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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
MONDAY, 24 JULY 2000 

 

Today:  Dinner at Mondesir

In Today's Daily Reckoning:
*** See-Saw Syndrome Continues
*** Better than expected earnings aren't good enough
*** Henry's birthday

*** "Stocks Seen Stuck in See-Saw Pattern" says today's 
Reuter's headline. The paper notes the action but seems 
unaware of the fulcrum - which appears to be Richard 
Russell's 50% retracement level - Dow 10,759.


*** This 50% retracement marks the level at which the Dow 
recovered half its losses...from its January high of 
11,722 to its subsequent low of 9,796. Dow theorists 
believe it is an important predictor. If the Dow holds 
above the 50% level...it's bullish. If it remains 
below...well, you can guess.


*** Back and forth, up and down...the Dow hasn't been 
able to make up its mind. But each time it looks as 
though stocks are on their way up...as it did last 
Thursday...they get beaten down.


*** Friday was no exception. The Dow fell 110 points on 
Friday. The Nasdaq lost ground too.


*** Taking the week as a whole, the Dow was down 79 
points, and the Nasdaq down 152 (or 3.6%).


*** The Advance/Decline action wasn't encouraging either. 
1427 stocks rose over the course of the week; 1864 fell.


*** This is the season for companies to announce their 
earnings for the last quarter. 82% of the companies 
reporting so far have "beat the numbers." AOL, for 
example, reported earnings of 1 penny greater than 
expectations.


*** But AOL stock fell $3 on the news. "Of the top 10 
largest companies in the S&P 500 Index," writes Steve 
Sjuggerud of the Oxford Club, "every one that's announced 
so far has beaten Wall Street's earnings expectations. 
Yet, every one of these companies is down since it 
announced better-than-expected results. (The one's who've 
announced so far are GE, Intel, Microsoft, Citigroup and 
Lucent). The latest announcement, from Lucent, is a prime 
example. Lucent beat expectations yesterday. 


"But the announcement of beating expectations let down 
investors - the stock fell $10 a share, down to $54."

What gives?


*** "Stocks," says Steve, "are priced for perfection 
right now. Wall Street analysts now expect S&P 500 
earnings growth of 24% over the next year - the most 
optimistic forecast since 1984."


*** Perfection is as hard to achieve in the stock market 
as it is in figure skating. And with expectations this 
high, the opportunity for disappointment is great.


"Lucent's 10-point fall cost investors $32 billion 
yesterday," according to Steve's calculations. He cites a 
study by Ned Davis Research to make his case: "Since 
1980, when Wall Street analysts expected earnings to grow 
by 18% or more (like now), stocks ONLY rose 4.3% a year. 
However, when analysts expected earnings to grow by LESS 
THAN 12.5%, stocks actually GAINED 27% a year."


*** When dreamy investors turn against a stock, the 
results are shocking. Agilent fell 33% last week. Lexmark 
fell 22%. Macromedia was down 27%.


*** But the real nightmare is still ahead. E-bay must be 
one of the great success stories of the Internet. It is a 
pure play...an immaculate conception of the information 
age, free from almost all taint of the old economy. E-bay 
sells information - provided by the users themselves. It 
was a great idea, profitable from the very beginning. And 
it now has 12.8 million users and generates $225 million 
in sales. But it makes only 6% on each transaction - 
which gives the company a profit of less than $11 
million. 


*** What's $11 million of profit worth - earned by a 
company with no defensible niche in the market? 
Investors, in their collective wisdom, put the value of 
the company at more than $10 billion. But it would only 
take about $200 million in T-bonds to earn $11 million in 
annual interest. Implication: E-bay stock is about 50 
times more expensive than it should be.


*** Bonds have been doing pretty well, by the way. 
Including interest yield, they're up about 10% so far 
this year. 


*** Gold did nothing on Friday. Platinum fell $1.40. Gold 
stocks hit a new low. 


*** "I've been watching beverage stocks for over a year 
now," says Lynn Carpenter. "And this is the first time 
I've seen numbers I like... while Bud's a syrup-slow 
grower, 3% revenue growth last year - too expensive at 
three times its sales - Coors is racing along at 35% EPS 
growth at just 1.1 times its sales." 
(http://www.dailyreckoning.com/body_headline.cfm?id=263)


*** After a couple of days in Paris, I'm back in the 
countryside where we will spend the summer. Of course, 
the summer is already half over...but you can't have 
everything the way you want it. Today, Henry joins those 
of us who have made it into the double digits - he turns 
10.


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DINNER AT MONDESIR


Poitou is a long way from Virginia. 


Baptists dine casually. Large dinners are most often 
served buffet-style, with good, wholesome food laid out 
in prodigious quantities.


Here in rural France, dining is usually a more formal 
experience. 


And, as I think I've told you, Elizabeth has an 
inclination towards what is commonly known as "old money" 
- that is, the segment of society where people once had 
money, culture and taste...and now struggle to make ends 
meet in some semblance of style. I don't know what it is 
about old money that attracts her - the cracked plaster, 
the antique plumbing, the frayed upholstery...the worn 
silver...the family portraits - but I go along with a 
curious mind and a sense of humor.


So, it was that we dined at with a group of 20 or so at 
Mondesir on Friday night.


New readers of the Daily Reckoning may wonder what this 
could possibly have to do with investing. I wonder 
myself...but I will try to find a connection as my story 
develops.


Madame Annick Delaplaine is a small woman whose taste in 
clothing seemed bizarre to our friend, Beatrice.


"She wears the funniest combinations," Beatrice remarked 
of her as we drove along. We were on our way to Mondesir, 
driving over a tiny bridge and along single-lane roads 
for at least a half-hour. That is one problem with the 
old money set in France - they are thin on the ground. 


But the drive was pretty. Big, swirled up bales of hay 
sit out in the fields, as in a painting by van Gogh. 
Fields of sunflowers are in bloom, which look like they 
might have been painted by Manet. And the Delaplaine's 
house - a large, stone edifice - looked as though it 
needed a painter.


I had met Annick and her husband, Antoine, at Beatrice's 
house a couple of months ago. I could not remember who 
she was until Elizabeth reminded me that she was the one 
who talked so fast I couldn't understand her.


Maybe if I encourage her to drink more, I thought to 
myself, she will slow down. I was seated at her right 
hand, an honor, at the table. Typical of the milieu, the 
table was set exquisitely, with beautiful, starched 
embroidered napkins carefully folded on each plate. So 
much silver and so many glasses crowded the table that 
you could scarcely find an empty spot to put your bread. 


The rural gentry in Poitou were well off at the end of 
the 19th century. Europe was booming. France enjoyed an 
explosion of new wealth. Imposing houses were built all 
over the country - with high ceilings, fine woodwork, and 
plenty of room for servants.


Annick and Antoine's house was an example of a "maison de 
maitre" of, say, 1850. It was imposing, solid, 
substantial - and looked as though nothing much had been 
done to it since the day it was built.


Today, the big problem is the high cost of labor. These 
big farms need a lot of attention. Even with modern 
machinery, it is a lot of work to keep them up. French 
gentry and aristocrats did not typically work the land 
themselves, nor tend the gardens, nor do the laundry. 
They had personnel to do this work for them. 


Even as late as the 1950s, the former owner of my house 
was able to get farm laborers in exchange for food, 
lodging and just a few francs a day. 


But the economy changed dramatically after the war. 
People left the farms and moved to the cities (a process 
that was already underway). Labor legislation increased 
the cost of employing someone. Birthrates fell. And by 
the 70s, it was already too expensive for most people to 
maintain more than part-time help.


So the "old money" families sold off the farmland and now 
have to do the housework themselves. A dinner party for 
20 people would have been attended by at least a couple 
servants. But on Friday, Madame Delaplaine and her two 
daughters did the considerable work themselves.


Some people would find it depressing - living in a house 
that seems only a few years from becoming a ruin...a 
house too big and too drafty to heat properly. But that 
is the attraction of it - the romance of decadence...of 
vines growing over the roof, peeling paint, faded 
wallpaper, and an air of shabby elegance and by-gone 
grandeur.


"The trouble with you Americans," said a man named 
Olivier, sitting across from me, "is that you have no 
sense of history. I visited Montana. I saw the Grand 
Canyon. It was nice. But I could not live there. There is 
no sense of the past."


It was hard to hear Olivier. Everyone was speaking at 
once. And the voices echoed off the musty wallpaper and 
the bronze statue at the end of the table. I could only 
catch little bits and pieces of what he said. But I 
discovered that if I nodded and smiled, Olivier seemed 
content to keep on talking. There is no telling what 
gibberish I agreed with.


Meanwhile, poor Amanda. On my right was a young blonde 
woman who had just come over from England - well, six 
months ago. She got tired of her mother-in-law coming 
into her house and opening the windows. Isn't it amazing 
how little details take on so much importance? Meanwhile, 
her husband couldn't get along with his father either. So 
they sold out and moved to France. Amanda is happy to 
have the English Channel between her and her in-laws. But 
she barely speaks a work of French and is beginning to 
realize that starting a new life in a very foreign 
country is not going to be easy.


Unaware that she was English, I had begun speaking to her 
in French. She was greatly relieved when she discovered I 
could speak her language.


"What do you call it in America," she asked.


"Call what?" I replied.


"You know, the language...I mean, do you speak English. 
Well, I mean, of course you speak English...but do you 
call it English?"


It was bad enough, not having any history. But now it 
seemed that we had no language either.


I was going to explain to her that not only do we speak 
English in America...we even get the grammar right, 
unlike the English. But she seemed on edge. 


"No," I said, "We call it Norwegian. We know it's really 
English, but we like to be different."


Amanda was a little ill at ease. The French and English 
never understand each other. Even the way the French 
serve dinner is a little off-putting. The French are too 
rigid and un-relaxed - in the English view. The English 
always feel as though they are the objects of ridicule or 
scorn. Often - they are right.

Meanwhile, I was filling Annick's glass at every 
opportunity in order to try to slow her down. But the 
more she drank the faster she spoke. She spoke clearly, 
but too quickly for human hearing. She needed to be 
recorded and then played back at a slower speed.


Nevertheless, I found that we had something in common. 
She manages pension funds in Paris and does some work 
with Goldman Sachs. What did she think of the New Era, I 
asked.


"Well, it's not the first one," she replied in a single 
syllable. Annick, it turns out, is a value investor, 
which may explain her curious wardrobe as well as her 
apparent sophisticated poverty.


She went on to explain, as near as I could tell, that 
Europe is on an upswing...which, she believes, will be 
devastating for the dollar.


An interesting study done by Goldman Sachs, reported in 
Grants, suggests that Europe is on the move. In Germany, 
specifically, Goldman estimates that productivity will 
increase at an annual rate of 2.8% from 2000 to 2005 - up 
from 1.8% in the '95 to 2000 period. 


"What is interesting about these numbers," writes Grant, 
"is the missing footnote." The footnote that is not there 
is the one that tells readers that the numbers have been 
adjusted by 'hedonic' measures. In other words, the 
German productivity numbers are real - not made up. 


We've gotten used to footnotes in the numbers from the 
Bureau of Labor Statistics - indicating that the 
calculations have been enhanced by various accounting 
frauds. Even so, American productivity growth has 
averaged only 2.2% per year for the last five years - 
considerably less than the productivity of the 1960s in 
America and the projected rates for Germany for the next 
five years. 


Europe is booming. And unlike the U.S. economy - no 
footnote is needed. The growth is real. Only in the U.S. 
are quality enhancements used to fluff up the numbers. 
These numbers have led people to believe that Europe 
would lag behind the U.S. perpetually, rather cyclically. 


Yet, as Dr. Richebacher deconstructs the numbers: "two 
thirds of the apparently superior U.S. economic growth 
performance over the last four to five years has been 
pure statistical fiction and one-third cyclical. Thus, 
once again, we see that there is no new era - just normal 
business cycles and abnormally distorted measurements. 
And what this means is that the dollar is ready for 
another cyclical drop. (http://www.dailyreckoning.com 
/body_headline.cfm?id=258)


Europe did not always lag America in productivity. Nor 
was the dollar always high. Grant's points out that 
German productivity growth surpassed US productivity 
growth from 1977 to 1995. And it was only a couple of 
years ago - as I recall - that the dollar was worth fewer 
than 5 francs, instead of more than 7. 


"The historical record," writes Dr. Kurt Richebacher, 
"shows that divergent economic growth between the U.S. 
and Europe has exerted the single, strongest influence on 
the dollar." When the US is growing, the dollar rises. 
When Europe is growing, the dollar falls. 


"To be right on the dollar," he continues, "you have to 
be right on the U.S. business cycle."


Anick Delaplaine and Kurt Richebacher both believe Europe 
is speeding up, while the U.S. is slowing down. They both 
also believe that this will mean a big drop in the 
greenback. Maybe even a dot.com-style drop.


The dollar index topped out on May 17th. This may turn out 
to be a good time to sell the dollar. And buy euros. 


Your correspondent, his eye on the dollar...


Bill Bonner


P.S. After dinner, and after midnight, Elizabeth spoke to 
Amanda. Elizabeth chattered away in French until she 
noticed that Amanda had tears in her eyes. It was all too 
much, she explained...trying to listen and not having a 
clue to what people were saying...trying to speak and 
being unable to get out the simplest idea. Trying to fit 
into an alien culture. "Please speak English," she 
begged, "...if that is what you call it."
 
 
 
 
About The Daily Reckoning:
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Last modified: April 02, 2001

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