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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 14 JULY 2000 


Today:  Bastille Day

In Today's Daily Reckoning:
*** Summer Rally continues...but hopes for a 'soft 
landing' fade
*** Intel needs a 140% profit margin
*** Take me out to the ball game...

*** "Growth stocks are back in vogue," said one analyst 
yesterday as the summer rally continued. He referred to 
the shift in enthusiasm from the Dow to the Nasdaq.

*** The Dow rose only 5.3 points. But the Nasdaq managed 
a 75-point increase. 

*** As stocks went, so went bonds. The smart money seems 
to be taking advantage of the summer rally to "go away" 
from stocks, as George Soros put it. 

*** There are two ways to rationalize today's 
bullishness. Some bulls think Alan Greenspan is going to 
deliver the much-hoped for 'soft landing' - in which the 
economy drifts down and lands in the soft, warm sand of 
summer...right next to the bear's beach blanket. No 
inflation. No recession. But the combination of rising 
stock prices and rising bonds (meaning, falling interest 
rates) makes the soft landing less likely. As long as 
investors believe in the 'soft landing,' it will never 
happen. Because as long as they anticipate continued good 
times, they continue spending, borrowing and driving up 
stock prices. (see: A Synthetic Soft Landing

*** The other bullish argument is more daring. The Gov. 
of Maryland, for example, is going around making speeches 
in which he claims that the business cycle has been 
overcome - by technology-driven productivity gains and 
better financial management. This is the argument that 
undergirds the entire New Era delusion - that 
productivity gains offset the effects of inflation. Since 
'overheating' no longer leads to inflation, there is no 
reason for the Fed to attempt to restrain the economy... 
and no need for cyclical downturns.

*** Jim Davidson is grappling with this issue, too. 
Davidson: "I think it is meaningful that the ideas that 
are so much a part of the digital economy are much less 
susceptible to diminishing returns than tulip bulbs or 
railroad cars." (see: Analog Bear, Digital Dreamer 

*** Meanwhile, the WSJ reports today that "more companies 
are raising prices than at any time in the past five 
years," and "import costs continue to climb due to higher 
oil prices." Oil rose again yesterday - $1.15. 

*** Richard Russell reports from San Diego that "a 10,000 
square foot home in San Diego on 5.6 acres sold last week 
for $25 million cash, $5 million above the asking price 
and the most expensive home ever sold in San Diego 
County. In New York apartments and condos regularly go 
for $5 million and up. These are apartments that used to 
rent for $400 and $500 a month back in the '30s and '40s. 
New Yorkers are now paying fortunes for Central Park West 
apartments. Times change, but when I was a kid wealthy 
people wouldn't consider living on the West Side - it was 
'the wrong side of town' in those days. Now any side of 
town is the right side if you can even find an apartment 
under a million bucks."

*** If spending need not be constrained in the private 
sector, there are even fewer inhibitions in the public 
one. "Gray Davis signed [California's]$95 billion 
budget," writes Doug Noland in Credit Bubble Bulletin. 
"This budget, reportedly, calls for a stunning 18% 
increase in spending over the current budget. According 
to local papers, the budget is "packed with pork." From 
the SF Chronicle, quoting an assemblyman, "It's 
completely out of control. The governor has become Santa 
Claus for every legislator with visions of boondoggles 
dancing in their heads."

*** Jack 'be nimble' Welch did it again. The GE CEO 
announced earnings higher than expected. Guess how much 
higher. One penny, as usual. Isn't it amazing that the 
world's largest company, with operations all over the 
world, in hundreds of different currencies, all changing 
relative value on an hour-by-hour basis, can be so 
precise about how much it will make? The stock fell $1.50 
yesterday...but Jack got a $7 million advance for a new 

*** Investors cannot do arithmetic. Intel is now as big 
as GE. It has only $30 billion in revenue, but a market 
cap of $500 billion. The company saw an increase of 
operating income of only 2% in the last 27 months - so it 
could hardly be called a growth company. With no premium 
for growth, the company would have to have a profit 
margin of 140% of gross revenues in order to justify a 
standard p/e of 12. At a p/e of 20, its earnings would 
have to be 83% of its revenues.

*** Commentators are referring to recent market activity 
as "rotation" from one sector to another...or 
"Darwinian," in which the strongest companies advance 
while the weaker ones fall behind. But in this kind of 
choppy market everyone loses...because meters are 
running. Interest has to be paid - and so do brokers, 
analysts, and fund managers.

**** "The head office realizes with uncharacteristic 
speed that 'no new projects' means good-bye to bonuses, 
executive jets and country club memberships." Says Dan 
Ferris, describing the profit cycle for mining stocks. 
"When commodities prices begin rising - as they are right 
now - the 'head office' sends out a team to scoop up 
existing junior mining companies who are already in the 
ground. If you happen to own shares in the junior mining 
company... you can do very well - very quickly." One of 
his picks in a global exploration and mining portfolio is 
up an annualized 152% in just 9 months. 

*** Addison reports from Paris that Bastille Day 
celebrations are underway. A parade of tanks, missile 
carriers and other military hardware has been going up 
the rue de Rivoli, near our new office, all morning. 
Today is the day when the French recall the storming of 
the Bastille by a Paris mob, and the subsequent mass 
murder and expropriation of aristocrats and sentimental 

*** I was called onto the field at Camden Yards and pawed 
by the Orioles' mascot last night. This indignity was 
perpetrated before a crowd of thousands as I was given an 
autographed baseball to thank me for bringing more than 
250 people to the game. The people were the employees, 
friends, and family of our publishing business in 
Baltimore. We enjoyed the game ...even though the O's 

*** The controversial John Rocker pitched, briefly, for 
Atlanta. When asked what he might do if he were booted 
out of baseball, Rocker replied that he might become a 

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"Don't write about this in the Daily Reckoning," 
pleaded my host. (Honoring his request - I will get 
the facts even more messed up than I usually do.) 

It was almost un-American. At last night's Orioles-
Braves game I barely saw a single play. 

Instead, I was doing business that couldn't wait. 
In a sign of the times, start-up tech and Internet 
companies are so desperately low on cash that they 
must make their pitches to investors wherever and 
whenever they can - even at the O's stadium.

Without giving the details, the context is worth 
examining. It shows how people gain real knowledge 
in the real world - as opposed to what Hayek calls 
the 'pretense of knowledge,' which, so far, is the 
most ubiquitous new product of the Information Age.

The young men I met last night have exciting ideas. 
They have brains and energy. They have new 
technology...and the gumption to turn it into 
successful businesses. But their timing is 

Had this been AD 1999 rather than AD 2000, they 
might have been sitting in the plush offices of 
Alex Brown a few blocks away - where, only a few 
years ago analysts, venture capitalists and 
investment bankers listened to a presentation by 
Bill Gates, explaining the business plan for a 
company few had heard of. Twenty-four people had 
been invited to the meeting - in which they were 
offered MSFT shares at pre-IPO prices. But only 15 
showed up. The others thought they had better 
things to do. 

Last night, the Bill Gates of the future, whose 
real name I am not at liberty to reveal, had to 
make his presentation to a group of hard-drinking, 
argumentative contrarians looking for a bargain.

Christopher Byron tells the story of how 
went public on The Internet fad du 
jour was "content." Investors were willing to 
believe that good content on a website could 
generate enough eyeballs, which in turn would 
generate enough advertising revenue, to make money. 
People in the publishing business didn't believe it 
was possible. But that didn't stop the underwriter, 
W.R. Hambrecht & Co., from dumping this on the 
public at $10.50 a share almost exactly one year 

"For a brief and glorious moment," Byron reports, 
" touched an intraday high of $15.12, 
giving [it] a market value of $162 million, as all 
involved congratulated each other on their 
collective financial genius...while leaving for 
another day the annoying problem of what to do when 
the $24.9 million in IPO proceeds ran out."

Well, now the proceeds are running out. Salon is 
firing people - including the writers who were 
supposed to provide the "content." The stock is 
down more than 90 % from its high - and the 
principals are probably at another stadium on the 
other side of the country pitching their business 
plan - stripped down and much-more realistic - to 
an equally distracted and equally skeptical bunch 
of investors.

"I'm seeing dozens of these deals," said a lawyer 
in our group, whom I will only identify as John 
Tilghman Dunbar of Venable, McGruder and Howard, 
233 North Ave. Baltimore 21205...410 325 7788. 
Social Security number: 213 56 0985. Mother's 
maiden name: Lucy. "These companies are re-
structuring, re-financing, merging, disappearing - 
you name it."

What went up like a Bastille Day rocket came down 
like Louis 16th's head. The Information Age seemed 
to offer little knowledge or wisdom to guide 
investors. A company that was worth a billion 
dollars one day was thought to be worth less than 
5% of that a few days later. The "efficient" market 
seemed to have no idea a stock should really be 
worth. was considered a $100 stock last 
December. By March, the market judged it worth 
$250. A month later, the collective wisdom of 
investors sent it back to $100. And now...guess's at $240 again. 

There are only two sources of knowledge - as I 
pointed out a day or two ago. But investors ignored 
them both. New investors had no personal experience 
with booms and busts. Nor did they rely on the 
experience of others, embedded in the rules and 
customs of stock market investing. They didn't know 
a P/E from a rhubarb pie. And they could care less. 

Nor was logic much help. "[S]imple arithmetic," 
says Byron, "didn't stop ...W.R. Hambrecht." Why? 
"Fee-obsessed underwriters...couldn't say no to 
seven-and eight-digit commissions. [They] set the 
merry-go-round whirling to create a market for 
deals that had crash and burn tattooed all over 

Freed from the arithmetic of reason (which is 
unreliable in any case) and the deaf to the voice 
of experience...investors, as well as investment 
pros, were left prey to the basest human emotions - 
fear and greed. 

We have seen plenty of greed over the last few 
years. The fear is still ahead. 

Until Monday,

Bill Bonner

P.S. The excitement of the early stages of the Internet 
revolution has come and gone. Heads are beginning to 
roll. The Terror is next.
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

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Last modified: April 02, 2001

Published By Tulips and Bears LLC