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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Tight Collars and Tight Margins, Reprise

In Today's Daily Reckoning:
*** Meaningless activity on Wall the Summer 
of Love continues
*** "I don't want to talk about it..." says Harry Potter 
Greenspan, the Wizard of the Federal Reserve
*** The most likely return on the S&P over the next 
decade: ZERO

*** Today's message will be mercifully short. I've got to 
get in the van with the family and drive to Cherbourg and 
get there in time to catch a ferry to Ireland. It's 
vacation season and the roads are clogged with people 
pulling trailers - often people from Germany or Denmark. 
So, the drive is expected to take 7 hours. Then, the 
ferry ride is 17 hours. Why did I decide to do this?

*** seemed like a good idea at the time. And now 
momentum carries us along. We've got tickets... 
reservations... gotta use 'em.

*** Momentum is carrying the stock market along too. Most 
of the action is meaningless. Up...down...up...down - who 
cares? The bear is at the beach. And it's his market.

*** S&P futures rose at the opening yesterday - as they 
always seem to do...a sign of continued bullishness among 
the lumpen investoriat.

*** 1448 shares advanced. 1379 declined. 47 hit new 
highs. 52 hit new lows.

*** The Dow rose 14 points after Harry Potter Greenspan, 
the Wizard of the Federal Reserve, said nothing. The 
Nasdaq was even more grateful. It rose 48 points.

*** Consumer Confidence rose in July. And sales of new 
homes rose too - 2.8%. In this summer of love, both 
indexes are at their 2nd highest levels ever. 

*** "I don't want to talk about that" said the Fed 
chairman in his non-talk. Specifically, what he didn't 
want to talk about was the controversy surrounding the 
productivity numbers. You and I, and other Daily 
Reckoning readers, know they are nonsense. Greenspan 
probably knows it too. But he doesn't want to talk about 
it. How could he? It would mean admitting that all his 
"new era" talk was rubbish.
(see: Ding, Dong The Fed is Wrong

*** Bill Fleckenstein ( 
had an interesting comment today. Let's assume that the 
doom and gloomers are wrong. That is, we'll assume that 
there will be no crash nor major recession for another 10 
years. Assume also that the P/E of the S&P will be 
roughly its average since 1926. And that earnings growth 
of S&P companies will be about average since 1970. And 
adjust the numbers for the average inflation level since 
1960. Guess how much you can expect to make from your S&P 
stocks over the next decade? Zero.

*** Marc Faber mentions a similar calculation, done by 
David Krotok, for the Nasdaq. Assume that these companies 
can gow earnings at a compound rate of 20% per annum - a 
rate that is so high it has almost never been achieved. 
And assume that at the end of 10 years the Nasdaq P/E 
will be twice its earnings growth rate (one times growth 
is the more normal level). This takes Nasdaq's current 
earnings of $25 billion to $155 billion - with a P/E of 
40. Even under these fancifully generous conditions, the 
Nasdaq is still lower than its high for this year.

*** Another calculation by Krotok determined what would 
have to happen in the Nasdaq in order for it to produce 
the same return for investors over the next ten years as 
they could get from treasury bonds. Nasdaq stocks would 
have to bring in their 20% per year earnings growth each 
year - and sport a P/E in the year 2010 of 80...1000% 
higher than the average since 1970.

*** You may take from this that it is possible for the 
Nasdaq or the S&P to match the returns of treasury bonds 
- but it will take a miracle.

*** Tom Petrie, by way of Ray Devoe "reckons that a $30 a 
barrel translates into a $70 billion drag on the U.S. 
economy and interest rates....would have to rise to 7_-8% 
to exert a comparable braking impact." Devoe speculates: 
"The obvious winners in this scenario are OPEC, of 
course, Fed Chairman Alan Greenspan and Governor Bush. 
Congress might possibly be considered to benefit since 
they did not have to tax $70 billion out of the economy 
to slow it down. But, since this is an election year for 
the Presidency, one-third of the Senate and all of the 
House - a tax of that magnitude would be virtually 
impossible to become law."(see: "Belchfire 8" Gas 
Guzzlers and the American Public
*** The International Herald Tribune studied the results 
of mutual funds worldwide for the second quarter. The 
assessment: "No matter where they were domiciled, the 
best equity funds tended to target areas that had little 
or nothing to do with technology...such as real estate, 
energy and food." The old economy, in other words, is the 
one delivering the profits - not the new one.

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No time to write a letter today. So, Addison is going to 
select one of the "Greatest Hits of 1999." And I'll be on 
a boat tomorrow morning. You will hear from me as soon as 
we get to our digs in Donegal. Friday. Stay tuned. 

Until then, your roving correspondent...on the road 

Bill Bonner

("Tight Collars and Tight Margins" first ran exactly one 
year ago today: July 26th, 1999. In this episode Bill and 
his family are traveling on The Scotia Prince - a ferry 
between Portland, Maine and Yarmouth Nova, Scotia. 
Today... July 26th, 2000, as you've just learned, Bill and 
his family are traveling on a ferry between Cherbourg, 
France and Waterford, Ireland. The symmetry is stunning. 
Enjoy, Addison)


The Orioles stadium in Baltimore is decorated with 
baseball photos from a much earlier era. Looking at the 
photos, you will see that the bleachers are much more 
modest than Camden Yard today. But the most striking 
difference is what is in the bleachers - the fans.

The players look pretty much like those of today, but the 
fans are entirely different. They are all male, which 
might be expected. But they are wearing coats, ties and 
hats. Fans today no longer wear ties. Or coats. Or straw 
hats. They wear shorts and tee shirts. This attire is 
almost de rigueur among sports fans and vacationers. The 
passengers aboard the Scotia Prince, the ferry between 
Portland, Maine, and Nova Scotia wore little else.

Psychological studies show that clothes really do make 
the man. Or, perhaps they just help the man on the make. 
Women were asked to select men, from photos, whom they 
found attractive. They almost invariably chose the guys 
who were well-dressed... even when the same guys were 
displayed in more casual attire. I don't know if a study 
has confirmed this - but I'll bet the advantage increases 
as people age. Real clothes cover paunches, bulges and 
blemishes. As America gets fatter and grayer, it has more 
to hide. 

So why the unflattering dress codes?

I considered that question as I waited for the Scotia 
Prince to dock at Yarmouth. The baseball photos were 
taken, I guessed, in about 1920. This was only a couple 
of years after the Great War. At the time America entered 
the war, a French soldier at the front lines had a life 
expectancy of just 21 days. It was only a couple of years 
after the Spanish flu epidemic. Thought the statistic 
seems unreliable today, the virus is believed to have 
been responsible for the deaths of one out of every ten 
citizens in cities such as Baltimore and Philadelphia.

The people on deck did not seem prepared for any sort of 
adversity - except perhaps famine. They were big... and 
soft. And very gray, too. Perfect targets for a bug...or 
a bear. 

Michael Rothschild's book, Bionomics, presents an 
analysis of a beehive as though it were a profit-making 
business. What you see quickly is that bees operate on a 
thin margin. If the weather is bad... or another hive 
moves into the territory... the hive won't make it. It 
doesn't take a lot of adversity, in other words, to turn 
a profit to a loss... and ultimately to cause bankruptcy. 
Nature is unforgiving.

Those men who watched the Orioles game in 1920 were much 
more conscious of nature's thin margins. This was before 
the days of penicillin. And novacaine - painless 
dentistry was still in the future then... as it still is 
today. Human life was a more marginal proposition than it 
is today. Investments were more marginal, too. When you 
put your money into stocks, you took an enormous risk. 
Periodic panics produced unequivocal bankruptcies. Alan 
Greenspan wasn't even born yet. And the first loop of the 
safety net had not yet been stitched. So people girded 
themselves up as best they could - morally, financially, 
and sartorially. They fastened themselves in with strict 
codes of conduct and stiff collars. They bought life 
insurance and saved gold coins. Rectitude and prudence 
were defenses against adversity. 

They were up tight.

Here in Nova Scotia, they stacked wood. A few cords of 
wood are insurance against the long, cold winter. Wood is 
real money in the bank. It is honey in the hive. It is a 
margin of safety. Nova Scotia has been in a slump since 
1920. Maybe that's why they still stack wood.

Nature abhors a vacuum. She also abhors high profit 
margins. Wherever they exist, she brings in a 
competitor... or a new technology... or some form of 
adversity. Americans today are enjoying some of the 
loosest margins in history. They fear almost no 
enemy...human or bacterial. They see no danger and no 
purpose to be served by self-restriction. No tight 
collars, in other words. No tight budgets either. No 
matter how nice things are today, they believe, they will 
only get better. 

I hope they are right.

But no matter how right they are, they won't be right 
enough to save America's tech stocks and big Dow stocks. 
They are priced for a world with a very bright future. 
But it's a future that cannot exist. The prices on 
leading stocks imply that they will become very 
profitable at some point in the future... and then the 
future will stop dead in its tracks to allow these 
companies to benefit from their hoped-for margins. How 
else can you make sense of or dozens of 
others? (...dozens of others that gut crushed this 
spring...Addison) Their business model calls for them to 
invest millions in order to buy a chare of a market that 
does not yet exist. If things go very well... this market 
will come into being and the former surgeon general will 
then sell things at a profit. What things? 

Who knows? 

But they have to sell millions of dollars worth and 
continue doing so for years in order to justify the stock 
price. So they better hope that evolution of technology 
and the marketplace halts right there, and the future 
ceases... like a photo of dead baseball fans.

Maybe it will. Maybe baseball fans will look the same in 
ten years from now. Maybe the 0's will win the pennant 
every year, too. Maybe nature will give the bees a break. 
But don't count on it.

Your correspondent,

Bill Bonner

(On July 26, 1999 you would have paid 25 1/2 for at yesterday's close it was trading just 
below $2... Addison. More 'Greatest Hits' tomorrow.)
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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Last modified: April 02, 2001

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