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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 30 JULY 2001 


Today:  Pursuit of Mediocrity

*** Slowdown "all in consumers' heads"...but Big Tech 
endures a "brutal quarter"...

*** Poor John Teeples - successful employee of two of 
the New Economy's most profiled companies... 

*** Lance wins the Tour de France, again - 'it's really 
quite annoying' old economy car-maker paying 11.3% 
on accelerating revenues...and more!

*** Bonjour, Addison here...Bill and la famille have 
headed south to Nicaragua for a couple of weeks of much 
deserved vacation... Eric, too, is enjoying a little 
R&R, so today it's just us chickens...

*** "Slowdown is all in consumers' heads," a Journal of 
Commerce headline tells its readers...

*** I wonder if Tom Ahrens, the Canadian soybean farmer 
we mentioned in Friday's Daily Reckoning is delusional. 
You'll recall Mr. Ahrens retirement fund, formerly 
brimming with $210,000 in Nortel, has shrunk to 
$40,000... and he now owes his broker $30,000. 

*** Or what about "Poor John Teeples?" 

*** According to a report in the New York Times, "Mr. 
Teeples, age 45, worked for six years as a software 
salesman with Microsoft. He saved his money. He bought 
stock options from a pair of brokers who persuaded him 
to put his money - all of it - with them. He had amassed 
$700,000 in his retirement account by putting in 80-hour 
weeks. He was with the right company at the right time: 

*** "Today, his retirement funds are down to $400. Not 
$400,000 - $400. 

*** "Of the 23 stocks that the brokers bought for 
Teeples and his wife," says the Times story: 

"12 were companies that Morgan Stanley had brought 
public or provided with other investment-banking 
services. Ten were rated buys by Morgan Stanley 
analysts when they were bought. Three of these rose 
slightly, but seven fell, generating $85,000 in losses. 
By the time Teeples sold all his shares in those seven, 
they had lost, on average, half their value.

"Teeples and his wife have taken out a second mortgage 
on their home to pay their bills, and he went back to 
work in November at a wireless-data company in Baltimore 
that he would not identify."

*** Notes Dan Denning: "Mr. Teeples, at age 45, is 
unlikely ever to recover his former wealth. He was with 
Microsoft when it paid to be, and he was in Cisco 
options when it didn't. Most people don't get one 
opportunity like this in a lifetime, let alone two."

*** Microsoft, Cisco, Nortel...Sun Microsystems, Lucent, 
Oracle... On average, second quarter profits at US 
computer-related companies dropped 66%, a 
report declares. Intel reports profits fell 94%. 
JDSUniphase's $50 billion year-end loss made US economic 

*** "It was a brutal quarter," a research analyst told 
Bloomberg. "The third quarter is going to be even worse, 
and fourth-quarter estimates are still too optimistic."

*** Neither consumers with the desire to "max out" their 
Visa cards - nor businesses wishing to take the Fed up 
on its inducements to 'easy money' - can keep pace with 
overcapacity in the industry. 

*** Layoffs by tech companies totaled 31,000 last week 
alone. Alas, workers dreams of exploiting the 
capitalists' may well have to be postponed until the 
next boom hits Wall Street. When will that be? Well... 
at the Daily Reckoning we do not presume to be able to 
predict the future, but we're willing to hazard a guess: 
not this year. Not even next.

*** The S&P 500 is experiencing its worst slowdown since 
1958. "The rat-a-tat-tat of newspaper headlines 
announcing 'plunges,' 'drops' and 'declines' in second-
quarter results adds up to this rather startling fact," 
reports "Not since the days of 
poodle skirts and the Big Bopper have corporate 
operating earnings declined to such a degree." 
(See: A Nasty Case of Deja Vu )

*** Well at least we can all be thankful that this 
slowdown is "all in consumers' heads." 

*** The indexes were a mixed bag on Friday. The Dow 
dropped down 38 to close the week at 10,416. The S&P 500 
index gained a couple to 1205; the Nasdaq added 6 to 
2029. Year to date... the Dow has lost 3.5%; the S&P is 
off nearly 9% and the Nasdaq is down 18%... the Nasdaq 
100 - home to the largest techs - is off 28%.

*** But here's some good news... at least for some. 
Lance Armstrong, the American cyclist who overcame 
testicular cancer in 1995, won the Tour de France for 
the third straight time here in Paris yesterday.

*** "Pandemonium," says Becky Kramer, the newest 
addition to the DR intern squad. Becky was on the Champs 
Elysees when the race finished. "One guy was parading 
around with such an enormous American flag, I thought he 
was going to get beat up."

*** "This American guy comes over here and wins three 
Tour de France's in a row," said one of our French 
colleagues this morning, "it's really quite annoying."

Addison Wiggin
Paris, France

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revenues... even as the global economy grinds to a halt. 

by Jay Akasie 

With its subcompact New Beetle turning other small cars 
into bland econoboxes - and its shiny Bentley, 
Lamborghini and Bugatti's redefining the superluxury 
space - it's no wonder Volkswagen AG is on a roll. 

Especially when you consider that between those eye-
catching opposites lies an impressive middle fleet of 
retro Audi TT roadsters, chiseled Passat sedans and even 
hot-rod Skodas that make Czech housewives dream of 
racing at Le Mans. 

But even better than a new set of wheels, we think, are 
VW's deeply discounted and often overlooked preferred 

Unlike most U.S. preferreds, the VW brand offers an 
upside potential nearly identical to the ordinary shares 
but are cheaper and pay a richer dividend. It sounds to 
us a bit like buying a Bentley for the price of a Bug. 

Indeed, with Volkswagen's margins increasing and its 
revenues impressively on the rise - even as questions 
arise about the health of the global economy - the 
preferreds currently offer low-priced participation in 
one of the world's best-positioned automakers. 

So just what are these preferreds? 

Let's take a look. They pay higher dividends than the 
ordinary shares, and they take precedence over the 
ordinaries in the payment of dividends. The preferred 
shareholder also has a senior claim on company assets 
over the holder of ordinary shares in the unlikely case 
of a Volkswagen liquidation. 

What's not to like? The preferred shares do not have 
voting rights. Nor do these 'preferreds' carry a fixed 
dividend. The VW board adjusts the dividends on the 
preferred just as it does with the ordinary shares. 

But an analysis of the past 10 years shows roughly 
identical year-to-year percentage changes, implying that 
the preferred and ordinary dividends are equally 
influenced by annual earnings. What's more, over the 
same 10-year period, the payout on the preferreds has, 
on average, exceeded that on the ordinaries by about 

The 'preferreds' currently trade at 33.4 euros per share 
with a dividend of 5.4%, vs. 51.5 euros and a 3.3% 
dividend for the ordinaries. They have a price-to-
earnings ratio of 5.7, while the P/E for the ordinaries 
is 8.8. If you don't care about voting rights - and with 
this deal, why should you? - the preferred stock is 
definitely the better bargain.

What's more, the 'preferreds' are gaining more notice, 
thanks to a brouhaha over the so-called Volkswagen Law 
in the German state of Lower Saxony - home to VW's 

The law prohibits any single shareholder from 
controlling more than 20% of VW's, or any other native 
company's, voting power. It's a handy little law for 
Lower Saxony, which, with about 19% of the vote, is 
itself VW's largest shareholder. And it can work to your 

The preferred stock issue aside, VW is an attractive 
investment on its own terms. Its balance sheet has 
steadily improved, thanks to Ferdinand Piech, 
Volkswagen's patrician chairman and chief executive, who 
has emphasized cost-cutting. 

At the same time, overall sales are growing at a steady 
pace despite the uncertainty in global markets. Trailing 
12-month revenue totaled 87.6 billion euros as of March 
31, and the five-year compounded annual growth rate 
averaged 13.6% at year-end 2000. 

Moreover, the company had its strongest U.S. sales month 
in 28 years this June. Last year, its overall world 
market share rose to 12.2%, and its North American 
market share rose nearly two points, to 6%. Volkswagen's 
collection of car brands - from Seat in Spain to Skoda 
in Eastern Europe - surpassed the five million-delivery 
mark for the first time last year. The company has a 
commanding presence across Europe, Asia and South 

Volkswagen runs with an efficiency that is the envy of 
the automobile world. The entire company's offerings, 
with the exception of niche products like the Bentley 
and the Lamborghini, are built off of just four 

Sharing parts and platforms has helped keep costs down, 
and Volkswagen's margins continue to rise. Gross margins 
rose to 12.64% in 2000 from 11.34% in 1999, while EBIT 
margins accelerated to 3.8% from 2.5%. Hendrik Emrich, 
an auto analyst at Berenberg Bank in Germany, estimates 
the company's platform strategy will save about one 
billion euros next year, or about 1.4% of the cost of 
sales in 2000.

All the more reason why individual shareholders 
shouldn't give a hoot whether or not their shares have 
voting power. 

"Volkswagen's one of the few truly global automakers; it 
sells just about everywhere. And it has an incredibly 
strong brand portfolio," observes David Moorcroft, an 
auto analyst with Commerzbank. "Buying the preferreds is 
a cheap way of getting into an automaker that has, for 
starters, 20% of the Western European auto market." 

Our sentiments exactly.


Jay Akasie,
For The Daily Reckoning

Jay Akasie is a staff writer for As 
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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 30, 2001

Published By Tulips and Bears LLC