "We can say with reasonable conviction that this could 
well be 'a' bottom," writes Kevin Klombies, "but it isn't 
likely 'the' bottom. As Barrons pointed out, Intel was 
trading at 45 times earnings at $75 per share and was still 
trading at 45 times earnings at $29 per share. That hardly 
suggests that valuation levels are being wrung out of this 
market." (see: Quick Profits From A Bear Bounce, Anyone?)

*** "Usually, falling prices mean stocks are bargains," 
says a WSJ article. "But earnings are falling at an even 
faster clip than prices lately - so price-earnings have 
actually been going up. A week ago, the price-earnings 
multiple of the Nasdaq was 121, according to Birinyi 
Associates, below the current 154 figure, meaning that 
investors are paying more for a dollar of earnings than 
just a week ago. [Whoever wrote this sentence needs an 
editor even more than I do.] Even if the money-losing 
stocks are taken out of the Nasdaq calculation, the P/E 
ratio is 35 - an historically high level."

*** But not all stocks have rising P/Es... I noticed a note 
this morning in the Richmond press about a local company, 
Ethyl, laying off 40 employees after profits fell 77% in 
the last quarter. Keep an eye on Ethyl simply because it is 
one of the 'ugliest' companies in America. Its main product 
is a lead additive for gasoline that is being banned all 
over the world. The stock has been hammered since 1998, 
when it was selling for more than $8. You can buy it today 
for less than $2 - a price only 2.2 times earnings.

*** Markets do not go straight down. After hitting a high 
in 1966, for example, prices went up and down for years... 
while inflation lowered their real values. Finally, the 
market fell apart in 1973 and did not recover in real terms 
until the early 1990s. Investors waited a quarter of a 
century to get even.

*** Daily Reckoning readers will remember just 2 weeks ago 
Lynn Carpenter forecast the Nasdaq would reach 1800 by 
summer. Will she be right? We'll see... we'll see...

*** "The break below the important psychological benchmark 
2000," says John Myers, "will prove troubling - very 
troubling - for the journeyman investor and his 401(k). By 
contrast the Canadian gold and precious metal index is at 
the cusp of breaking long-term resistance and is 
threatening to break through its 52-week high. The index, 
which touched below 3500 last November, is now standing at 

*** "The Japanese may do it...But America doesn't rig its 
markets," writes John Crudele, rhetorically, in the NY 
Post. Or does it? Crudele points to Peter Fisher, an 
important member of the Federal government's Working Group 
on Financial Markets (a.k.a. the Plunge Protection Team) as 
the man who can save the day for Wall Street. How? "He and 
the Bush administration need to inject money directly into 
the market," advises Crudele. "They need to buy the heck 
out of stock index futures contracts, which will give a 
lift to the entire equities market." More below...

*** MSNBC surveyed the nation's reaction to the slump, 
finding that "business leaders...say they are weathering 
the storm." The storm they must be referring to is the one 
that has not hit yet. "Consumers Still Spend" says the 
International Herald Tribune headline. "The bear market in 
equities so far has had surprisingly little impact on the 
broader economy," the article says... "largely [reflecting] 
the fact that the stock market weakness has been 
concentrated in a technology sector that most analysts now 
agree was vastly overvalued." Those analysts...always on 
the job.

*** Yet, "we think it's virtually inconceivable that the 
stock market's plunge won't lead to a significant weakening 
in consumer spending," said an economist to the IHT 

*** Debt as a percentage of disposable income for the 
American consumer has risen from just over 15% to nearly 
22% since the last recession in the U.S. In part, the 
increase is driven by aggressive marketing of credit cards 
by companies actively engaged in 'adverse selection'. 
"Capital One," for example, writes Eric Fry, "increased its 
account base by over 40% last year, to 33.8 million 
accounts. Providian did not trail far behind, boosting its 
account base 31% last year, to 16.3 million accounts." But 
as the economy slows payment delinquencies on these 
accounts are on the rise. Look for these 'cyclicals' to be 
the next round of companies to miss their numbers. (see: 
Cracks In The Plastic)

*** "Trading with pariah states, manipulating the market 
for huge personal gain, hiding profits in a thicket of 
offshore companies...He sees himself as a citizen of the 
world, unencumbered by the laws of sovereign nations." Thus 
does the IHT describe Marc Rich. Sounds like a decent 
enough fellow; too bad he had to get tangled up with Bill 

*** "Hoof and Mouth Disease in France!" screams today's 
Figaro's headline. Frantic efforts to prevent an outbreak 
in Europe failed as the first case was confirmed yesterday. 
The US banned animal imports from the EU. The EU banned 
imports from Argentina. Uh oh...I may have to smuggle my 
pigs home under cover of night.

*** Daily Reckoning readers, while certainly not as astute 
as your average IHT reporter, are proving themselves quite 
adept at just the kind of pseudo-intellectualism I admire. 
Currently, on the discussion board on the DR website, 
readers are debating the proper way to conjugate Latin 
verbs, an inquiry into the derivation of the symbols "Bear 
and Bull" as pertains to stock market prejudices and a 
correction regarding my use of a quote by Ecclesiasticus 
Maximus... not exactly the kind of profitable stocks tips 
most 'investors' are wont to find on these boards, but 
entertaining all the same...

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"The single hardest concept to get over to investors is 
that there are tidal movements in the market. The bull tide 
takes stocks from undervalue to overvalue. The bear tide 
corrects the bull movement as it takes stocks back to 
undervalue again. 

Why can't people accept this? Probably because it too 
simple, too basic, and too theoretical."

Richard Russell

Warren Buffett's success in the investment markets are 
testament to the power of humility. Instead of trying to 
predict the future, outsmart the market, or figure out 
which new technology is going to be a hit in the years to 
come...Buffett sticks to simple principles and 'immutable' 
rules. He favors a bird in the hand over two in the bush, 
for example.

Even so, Buffet errs: "Obviously, we can never precisely 
predict the timing of cash flows in and out of a business 
or their exact amount. We try, therefore, to keep our 
estimates conservative and to focus on industries where 
business surprises are unlikely to wreak havoc on owners. 
Even so, we make many mistakes: I'm the fellow, remember, 
who thought he understood the future economics of trading 
stamps, textiles, shoes and second-tier department stores"

But Buffett's mistakes are small mistakes, correcting 
relatively small exaggerations of his pride and prejudices.

Larger excesses require larger mistakes and grander 
illusions that can puff up a bubble until its ready for its 

Today's letter focuses on a huge blunder - an illusion 
grand enough to correct not only the exaggerations of the 
Nasdaq...but those of the Dow well as the other 
historic excesses in the U.S. economy.

Savings have almost disappeared in America. Since WWII, the 
world has come to rely on America as the spender of last 
resort. America does not sell enough goods and services 
abroad to pay for the many things it imports. Instead, the 
entire system rests on three things which have become 
exaggerated to the point of becoming grotesque: the dollar, 
debt and deficits. 

As a result, "despite the illusion of prosperity over this 
past decade, most American workers haven't shared in the 
new wealth..." writes Stephen Gottdeiner in the Letters 
page of Barron's. "But they have engaged in conspicuous 
consumption of life's luxuries at the higher cost of 
credit," he continues. 

"Since 1990, average credit-card debt has risen from $3,000 
to $8,000. Filings of bankruptcy have more than doubled. 
Home refinancing may have only prolonged consumption and 
inevitable termination of the debt cycle."

How could people have allowed themselves to sink into a bog 
of debt - at the very time the economy was supposed to be
making everyone rich?

But that is the pernicious joke that Mr. Market plays: 
"Speculation is most dangerous," says Warren Buffett, "when 
it appears easiest." And it is the very moment that you 
think you are getting rich quick that you are most likely 
to go broke in a hurry.

"Speculation buys up, in a very practical way," wrote John 
Kenneth Galbraith, "the intelligence of those involved."

Thus, as prices rise, people convince themselves that they 
are geniuses for getting in on it. They turn their brains 
to thinking of reasons why prices might rise even more. The 
smarter they are, the more easily they can convince 
themselves that there is a marvelous opportunity to get 
rich just waiting for those investors smart enough to seize 
it. They embrace an illusion... and thereby make the 
mistake needed to bring things back in balance.

America's bubble market of the 1990s was made possible by a 
single over-riding conceit: that America's new Information 
Economy is different from every economy that ever came 
before and doesn't need to follow the same old rules. 

The illusion is so far-reaching that it has led Americans 
to believe that they actually got richer over the last 

But while Americans celebrated their "information economy" 
and thought it was making them rich, they were actually 
getting poorer - a fact which cannot be ignored forever.

"What is pushing the United State into a recession is an 
unbalanced economy. There's simply too much debt 
accumulated by working-class families, and insufficient 
income growth to pay for it," Mr. Gottdeiner concluded.

Meanwhile, "corporate America has created the crisis of 
overproduction. Thus, as the rate of profit falls, layoffs 
will accelerate as well. Our economy will experience a 
deflationary spiral that interest rate cuts can't cure. 
Time has run out, not only for the debtor, but the creditor 
as well."

More tomorrow...

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

Published By Tulips and Bears LLC