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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 19 JUNE 2001 


Today:  Ironic Twists

*** Consumers suffer biggest wealth loss in 50 years...

*** "Beware the Tech Rally" - techs still overpriced... 
shorting the New Era's 'pretty-boy' pick...

*** Capitalists exploited by over-paid 
CEOs...Argentina's 'major' hair-brained currency 
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*** Capital spending (new orders) fell 4.6% in 
April...with a 10.3% drop in spending on computers and 

*** And no wonder. A front-page report in the 
International Herald Tribune tells us that the telecom 
industry, for example, has laid 100 million miles of 
fiber optic cable in the last few years. 97% of those 
lines are still 'dark'...and most may never be used. 
Apparently, even after they are in the ground, it takes 
a lot of money to light them up.

*** Cisco's sales dropped 30% quarter to quarter. 
Yahoo's sales fell 42%. In Silicon Valley overall, sales 
are expected to be off by 50% in the first half of this 

*** Yet, nearly three quarters of analysts who cover 
Cisco, for example, now recommend buying the stock. 
Cisco is down about 80% from its high, but almost all 
analysts seem convinced that, in time, it will come 

*** "Of course, if you're holding tech stocks for years 
and are willing to wait out the many ups and downs to 
come," writes John Futrelle in Money, "you need not 
concern yourself with whether the absolute bottom comes 
next quarter or even next year." That's right, John, 
sooner or later you will lose money...

*** Investors still have faith...that this little storm 
will soon blow over and things will be back to normal. 
The trouble is, their vision of what is normal has been 
distorted by nearly two decades of above normal stock 
market returns. Alas, those good old days may never 
return...and most tech stocks may never return to their 
previous highs.

*** But let's see what happened on Wall Street 
yesterday... over to you, Eric:

- The NASDAQ rolled craps - scoring its seventh losing 
session in a row. The tech-heavy index, which fell 39 
points, had not posted seven consecutive daily losses 
since 1998. The Dow eked out a 22-point gain.

- The drone of tech company CEOs warning about an 
"unexpected earnings shortfall" is becoming white noise 
on Wall Street. Yesterday, Oracle, Solectron and Level 3 
Communications all weighed in with downbeat comments.

- Only about one-third of the companies in the S&P 500 
will survive over the next twenty-five years, authors 
Richard Foster and Susan Kaplan estimate in their book, 
Creative Destruction. Yet, as professional investor 
Richard G. Leader sees it, the board members of these 
ill-fated companies will still "pay huge sums to the 
very managements responsible for leading these companies 
to their deaths."

- Nortel Networks, for example, made headlines last week 
for taking a colossal $19 billion write-down in the 
current quarter. The company's stock price and earnings 
prospects are both on life-support. Yet, Nortel 
President and CEO John Roth shared the company's pain 
last year by making $6.9 million in base pay...and 
another $135 million by cashing in Nortel shares as it 
plummeted from $89 to $9. Leader observes: "Mr. Roth now 
plans a very comfortable 30,000 former 
Nortel workers look for new jobs." 

- And that's just the beginning. "Nextel shareholders 
saw their stock plummet from $73 to $14 - as their 
president cashed in $31 million of stock options. The 
president of JDS Uniphase put $25 million in the bank... 
as [the company's stock] declined from $140 to $12. The 
list goes on and on..."

- Here's a suggestion from The Daily Reckoning: rather 
than accept huge bonuses, CEOs losing that kind money 
ought to go the way of the samurai...and commit ritual 

- "Working from last year's Golf Digest listing of 
Fortune 500 CEOs ranked according to their golf 
handicaps," writes's Jay Akasie, "we 
came up with some screaming sell signals." 

- It's called the "CEO Duffer Index". In short, there's 
a stunning correlation between suffering companies... 
and CEOs who post impressive golf scores. Scott McNealy, 
for example, had his 3.3 handicap trumpeted in print - a 
year later? Sun's stock price was buried in a sand trap, 
having plummeted 58.1%.

*** "Argentina's famed economist Domingo Cavallo has 
pulled out all the stops," notes my friend, Steve 
Sjuggerud, today on the Daily Reckoning website. "On 
Friday - despite the illusion that Argentina is moving 
in the right direction and that someone competent is at 
the reins - Cavallo announced a major hair-brained 
scheme, which is not only strange, it's ripe for 
corruption and abuse. Now, the 18% we were enjoying on 
Argentine bonds is only suitable for those with an iron 
stomach for risk... " (see: Argentina Shocks Me - Time 
To Move On)

*** And...Lynn Carpenter has had a hot hand lately. 
"Enron has been burning cash in a hot market while the 
other oil majors were making money..." she wrote 
recently. "Debt was increasing fast and dangerously 
while its competitors have hardly any. And Enron was the 
New Economy gurus' pretty-boy pick -- they were 
predicting its web ventures would make it rich. Wrong." 
Last Thursday, Lynn says she waited until her charts 
showed the smart money where to go... by Monday she and 
her readers pocketed 71%. 

*** "More U.S. household wealth evaporated in the first 
quarter of 2001 than in all of 2000 - which was the 
first year in half a century in which American net worth 
declined," Reuters tells us.

*** How can consumer spending hold up? Consumers' 
spirits may be willing. But their purchasing power is 
getting weak...more below...

*** "When is the new economy coming back?" my dinner 
companions asked me last night. Elizabeth and I were 
dining with French neighbors. On their minds was the 
same question that must occur at dinner parties all over 
the world: when will this little downturn be over? 

*** "Forget it," I replied, putting a damper on the 
conversation. "The new economy is history. We'll have to 
wait for the new new economy... and that won't come 
along for many years..."

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"It is the most aggressive monetary easing by the Fed in 
such a short period of time since 1929-30," reports Dr. 
Kurt Richebacher from his home in Cannes, France. 

Dr. Richebacher follows with the obvious question: 

"Will it work?"

Here at the Daily Reckoning, we have no ready answer. 
But we believe that great markets work like great novels 
- with a plot that involves an ironic twist or two. We 
cannot imagine a great novel in which the dramatis 
personae get exactly what they expect. (Suppose Scarlett 
had married Ashley Wilkes and lived happily ever after? 
Margaret Mitchell would have sold a few copies to her 
friends and relatives and that would have been the end 
of it.) Nor would we want to live in such a world; it 
would be as sincere and earnest as a poem by Maya 

And so, with our accustomed optimism, we look forward to 
a twist or two in the story of 'Alan Greenspan, Public 
Servant or Master of the Universe?'

In today's letter, we think we have found one.

A story in yesterday's USA Today tells us that credit 
card customers are still paying high rates of interest 
on their balances - despite 5 rate cuts in 5 months. Mr. 
Greenspan can cut rates further, but the credit card 
companies have already reached the minimum interest 
rates at which they are willing to lend. Bank One's 
platinum Visa, for example, has a minimum interest rate 
of 15.9%.

Also in yesterday's news was an item describing the 
stiffening of the yield curve. Not usually a subject for 
polite conversation, the yield curve tells us what rates 
of return lenders require over what periods of time. 
Greenspan has been able to push down short-term rates - 
by making money available to member banks at real rates 
approaching zero (the nominal rate less the rate of 
inflation). But long-term lenders seem to have long-term 
memories. Perhaps their recollections reach back even to 
the 1970s, when inflation effectively wiped out many 
years of interest earnings, not to mention capital 

Long-term lenders, as wary of inflation as the credit 
card companies are of credit risk, try to leave a few 
points between themselves and ruin.

And thus consumers, looking for relief from high debt 
levels, will find little succor from the Fed. Neither 
short-term credit card interest rates, nor long-term 
mortgage interest rates are falling. 

But that is not all.

Yet another report from yesterday's news told of a Fed 
governor's comments on the bubble. Inexperienced 
entrepreneurs went to sophomoric venture capitalists, he 
explained, to raise money for unproven projects that 
were soon touted by amateur analysts and sold to novice 
investors. "Thank God, the banking sector stayed out of 
it," he concluded.

But why, for perhaps the first time in history, did the 
banking industry miss an opportunity to lose money in a 
financial aberration? Have bankers gotten a lot smarter 
since they financed the stock bubble of '20s or the 
Emerging Market loan bubble of the '70s, or the Texas 
oil bubble of '80s...or nearly every real estate bubble 
that ever happened? Probably not. The answer, dear 
reader, lies in the character of the financial markets, 
not in the character of the bankers themselves. The 
former, we will wager, has changed; the latter has not.

Instead of borrowing from banks, entrepreneurs and 
businesses were able to raise capital from investors. 
The banks, always ready to throw good money into a bad 
deal, were bypassed.

And so it turns out that Mr. Greenspan, Master of the 
Universe, cannot really control even the one thing that 
is supposed to be within his domain: the cost of credit. 
The banking system, through which his reflationary gas 
is pumped, no longer works the way it used to. The tubes 
have been disconnected. The result: Mr. Greenspan 
pumps...but the vapors go where they were not expected.

"Outright worrying, if not frightening," writes Dr. 
Richebacher, "is the total absence of any effect of this 
quick succession of rate cuts on the U.S. bond market... 
this interest rate [the fed funds rate] has lost its 
former central importance in the financial system simply 
due to the fact that the activity of borrowing and 
lending in the U.S. ...has shifted heavily away from the 
banks and towards the markets and a huge panoply of non-
bank financial intermediaries that largely fund 
themselves in the money market."

The fed funds rates has been cut 2.5%. And the money 
supply, as measured by M2, has been increasing at rates 
from 10%-14% so far this year. What has happened so far?

The economy has gotten worse. Sales are falling. Profits 
are disappearing. Productivity has collapsed. Jobs are 
becoming scarcer and consumers are getting poorer.

But, stocks rallied. From April 2nd to June 2nd, the 
Russell 2000 gained 22%. Now that rally seems to have 
run its course.

Analysts are still bullish. Economists are complacent. 
Consumers are optimistic. All seem to believe that the 
boom of '82 - 2001 will go on forever, with only minor 
setbacks. What kind of ironic twists awaits them, dear 

We will find out.

Your commentator,

Bill Bonner

P.S. If bankers as a class are no smarter today than 
they were, say, in the Texas Oil Boom, could the same be 
true for central bankers? "Following the steep fall of 
stock prices in October-November 1929," Dr. Richebacher 
explains, the Fed lowered rates not just 5 times - but 6 
times... "twice in November and four more times until 
June 1930, always in 50 basis point steps. In response, 
the stock market rapidly recovered, ending 1929 up 25% 
from its low of Nov. 13." 

But Wall Street was not looking ahead, it was looking 
backwards, wistfully. After the spring rally, stocks 
fell again and did not recover until 1956. Many of the 
most popular of the stocks from the late '20s never 
recovered. The great boom of the '20s ended, ironically, 
in a Great Depression.

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: June 19, 2001

Published By Tulips and Bears LLC