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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 24 JULY 2001 


Today:  Pro Forma Life

*** Wall Street gets depressed... 'information fatigue 
syndrome' strikes the nation...

*** "Homeowners borrowing trouble..." Freddie Mac makes 
trouble more readily available...

*** Global deflation gets serious...Japan at 16-year 
low...London at 3-year low...Gold still in 20-year bear 
market...but at least Henry is making money...

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*** I haven't heard from Eric this morning. Maybe he's 
depressed. Merrill settled an investor lawsuit for 
$400,000. The walls have been breached. Lawyers from all 
over the country are said to be arriving at New York's 
Port Authority bus station, having approximately the 
same effect on Manhattan as the arrival of the Visigoths 
in Rome.

*** But, heck, I've got the Internet...I can find all 
the information I need about what's happening on Wall 
Street. In fact, I can find more than I need.

*** The Detroit Free Press warned yesterday about a new 

"Now mental health experts have come up with yet another 
psychological disorder - 'information fatigue syndrome'. 
Its symptoms include depression, anxiety, insomnia, 
inability to focus, headaches, high blood pressure and 
social withdrawal... Atlanta clinical psychologist 
Harold Steinberg says some of his patients have even 
answered their cell phones during therapy sessions. 'I'm 
amazed at how many of them believe they have to take 
every call, read every memo and respond to every 
message,' he says."

*** Successful people are busy people. Everyone wants to 
appear to be they need to feel busy. So 
they pick up a cell phone...or get on the computer.

*** And....what's's a news 
people will be able to get on a computer terminal while 
they're eating a Big Mac at McDonalds. The terminals are 
being placed in McDonalds by one of the nation's leading 
debt pushers - Freddie Mac - in order to encourage low-
income families to get a mortgage. 

*** But "Homeowners Might be Borrowing Trouble," warns 
the Seattle Times. Mortgage applications are up 54% this 
year over last. Nearly half of that is refinancing work. 

*** "But some experts are spotting ominous signs in the 
refinancing boom," says the Seattle paper. "Half of the 
homeowners who have refinanced recently did it to pay 
off credit cards, car loans and other consumer debts..." 

*** In the refinancing booms of 1992-93 and 1998-99, 
only about one in five borrowers paid down debt. Many 
homeowners tapped so much of their equity that they now 
must pay private mortgage insurance premiums to protect 
the lender, a cost they did not have before refinancing. 
One risk of consolidating consumer loans: it turns 
unsecured debt into a bill that can cost you your house. 

*** Get in debt...get a computer...get a cellphone 
...get a lawyer - get busy! Is life in America, in the 
21st century, great...or what?

*** While Americans are dripping ketchup onto computer 
keyboards, the rest of the world is drooping its way to 
recession. The London stock exchange dipped near to a 3-
year low yesterday. German confidence is at a 3-year 
low. Dow Jones' world stock index hit a high of 19,256 
in May of 2000; it now stands at only 12,892.

*** In Tokyo, stocks hit a 16-year low - erasing every 
penny of stock market gain since 1985! Industrial 
production in Japan is also falling - down 14% 
annualized in the first quarter of this year....and 7% 
in the second quarter. 

*** Japan is, I remind you, the world's second largest 
economy. I - and I alone - have opined that it might 
also be the world's leading economy, in the sense that 
wheresoever it goest the world's #1 economy - the U.S.- 
may follow. 

*** The Dow fell 153 points yesterday. And the Nasdaq 
once again dropped below 2000 to end the day at 1988. 
Amazon fell 5% in after hours trading (about 
which...more below). GE ended off 3%. 

*** The gold mining index - the HUI - gained 3% last 
week. And guess what group of stocks has done the best 
this year? Hard to believe, but it is the gold mining 
companies - up 27.7%. But the price of gold has barely 
budged. Go figure.

*** "SELL ENERGY??? Are you nuts?" writes John Myers of 
Outstanding Investments. "Some die-hard Pollyannas will 
argue about new technologies or giant discoveries just 
waiting to gush to the surface. But if you talk to oil 
insiders, a typically optimistic bunch, you see 
unanimous conviction in their eyes that oil reserves are 
rapidly dwindling. Meanwhile, our dependency on crude 
grows each day." (see: The Crude Truth

*** What else? Well, Henry turns 11 today. The little 
entrepreneur has made more than $50 by picking 
blackberries and selling them at a local roadside 
market. For whatever reason - Henry wants to make money.

*** After church on Sunday, we strolled through the 
graveyard in West River, Maryland, where many of Henry's 
ancestors are buried.

"There's Doctor McCeney," I pointed out. "He was your 
great, great, great grandfather."

"What was so great about him?" Henry asked.

"Well, that just means he was...let's see...the father 
of the father of the father of your grandfather..." I 
reply. "And there's your great, great, great 
grandmother, who died in 1898."

"Well, what did he die of?" asked Henry.

"I don't know," I reply. "Why do you ask?" 

"Because I want to be a doctor when I grow up."

"Why do you want to be a doctor?"

"Because doctors make a lot of money."

"Oh..." we continue our stroll through family history.

"And there's another great, great grandfather, Henry. He 
was a doctor too."

"Did he make a lot of money?"

"I don't think so, Henry. Doctors don't always make a 
lot of money."

"Then, I think I'll be something else."

"Henry, making money isn't the most important thing in 
the world."

"Oh, what's more important?"

"Uh...doing the right thing."

"Well, can't you do the right thing and still make a lot 
of money?"

"I don't know, Henry, I don't know..."

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He don' plant 'taters.
He don' plant cotton
And dem folk dat plan' 'em 
Dey's soon fogotten
That ol' man river... he just keep rollin' along.

"Once the Toast of the New Economy," writes David 
Streitfeld in the Los Angeles Times, referring to one of 
our favorite stocks,, "May Be Toast."

On January 4th 2000, I suggested to readers of the Daily 
Reckoning that shares of - then $69.75 - 
might be overpriced. Eighteen months 
$14.85...Amazon is still overpriced.

I feel some obligation to continue our coverage of the story. Not that there have been any plot 
twists - there have not. Nor have there been any moments 
of high drama or suspense.

Instead, the big, muddy river just keeps rolling along. 
Bezos' company continues to do just as we expected... 
rolling along towards 'pro forma' profitability... and 
GAAP bankruptcy.

What we find most interesting in the Amazon story is how 
the distance between 'pro forma' and GAAP numbers - like 
the space between opposing river banks - seems to widen 
as the big river nears the end of its course. On a pro 
forma basis, Amazon is expected to reach profitability 
by the end of this year. But when normal accounting 
rules are applied - the Amazon river may freeze over 

"Amazon said that it expects an increase in revenue to 
between $625 million and $675 million in the third 
quarter, and that it will hold pro forma losses at 
current levels," says the report on CBSMarketWatch. "The 
company maintains that it is on track to break even on a 
pro forma basis in the fourth quarter. Pro forma 
calculations are based on assumptions about the 
company's business and exclude one-time charges." had $2.8 billion in revenues last year, on 
which it earned a minus $569.5 million. It has continued 
its losing ways during the first two quarters of this 
year - with a $168.4 million loss in the quarter just 

I do not claim to be the most learned or sophisticated 
financial analyst. But losing half a billion a year on 
less than $3 billion in sales does not seem to be the 
way to fortune, even in the New Economy. And yet Bezos 
has made a fortune from Amazon. He, like others who have 
made money on the company, has done so by selling the 
shares. That formula has been a moneymaker ever since 
Henry Blodget helped drive the stock up above $150 a 
share. Even at $14.85 a share, Amazon still looks like a 
better share to sell than to buy. Bezos seems to think 
so. A recent report on insider trading shows Bezos 
selling two blocks of 300,000 shares each.

"We went through a stage where online retailing was 
going to conquer the world," said Eric Von der Porten of 
Leeward Investments. "No one was ever going to go to a 
mall again. But now it's going to settle down. It's 
going to be a lot less exciting."

Especially unexciting is the growth in Amazon's sales. 
Over $5 billion in sales were expected for this year. 
The actual total is now estimated to be closer to $3.4 
billion. The company's sales growth rate is little 
different from what you might hope for in a laundromat 
or landscaping business - about 17% per annum.
Worse, most of Amazon's growth is coming from selling 
electronic equipment, not books.

"And there is the Amazon dilemma," explains Streitfeld. 
"Where it is profitable it is not growing, and where it 
is growing it is not profitable. Mark Rowen, analyst 
with Prudential Securities, thinks this is because 
electronics are still heavily discounted, while 
discounts have been curtailed on books."

That is, however, only the beginning of Amazon's 
troubles. After 17 consecutive unprofitable quarters, 
Amazon has accumulated $2.7 billion in debt. The great 
hope of the enterprise was that growth in sales would 
reduce, proportionally, the debt burden to a reasonable 
level. But now that growth rates have fallen, the 
company will have to achieve - in rough numbers - a 
profit margin of about 7% or so, just to service its 

In a pro forma world, debt is no problem. But in a pro 
forma world, nothing is a problem. Problems are 
dismissed and forgotten. In a pro forma world, absent 
earnings pose no more problem than missing Congressional 

But Amazon flows through the real world - a jungle, in 
fact, where it has attracted the interest of piranhas. 
Amazon raised $700 million by selling bonds last year, 
announcing a series of deals with Internet start ups to 
prepare the market for its bond sales.

"On Jan. 21, 2000," Streitfeld recalls, Amazon said it 
would receive $82.5 million over five years from, an online auto retailer, in exchange for 
helping to introduce Greenlight to Amazon's customers. 
Three days later, Amazon announced a similar deal with Seven days after that, a deal with 
Audible Inc., a provider of spoken-word recordings, was 

Amazon forgot to use the magic words. It failed to 
mention that these were not real deals, but pro forma 
deals. No cash changed hands...just shares in other 
often-worthless web companies. Now, it is being sued by 
one of the hedge funds that bought its bonds. Soon, it 
will be sued by other investors who believed 'pro forma' 
numbers were the same as real ones.

Pro forma life can be anything you want it to be. Pro 
forma, lawyers pose no clear and present danger to 
Amazon. Pro forma, Amazon will break even this year. 

Pro forma, Bill Clinton did not have sex with that 
woman, and the weather is always perfect.

Bill Bonner,
Writing to you, pro forma, of course.

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 24, 2001

Published By Tulips and Bears LLC