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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Three Amigo Bottom Indicators

*** History, Recessions - and a 32% boost in the S&P... 
Semiconductor Index on a tear...

*** "Talk is cheap and Wall Street gets it wholesale"... 
Boobus Americanus contracts a quick and serious case of 

*** The million-dollar divide in California real 
estate..."You better hope you've got a live deal"...and 
much, much more...

*** Hmmmn...wasn't it just a week ago that we were 
lamenting the fact that "the only thing new in the 
'news' these days" is the names of companies reporting 
bad earnings and announcing layoffs...

*** Just yesterday, in fact, we reported 31,000 people 
lost their jobs in one day. Wait, it only seems like 
yesterday. In fact, it was last Friday.

*** Over a million have gotten the ax since January 
first of this year. Intel reported profits for the 2nd 
quarter had dropped industry 
profits were down 66% across the board...

*** Yet, Craig Barrett, hombre numero uno at Intel, says 
he believes the end of the global slowdown in demand for 
tech products "is in sight," and "boom!" up the stock 
leaps 4.5%... 

*** The chip sector has been on a tear for the last 
seven days...jumping 3% yesterday alone...Dell was up 
4%...PMC Sierra leaped up a whopping 10.5%...

*** Has Boobus Americanus lost their collective mind? 
(Thank you Doug Casey for that most affectionate term.) 

Before we try to answer, let's check in with our man on 
the scene in New York. Eric?


Eric reports from Wall Street:

- Ask most investors about the tough economic conditions 
hovering over the stock market and they'll invariably 
say, "Earnings will recover in the second half;" Or, 
"The economy is bottoming;" Or, "Greenspan will cut 
interest rates until the market recovers." 

- And now, along comes Salomon Smith Barney equity 
strategist John Manley with the comforting observation 
that the economy and corporate profits are - at last - 
deteriorating at a slower rate.

- Three cheers for slow deterioration!

- Yesterday, the rose-colored glasses crowd was out in 
full force, proclaiming among other things that 
semiconductor prices had hit bottom.

- "The industry has bottomed out," Intel's Chief 
Executive Craig Barrett told reporters in Penang, 
Malaysia. "There will be an uptick in demand in the 
third and fourth quarters."

- The Semiconductor Industry Association seconded 
Barrett's optimistic outlook. "Based on the inventory 
reduction that has occurred in the first half of 2001 
and the further reductions projected for the third 
quarter, we believe the industry will return to 
sequential growth in the fourth quarter of this year," 
said George Scalise, president of SIA.

- The Philadelphia Semiconductor Index (SOX) rallied on 
the rosy forecasts and has now gained more than 19% over 
the last seven trading days.

- The Dow backtracked from a 99-point midday advance, 
but hung onto 41-points to finish at 10,551. The Nasdaq, 
meanwhile, gave back nearly half of its early session 
gains to finish up 19 at 2087.

- Even if the glass is suddenly half-full in the 
semiconductor industry, Wall Street is just beginning to 
feel the pain. "There is a major job recession on the 
Street," writes the New York Observer's Landon Thomas. 
"With at least 1,500 investment-banking jobs already 
gone this year, it's going to get worse before it gets 
any better." 

- Dresdner Kleinwort Wasserstein's announced recently 
that they will cut 1,500 banking jobs - with the knife's 
sharpest edge to be felt in its New York offices.

- "No longer are just 'under-performing' bankers getting 
the ax," Thomas continues. "These days, anyone can be 
let go. Indeed, the joke within Merrill now is that if 
you're not working on a live deal - even if you've just 
closed a major one - you are liable to get fired."

- How's this for proof of a bubble in the real estate 
market? Coldwell Banker released a report showing that 
if you want a 2,200 square foot, 4-bedroom house in 
Oklahoma, it'll cost you $134,275 in Tulsa...but only 
$134,225 in Oklahoma City. A $50 dollar divide.

- In Palo Alto, your family digs would set you back $1.1 
million, while just a few hours away, in Bakersfield, 
that dwelling costs only $119k. Over a million dollars 
separates the two...

[Here's a simple question: Does anyone really need a 
house in Palo Alto that badly?] 

- "Wow!" is all I can say to another survey conducted 
for the Securities Investor Protection Corporation 
(SIPC) and the National Association of Investors 
Corporation (NAIC). The survey was designed to test 
"investor awareness"...and 4-out-of-5 investors failed.

- Fewer than one in five realize that there is no 
"insurance" for stock market losses. When asked to 
identify the "organization that insures you against 
losing money in the stock market or as the result of 
investment fraud," only 16 percent knew that there is no 
such group.

- "We've been at this for 50 years now," says the NAIC's 
Robert O'Hara "and we see the same problem over and over 
again: new investors come in during bull markets and 
then don't know what to do when things go sour later."

- "Informed is better," says James Grant.

Back to Addison in Paris...


*** Informed is better with respect to the perennial 
search for the bottom, too. "Stock market gains lead 
corporate earnings during a recession by an average of 
11 months," writes John Mauldin. "The cycle begins when 
it looks like there is no end to bad earnings reports." 

*** Mauldin's research shows that, on average, the S&P 
rises 32% from the market's bottom before the earnings 
cycle bottoms out. (Mauldin suggests a few potential 
indications below...)

*** Here at the Daily Reckoning...well, we're not so 
sure. "Talk is cheap and Wall Street gets it 
wholesale..." says Bill King, and we're inclined to 
agree. "Until a requisite number never want to hear the 
words stock and market again, the bottom is not in."

* * * * * * * * Advertisement * * * * * * * * * * *

The landing approach has begun. The flaps are down. A 
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are still optimistic. But corporate profits are way off. 

Has Alan Greenspan engineered a soft landing for the 
formerly high-flying tech bubble? Or is there a lot more 
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The Daily Reckoning Presents: A Special Guest Essay in 
which the author searches for serious signs of a 
turnaround in the markets... 


By John Mauldin

The recent market action has a lot of people scratching 
their heads. Of course, the cheerleaders tell us each 
move down is the bottom. And one day they will be right. 
But that does not explain the markets. 

First, let's remember a basic fundamental. For every 
seller in a bear market there is a buyer. Given the real 
problems in the economy, however, the question to those 
of a bearish persuasion becomes: "Why is anyone buying 

The answer is they see the potential for real profits! 
(Even though they have to ignore the S&P 500 selling at 
an unbelievable historical high P/E ratio of 29 in a 
bear market).

According to Bank Credit Analyst, stock market rises 
lead corporate earnings during a recession by an average 
of 11 months. On average, the S&P has risen 32% from the 
market's bottom before the earnings cycle bottoms out. 
Note that the stock market rise does not begin after the 
recession is over. It begins usually at the bottom of 
the recession when things look the worst.

This market rise comes before things turn around and 
before unemployment bottoms out. It begins when it looks 
like there is no end to bad earnings reports. Thus the 
search for: The Bottom. A 32% rise in less than a year 
can salve a lot of bear market wounds.

Seems easy enough. Just invest when blood is running in 
the streets. But the trick is to figure out when things 
look the worst. Are we looking for ankle-deep or knee-
deep blood? Things may look pretty bleak today, but 
there is no reason they cannot look worse tomorrow.

And that, dear reader, is what our assignment is today. 
We are going to explore some of the signs that happen 
when things are at their worst. We want to know what 
month in the future earnings will turn up so we can 
subtract 11 months and jump back in the market BEFORE 
the 32% rise.

In the Fed Watcher section of his website, Dr. Ed 
Yardeni, chief economist with Deutsche Bank Alex Brown, 
gives us a number of charts which show the relationship 
between certain factors and Fed funds rate. I take these 
and overlay the S&P 500 data to help us see if we can 
find something of market-predicting significance.

There are several items which are highly correlated with 
Fed fund rates. They are also highly correlated with 
stock market direction. And even more important, when 
you go back to 1990-91 and pay close attention, some of 
them even give us a hint at that most elusive of 
moments: The Bottom.

As you might expect, the direction of the Fed funds rate 
is closely related to GDP growth. In past recessions, 
the Fed funds rate only started to come down after GDP 
growth slowed down. But in our current economic cycle, 
we see Greenspan and crew cutting rates only shortly 
after the slowdown began. Faster than at any other 
recent period, but not soon enough in the opinion of 
many observers, including your intrepid analyst.

This is why so many analysts are bullish; they see that 
chart and connect the dots which show the economy and 
markets growing stronger next year. I think this 
"correlation" is tentative, at best. Betting my economic 
future on the effectiveness of rate cuts, let alone on 
the likelihood that cuts actually produce magical 
changes in exactly 12 months, seems questionable.

The first indicator I want to look at is the strong 
connections between capacity utilization, the Fed fund 
rate and the stock market. Interestingly, capacity 
utilization bottomed in early 1991 and the stock market 
found a bottom a few months later. 

The second indicator is the NAPM Price Index (National 
Association of Purchasing Managers). It also bottomed in 
early 1991.

All the other graphs show the correlation to the Fed 
fund rate with factors like industrial production, G-7 
industrial production, profits, earnings, commodity 
prices, metals, etc. While correlated with the Fed fund 
rate, these did not seem to anticipate a turn around in 
the stock market prior to the actual rise. (I should 
note that these are my conclusions and are NOT to be 
interpreted as coming from Dr. Yardeni.)

It makes sense why capacity utilization and the NAPM 
Index would tend to be a pre-cursor to a turnaround. 
Until factory production and purchasing turn around, how 
can we say we are at the bottom? Unemployment, earnings 
and such will still tend to look bad and get worse, even 
as the stock market and the economy rise from their 
graves, but something has to signal that we are at: The 

Remember my earlier point: as bad as things are, they 
can get worse? Until these indexes start to show some 
signs of life, things can get worse, and probably will. 
On Wednesday, the NAPM Index, after rising slightly in 
May, fell out of bed in June. Every month brings a 
decrease in capacity utilization.

But I promised one more indicator of The Bottom. And 
that would be junk bonds, the current nuclear waste of 
investments. Junk bond funds typically turn around at 
the bottom of a recession. Again, this is logical, as 
bond values are an extension of the ability of companies 
to make their payments. When the prospect for re-payment 
improves at enough companies, the bond funds themselves 
begin to show signs of life.

Junk bonds are currently showing no signs of life. They 
really are getting treated like nuclear waste. I could 
quote some devastating numbers about how default telecom 
bondholders are only getting 12 cents on the dollar and 
about how many hundreds of billions of dollars of 
telecom bonds are still waiting for the shoe to drop, 
but space and time suggest not.

Someday, however, you will want to invest in junk bonds, 
only then we will respectfully call them High Yield 
bonds. High Yield bond funds rose almost 80% after the 
last recession in 1990-91. I actually look forward to 
the day, as it will be a once in a cycle trade that we 
will get to brag about to our brothers-in-law. 

But for now, the Three Amigos of capacity utilization, 
the NAPM Index and junk bonds tell us we are not yet at 
the bottom. When to get bullish? When these indicators 
start to turn up for two months. (Or you can be 
aggressive and start to increase your portfolio at the 
first signs of life in all three indicators 

You might miss a point or two in the following rise, but 
history says you won't miss too much. And you could miss 
more than a point or two in the market fall as we wait 
for the economy to turn around. 

Still searching for the Big Bottom...

John Mauldin,
for The Daily Reckoning

John Mauldin is an investment advisor, an authority on 
hedge funds, and a frequent contributor to the Daily 
Reckoning and the Fleet Street Letter. You can read his 
latest writings or subscribe to his e-letter by going to or sending him a note at:

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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: August 04, 2001

Published By Tulips and Bears LLC