Contributed by Bill
Publisher of: The
Fleet Street Letter
WEDNESDAY, 8 AUGUST 2001
*** Productivity is in...darn, no crash...'miracle'
*** Cisco issues 'pro forma' earnings...meets
expectations...what about those write-offs?
*** More literary self-loathing...and a challenge to the
|*** Well...it didn't happen. The BLS reported their|
productivity numbers. But Mr. Market barely noticed. No
big crash, as the boys at Dresdner warned their clients
*** Still, journalists, cheerleaders and analysts set
out to earn their pay. Opinion, interpretation, analysis
bellowed forth. And the question was asked: 'Miracle' or
a 'Myth' - which is it?
*** "Productivity - like faith in things unseen - is one
of those things that's tough to get your arms around,"
says Eric. "The Government says we're more productive,
but does anyone actually see any supporting evidence? Is
the post office more productive? Is the box-boy bagging
groceries in the market more efficient? Are lawyers
accomplishing more lawyering per billable hour? Believe
the government's numbers if you want. I'm agnostic on
*** Growth purportedly accelerated in the second quarter
to an annual rate of 2.5%, well above the 1.6% or so
increase that most economists had expected. Of course,
"much of the improvement can be found in Old Economy
companies," says the FT, "which have applied
technological solutions, but do not trade under the New
Economy banner on Wall Street." Still, the 'miracle'
myth lives to see the light of another day...
Let's see what else happened on Wall Street yesterday:
Eric Fry reporting from New York:
- "Are we there yet? Are we there yet?" writes Richard
Leader, "[like children on a summer road-trip], many
investors are beginning to ask the same question about
when we'll see an economic recovery and some stock
- To judge from earnings reports like Cisco's and asset
write-downs like the $47 billion doozy JDS Uniphase
produced, we've got a ways to go before we get to bull
- "These numbers are just something, don't you think?"
asks the New York Observer's Chris Byron. "Bigger and
bigger, and more outrageous by the week!...We're
speaking, of course, of Wall Street's whole new game of
"Can You Top This?" balance sheet write-downs."
- "It was only a couple of weeks ago," Byron reminds us,
"that Nortel Networks Corporation-that big networking
company from up in Canada-shocked everybody by
announcing a $19 billion write-off on the rationale that
the slumping economy had rendered the company's balance
sheet more or less 50 percent worthless.
- "And now comes a write-down-courtesy of JDS Uniphase
Corporation, a Nortel supplier based in San Jose,
California, that makes the Nortel charge-off look like
chump change. Are you ready for a write-down of a whole,
entire $47 billion?"
- "How big is a nearly $50 billion write-off?" Byron
- "Well, let's say we got up one morning and decided to
throw away the American Express Company. That would be a
$53 billion write-off. Or say we decided to get rid of
the Boeing Company, or Sony Corporation, or the Ford
Motor Company. Those would all be $50 billion write-
offs, give or take."
- Despite the massive write-offs and collapsing profit
margins to boot, JDS Uniphase still boasts a $12 billion
market cap. The bull market mentality lives.
- After the close of yesterday's trading, Cisco reported
that its revenues fell "only" 25% to $4.3 billion. But
the company somehow produced "pro-forma" earnings of two
cents a share - just like it promised.
- CEO John Chambers characterized Cisco's previous
projections of a long-term growth rate of 30% to 50% as
- "If high technology companies have been truly 'flying
blind' with pea-soup visibility," writes Fleet Street
Letter contributor Ray Devoe, "my question is, why
should they have such high P/E multiples before they hit
the wall? The huge write-offs are bothersome. They show
that previous earnings were vastly overstated, that
these companies overpaid badly for acquisitions - and
had no idea what was truly taking place in their core
business." (See: The Glowworm Disconnect)
- It was hot in Manhattan yesterday. Unfortunately, not
even 98-degree temperatures could lift the chill over
Wall Street. A few Dow stocks managed to bounce a
little, but the Nasdaq shed another 6 points to 2,207.
To Addison, back in Paris...
*** "Preparing for retirement or not, boomers are
spending as though they will be young forever," writes
Bill in the DR Blue, engaging in a little "literary
self-loathing" all his own. "It is more likely they will
just be old for a very long time."
*** But while medical advancements keep him alive...what
will our hero live on? "He has stocks - but they have
gone nowhere but down over the last three years. His
other major asset is his home. Housing appreciated last
year at a rate of 11%, adding more than $1 trillion to
homeowners' wealth - at least on paper. But since 1995,
homeowners have also added almost $2 trillion to their
mortgage debt. And in order to realize this 'wealth,'
they will have to sell. But to whom? And for how much?"
*** Bill, fresh back from Nicaragua, will be speaking at
the 2nd Annual Retire Overseas Conference in Paris on
September 7-10, 2001. If you are interested in coming to
the conference, click
*** Today in Paris it is cool...and quiet. Parisians,
for the most part, take the month of August off and
vacation in the country. The City of Lights then settles
in for a somnambulant summer siesta.
*** From time to time, this morning, a cool breeze
ruffles papers on my desk and I can hear glasses
clinking and laughter rising from Le Paradis caf� on the
street below. The bells of St. Merry - the oldest cast-
iron bells in the city - ring on the hour.
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The Daily Reckoning Presents: A Guest Essay in which the
author sneaks in the back door to challenge one of the
basic assumptions of the Daily Reckoning...while Bill is
RECKONING OR REDEMPTION?
By Porter Stansberry
"Investors don't get what they expect, but instead what
Boy, it's easy to believe that Bill is exactly right,
because there are lots of things about America that
don't make any sense...
For example, the pretense that you can live at the
expense of your neighbor has never been more popular in
America. Just look at the recent tax refund. Everyone
gets $300 back - no matter how much tax they originally
paid. That's not even remotely fair - but it's very
popular, isn't it?
Of course this kind of thing can't last. A reckoning is
coming. The rich in this country, as has always been the
case, will move their assets offshore. Like Bill, living
in France. And the taxes on the middle class - whether
direct or indirect (inflation) will rise.
For financially savvy people, the scariest reckoning to
come relates to the current housing market. The
government not only has a monopoly on money, but they've
also created a system whereby most of nation's debt
resides in mortgages, which are owned by government-
backed agencies. The Fed-backed Fannie Mae and Freddie
Mac - which borrow short maturity debt at lower interest
rates than their competition because of their de-facto
government guarantee - now hold debt equal to 66% of our
By 2005, it's estimated that this will outgrow the
supply of Treasury bills.
In other words, the stability of our currency and the
value of your savings, your stocks and your property,
will depend on your neighbor's willingness to repay his
mortgage...the same mortgage he keeps taking equity out
of to buy big screen TVs and tech stocks like EMC, JDSU
and Sun Microsystems.
"Why not?" he says, "We owe it to ourselves..." And
besides, he doesn't expect to have his house foreclosed
upon - it's illegal in some states. Unfortunately,
reckonings don't follow local ordinances.
If you spent any time looking for these kinds of trends
- the serious mistakes and wrongdoings of our society -
you'll find them almost everywhere. I know. I am the
former editor of one of Bill Bonner's favorite
newsletters - The Fleet Street Letter.
But I don't work there anymore. And instead of spending
my time finding out what's wrong with America - the
reckonings to come - for the last several years, I've
been focusing on trying to find out what's right in
America - the opportunities to come. I made the switch
because, despite all that's wrong with the world, things
are getting better all the time. Somehow, over time, the
opportunities overwhelm the difficulties.
The reckonings don't last. Redemption follows.
Don't get me wrong. I'm sure we'll undoubtedly have
continuing economic cycles - booms and busts - but I'm
more convinced than ever before that Bill's view of the
20th Century as a period of ruin for humanity is totally
wrong. And, more importantly, I'm convinced that the
coming years will be better for us than we could
possibly imagine. Better financially. Better physically.
And vastly richer.
How do I know that things will get better, despite the
reckonings that will surely occur? Because the rate of
wealth creation continues to accelerate, despite all of
There's simply no doubt that we're a lot wealthier as
society than we used to be. The average lifespan has
nearly doubled since 1900. And the real, inflation-
adjusted cost of electricity has fallen 99.9%. Wheat is
now 98% cheaper.
In real terms, according to the Julian Simon, one of the
most well respected economists of the 20th century, the
typical American worker produced about $2-$3 worth of
output every hour in 1900. Today that figure is between
$20-$25 - a ten-fold increase. America continues to have
the most productive work force in the world - 80% higher
than European workers, for example.
When confronted with evidence of falling commodity
prices (in real terms) over time (the best evidence of
the economy-wide creation of wealth), Bill is likely to
respond: "in which currency have commodity prices
He raises a very important point. Milk used to cost
$0.05 per gallon. Today, it costs 50 times more. But the
figures I cite above are in "constant dollars." They
have been adjusted for the inflation that Bill
recognizes. The bottom line is that the average worker
today has to work considerably fewer hours to buy the
same gallon of milk, or any other good. We're getting
richer, not poorer, despite our reckonings.
And that means that for the long-term holders of equity,
there is no reckoning - only redemption. You see, common
stocks afford individuals the opportunity to own the
means of production - the machines and organizations
that have produced this amazing trend towards wealth.
And this is a system that, despite its best efforts, the
government hasn't yet been able to destroy.
Capitalists and entrepreneurs continue to make the world
a better place... and for this, they make a profit and
their investors earn a return.
Let me give you one example of a company that's actively
working to create a better future...
New health-care technologies are creating cancer
treatments without side effects. These new "cancer
vaccines" use your body's immune system to fight tumors
so that radiation and chemotherapy isn't necessary. And
the leading company in the field is Antigenics.
Besides its cancer vaccines (which are in final, stage
III FDA trials) this company also has a slew of other
top-notch, next-generation genomic-based medical
technologies. This stock could soar by ten times next
year if just one product in its pipeline hits big.
Best of all, its balance sheet is impeccable. Despite
being a research and development company without a
salable product since 1994, this company has ended every
single year with more cash than the year before through
research agreements and a very savvy Wall Street veteran
and CEO, Garo Armen. (Garo has personally been buying up
huge blocks of the stock, another bullish sign).
The company has trended higher this year, despite the
bear market, moving from $11 to over $17 today because
its success isn't tied to our economy, but instead to
the technological prowess of its scientists.
It's people like Garo Armen and companies like
Antigenics that will make our tomorrows richer. And
despite the ups and downs of the stock market, backing
companies like Antigenics can make you personally
wealthy. That's the point of investing. And the truth
Porter Stansberry is the editor of the Porter Stansberry
Investment Advisory. For more information about other
opportunities in the medical, technological and
distributed power generation fields, please visit:
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The Daily Reckoning:|
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoninghis take on the financial markets and whats going
on in the worldand 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 upnot 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 90sopening offices in Florida, London, Paris, Ireland, and
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.