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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 9 JULY 2001 


Today:  Stuff of Dreams

*** Consumers borrowing - against their homes! (Avoiding 
recession in the 'worst possible way.')

*** Classic bear market on Wall Street?

*** Insiders selling heavily...job losses...consumer 
sales falling...children disappearing (mine)...and more!

"Borrowing was so heavy in the 1990s," says a 
Harvard University study called The State of the 
Nation's Housing, "that home equity as a share of home 
value dropped 10 percent, even as home prices rose 


If Alan Greenspan wanted to avoid recession in the 
'worst possible way,' he would encourage people to 
borrow against their houses. This would put them at risk 
of not only losing their jobs, but their homes. 

Greenspan recently commented that rising home 
values were adding to the wealth of consumers. He should 
have added a modifier: rising house prices are adding to 
the 'perceived' wealth of consumers. The house doesn't 
change as its price goes up. The real value of the house 
remains the same. But 'taking out equity' gives the 
homeowner the illusion of spending profits instead of 
merely borrowing money.

The situation is clarified for him, like so many 
other things, in a genuine recession. The poor schmuck 
finds that the part that he still owns is worth less 
than before - while his debt has become, relatively, 
more important. What can he do? Forget about spending 
more...he struggles to make ends meet, until he loses 
his job...

"The continuing jobless claims are at levels that 
we haven't seen since November of 1992," said Wayne 
Angell, chief economist at Bear, Stearns & Co., "so 
there is no evidence that the employment recession is 
ameliorating." U.S. companies cut 124,852 jobs in June, 
56% more than in May. In the first half of the year, 
777,362 jobs were lost, almost 31/2 times as many as the 
same period last year.

Here's Eric's report from Wall Street:


- Ouch! It's starting to look an awful lot like a 
classic bear market on Wall Street - a long, grinding 
decline punctuated by sharp, short rallies.

- Last Friday, the Nasdaq plunged 76 points and the Dow 
dropped 227 points. The technology sector topped the 
list of casualties, as the Philadephia Stock Exchange 
Semiconductor Index tumbled 9%.

- All of a sudden, the losses are starting to add up. 
With last week's sell-off, the Dow has now given back 
more than one-half of the 1,900 points it had gained 
between April 4th and its May 21st peak.

- The dolorous global refrain of vanishing orders and 
collapsing profits in the technology sector is hardly 
the sweet music one expects to hear leading up to a bull 
market. One standout loser last week was Manhattan's own The online provider of investment research 
suffered a "stock market stock split." In other words, 
it lost about half its value by falling from $16.01 to 
$8.22. The culprit: lower-than-expected earnings that 
will necessitate pay cuts and job layoffs.

- Nor do the officers of America's public companies see 
any fast-approaching economic rebound, at least judging 
from their actions. "In recent weeks, U.S. corporate 
executives have been dumping the shares of the companies 
they work for," the Bank Credit Analyst (BCA) reports. 
Among companies listed on the NYSE or Amex, BCA 
calculates that over the last eight weeks, three 
insiders sold stock for every one that purchased. This 
3-to-1 sell-to-buy ratio reflects a high level of 
bearishness in the boardrooms.

- A weak employment report contributed to the pervasive 
sense of gloom on Wall Street last Friday. June non-farm 
payrolls fell 114,000 jobs. As Addison noted over the 
weekend, "The Dept. of much-Labored Statistics said the 
nation's unemployment rate has risen to 4.5% [from 4.4% 
in May]. Significantly, demand for workers in 'service 
industries' - often cited as the savior of the new US 
economy - dropped to its lowest level in 10 months." 
The number of people on unemployment rolls has now 
passed the 3-million mark for the first time since 1992.

- Moody's John Lonski points out, "From 2001's first to 
the second quarter, initial state unemployment claims 
might surge higher by a troubling 76% annualized. Be it 
quarter-to-quarter or year-to-year, initial state 
unemployment claims have been piling up in a manner that 
is ordinarily associated with a recession."

- Deflation seems to be the order of the day. Lumber, 
one of the most "knowing" of all commodities, has fallen 
24% from its recent peak in May. "The 'standard beef 
bowl' in Tokyo fell 30% last week," Greg Weldon tells 
us, by way of the Blue Team's Dan Denning. "Deflation - 
falling prices due to overcapacity - is wracking the 
economy." (see: Surviving A Stock Market Coma

- Are we about to learn the hard way what Japan has 
known through experience for over a decade? Interest 
rate cuts are no substitute for economic vitality. Most 
American corporations have neither the means nor the 
desire to increase - much less maintain - their current 
levels of capital spending. Cutbacks and deferrals have 
become the norm. As Lonski observes, "From the first to 
the second quarter of 2001, real business investment may 
contract by roughly 9% annualized for its steepest such 
slide since the 9.7% drop of 1991's recessionary first 

- About the only spending that has been going on all 
year is that of consumers, using money they don't really 
have for things they don't really need. But given the 
rising unemployment rate and the falling stock market, 
even America's heroic consumer may be starting to turn 
tail and run.

- Many retailers will report June sales this week and 
the news will likely not be pretty. Already, Federated 
Department Stores and Neiman Marcus have warned that 
sales are waning. If Federated is slashing its sales 
forecasts, can Nordstrom, Dillards and May Department 
Stores be far behind?


Bill from Baltimore:

*** "Where's Henry?" I asked Elizabeth on Friday 

"He's visiting with his friend, Ethan," was the 

"Where's Jules?"

"He's visiting his friend, Andy."

"Well, where's Maria?"

"She's down with Aunt Margaret."

"How about Edward?"

"He's staying with Benjamin and Lynn tonight."

"What kind of family vacation is this - everyone is 
gone," I observed rhetorically...

"Don't worry," comes the reply, "they'll all be back 
tomorrow. Now, I'm going out with Liddy. See you later." 

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Our revels now are ended. These our actors, 
As I foretold you, were all spirits and 
Are melted into air, into thin air; 
And - like the baseless fabric of this vision - 
The cloud-capp'd towers, the gorgeous palaces, 
The solemn temples, the great globe itself, 
Yea, all which it inherit, shall dissolve, 
And like this insubstantial pageant faded, 
Leave not a rack behind. We are such stuff 
As dreams are made on, and our little life 
Is rounded with a sleep. 

(The Tempest V.i. 148-158) 

The more equity you 'take out' of your house...the less 
you have left. While this seems obvious, a fuller 
awareness of it may lie ahead.

Of course, borrowing against equity is nothing new. Nor 
is the demand for it constant. Instead, the fashion for 
'taking out equity' has merely reached a cyclical peak - 
soon to retreat to more normal levels. At least, that is 
today's guess.

For, on or before this coming Thursday, from the cloud-
capped towers of Waltham, Massachusetts, the nation will 
get a small preview - I think - of where borrowing 
against equity can lead. It is not likely to be pretty.

But let us back up a few years. 

In the late '60s, a group of companies emerged that were 
known as the 'Nifty Fifty.' What was so nifty about 
these companies? They had everything going for them - 
brand names, patents, top management, spectacular sales, 
and solid profits. They were thought to be 'one 
decision' stocks...that is, you could make the decision 
to buy them just once, and that was all you needed to 
do. These were the stocks dreams were made of - stocks 
for the very long run.

They had such a big lead on their competitors that they 
could afford to hire the best managers and buy the 
latest technology. What could go wrong?

But popularity is as much a curse on Wall Street as it 
is in high school. The 'nifty fifty' stocks were soon 
trading at levels not seen again until the late '90s. 
And then, in the bear market of '73 - '74, they crashed, 
dropping in the esteem of their peers faster than a prom 
queen caught at a Bible class.

Prominent among the 'nifty fifty' was one company that 
seemed invulnerable. Polaroid showed up more often at 
family picnics than ants. For two generations, hardly a 
birthday, wedding or graduation ceremony was complete 
without a Polaroid product. 

Even today, the company seems like a winner. "Last 
year," reports James Grant, "it sold the most instant 
cameras in its history; 13.1 million. And it sold 1.3 
million digital cameras, occupying the No. 1 

Yet, at a recent price of about $2.50 a share, you could 
buy the entire company for just a little more than $100 
million. That is just 7% of sales and not even half of 
book value.

And on or before July 12, a consortium of bank lenders 
are expected to decide whether or not to force the 
company into bankruptcy.

What went wrong?

Here at the Daily Reckoning, we do not attempt to offer 
managers free advice nor even to critique their 
performance. Had we been running Polaroid, we have 
little doubt that the banks would have lowered the boom 
long ago.

Still, we have an opinion.

In a recent trip to a convenience store, your editor was 
surprised to find how cheap the disposable cameras had 
become. In an expansive mood, he bought more than one. 
While this attack of big spenderism may have helped 
Polaroid stave off the day of reckoning, it probably 
wasn't by much. The disposables must have profit margins 
as thin as celluloid. 

And the digital versions? The competition is fierce. 
Worse, there are no film sales, hence, no repeat 
business. In your editor's experience, a digital camera 
lasts until it breaks...and then it is replaced with a 
disposable one. 

A debt-free company might have been about to ride out 
the storm of innovation. Polaroid might have bobbed its 
way throughout the sea change in the picture-taking 
industry...and its shareholders might have continued to 
enjoy dividends for another generation.

Instead, the firm borrowed heavily. Today, Polaroid 
carries nearly $1 billion in debt. Bond investors have 
marked the debt down to such a low level that "at 50 
cents on the dollar," according to Grant, "they hold out 
the hope of a yield to maturity of 193%."

Whatever bond investors actually end up with, it is 
likely to be more than the stock buyers. They are buying 
equity in a company with little or no equity to sell. 
Polaroid 'took out the equity' when taking out equity 
was in style. Now, there may be nothing left. 

Thursday, Polaroid's bankers may round out its little putting the company to sleep.

Your correspondent, with his mind on this 'insubstantial 
pageant' and his body in hazy, hot, humid Baltimore.

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: July 09, 2001

Published By Tulips and Bears LLC