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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Tit For Tat

In Today's Daily Reckoning:

*** The Dow rose by 109 points yesterday. Bush seems 
headed for the White House. Productivity has returned to 
levels not seen since Austin Powers first met Dr. Evil - 
the swinging 60s. (That is, if you believe the Bureau of 
Labor Statistics.) And unit labor costs are going 
down...again, according to the BLS. So, unless something 
else happens - Greenspan is unlikely to boost rates again 
on the 22nd of this month.

*** What's not to like? 1588 stocks advanced. Only 1256 
fell back. 123 hit new highs - a very big number - while 
only 33 hit new lows.

*** "Those numbers were really positive for the market," 
Reuters quotes a fund manager. He was speaking of the 
productivity numbers in particular. The BLS has non-farm 
productivity rising at the fastest rate in nearly 17 
years - 5.3%. 

*** A larger economy, and better communications, produce 
an expansion of the division of labor. A Bombay 
architect, who used to content himself with whatever work 
came his way - designing a house for a neighbor, a 
sunroom for a man down the street, a gas station for a 
commercial client - can now specialize. Working on the 
Internet, he may choose to design only elaborate lawn 
follies, decorated with the lewd and nightmarish figures 
of Hindu gods. 

*** Applying himself singularly to the task, he is likely 
to be able to do more and better work than he would if he 
were to jump from one project to another. He may even 
design special tools - such as a software program - to 
make his work easier. Thus, productivity increases.

*** The Internet and globalization are bound to increase 
productivity. But it is unlikely that the BLS has been 
able to measure it. Nevertheless, the number the BLS came 
up with was much loved by Wall Street, seeming to confirm 
the delusions of New Era aficionados. Greenspan, so fond 
of words such as "innovation," "productivity' and 
"technology," can keep mumbling. Meanwhile, the BLS 
admitted that it was a touch too optimistic about the 
figures for the first quarter - and revised its figure of 
2.6% growth down to 1.9%.

*** Another figure the street liked was the price of 
labor, per unit of production. All the news is good news 
in the 'summer of love,' and this was no exception. It 
fell. Of course, once the productivity numbers had been 
teased out, the labor cost figure was a cinch. If output 
increased by more than 5% - wages could go up by the same 
amount before triggering an increase in unit labor costs. 
But if productivity did not really increase as much as 
advertised - the unit labor cost would look much less 

*** With all this positive feeling about the U.S. market, 
the dollar rose. The euro fell below 91 cents. It's still 
above its low point of 88 cents, reached in May, but not 

*** This may be an historic time to leave the dollar. The 
euro seems too cheap. The dollar seems overbought. I feel 
like buying something in Europe. I noticed that another 
chateau - a fixer upper - is for sale in the Poitiers 
area. Someone, please, stop me.

*** Gold goes down as the dollar goes up. Yesterday, gold 
responded on cue - falling 40 cents.

*** Amazon is still struggling to stay above $30. 

*** Which brings up an interesting question... if AMZN is 
still losing money by the end of the year can they still 
keep the ".com" in their domain name? After all, the 
designation is meant for commercial, for-profit 
companies. (

*** Cisco reported higher-than-expected earnings. It made 
a profit of 16 cents a share during the latest quarter - 
up 32%. Hmmm... if it can keep that up it will make 64 
cents for the year. Apply the rule that the P/E should be 
equal to the growth rate. That makes Cisco worth 64 cents 
x 32 = $20.48. Hmmm... that's a bit more than the current 
$68 price.

*** The Financial Times reports that there is a new "hot 
topic" in the investment world. It's called behavioral 
finance, "a theory that sweeps away the conventional 
thinking that investors make rational decisions." But you 
already knew that.

*** Dun & Bradstreet reports that "June Insider Trades 
Slowed Substantially from May." Insider additions and 
disposals for June slowed noticeably from the prior
month. On the purchasing side, executives bought a total 
of over $271.6 million-worth of shares in May, compared 
to just $193.1 million in June.

*** "That's a 28% drop... not a minor change," comments 
Lynn Carpenter of our team. "Insider sales tend to be 
right, but early. The lead between insider purchases or 
sales and a stock movement in the same direction is 
around 3-6 months." (see: Working Without a Net)

*** IBM made 19% less money in the second quarter this 
year than they did in last year's second quarter. Sales 
declined by 1%.

"Can you believe it," asks our pirate investor, Porter 
Stansberry, ( "IBM is dying 
on the vine while all of its competitors - Sun, EMC, 
Network Appliances, Dell, etc. are having breakthrough 

*** The trouble at IBM, as Porter points out, is that the 
company has been so keen to boost 'shareholder value' 
that they have destroyed the business. Instead of 
investing in new plant and equipment, Big Blue bought 
back its own shares - at record prices - cut costs, and 
massaged the numbers. These practices make the shares 
look good in the short run. But in the long run they are 
a disaster. 

*** I got up early this morning and caught the train at 
little Lathus station. As usual, I was the only one on 
the platform. Three hours later, I arrived in Paris. 
Well, it ain't Baltimore, but then... what is?

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

Big Profits and The Real Estate Bubble...

In the month of July 2000, the Dow swung between a high 
of 10,843 and a low of 10,481 - a breadth of 362 points. 
The Nasdaq had a range of 580 points. But both indexes 
ended down. In this roller coaster market, capital gains 
are no sure thing. Smart investors are taking refuge in 
value stocks.

In today's edition of the Daily Reckoning Investor 
Library, we'll tell you about one of the best value 
sectors right now: Real Estate Investment Trusts. Click 
here to view your free copy:
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * 


The man who touched off World War I, by sending the 
Archduke Ferdinand to his eternal rest, was described as 
an "anarchist."

Anarchists are back in the news - rising up to protest 
the World Bank, the IMF, the Republicans and Democrats, 
the pasteurization of milk and the division of labor. 
They are gathering now in Los Angeles, the Post warns, to 
make their voices heard at the Democrats quadrennial 
bombast - the national convention.

I admit to being soft on anarchism. The creed has much 
appeal. You don't get jury duty. Nor are you called upon 
to make campaign contributions. Your sentences don't have 
to make sense. And I like black.

But the 'anarchists' in the Post article give followers a 
bad name. As Ray DeVoe says, they are 'rebels without a 
clue.' The poor saps don't understand anarchism, but even 
less the many things they are protesting. Instead of 
eliminating government, they want more of it...more 
controls over this or that...more people with the power 
to tell you what you can do and what you can't. Compared 
to one of these people, even a Democrat seems harmless.

Without government, it is widely believed, the strong 
would exploit the weak...the rich would exploit the 
poor...the capitalists would exploit the workers...and 
people would drive on the wrong side of the road, if 
there were roads. 

The assumption underlying modern politics is the same one 
that supports economics - that man acts in his own self-
interest, rationally, and usually, ruthlessly.

Rational self-interest is said to guide decision-making. 
People figure out how they can get the most for 
themselves. They think about their families too, the 
theory goes, but only because they share so much genetic 

Rational self-interest is at the heart of the 'prisoner's 
dilemma' I mentioned yesterday. There, too, is the 
central banker's and politician's dilemma - which dooms 
paper money, including the dollar. 

A man, looking out for #1, will do things that benefit 
him - even if they are harmful to the rest of society: 
Grand Theft Auto, inflation of the currency, murder, 
rape, betray his partners and his wife - you name it. 

Against these abuses, this supposed anarchy, stands the 
government - ready to protect, defend, and sort out the 
conflicting self-interests of its citizens.

The only problem is that it isn't true. 

John von Neumann invented game theory, went mad, and 
eventually recovered. But his games allowed scientists to 
test people to see how rational self-interest really 

These games were the equivalent of putting people in a 
'prisoners dilemma' situation to see at what point they 
would 'defect' and choose their own interests over those 
of the group.

Scientists played the game themselves - putting small 
sums of money at risk. But instead of choosing the 
tactics predicted by the theory of rational self-
interest, they cooperated to produce the greatest good 
for the group of players.

These results were so at odds with the theory that the 
researchers refused to believe them. They argued that the 
players were too stupid to understand where their own 
interests lay.

Finally, in the 1970s, computers were brought in and 
taught to play the games. As Matt Ridley puts it: 
"Computers started using their cold, hard, rational 
brains to play the prisoner's dilemma, and they began to 
do exactly the same thing as those foolish, na‹ve human 

This led to a contest. Setting up 'prisoner dilemma' 
situations, contestants were asked to devise computer 
programs that would play other programs to see what 
strategy emerged victorious. The underlying question - 
when does it pay to cooperate...and when does it pay to 

The winner was an elegantly simple program called 'Tit 
for Tat,' a computer simplification of the kind of 
personality that might succeed in real life. Tit for Tat 
won by imitating what people really do - not what the 
rational self-interest theorists thought they should do.

Tit for Tat is nice. It offers to cooperate. It never 
defects first. But it is no doormat. When another program 
is unkind to it - it retaliates...and then offers to 
resume its cooperative behavior. What's more, Tit for Tat 
is clear. Other players know what it will do. 

What the competition suggests is that modern economics 
and the rationale for government is based on a myth. 
Humans do not really compete selfishly. They cooperate 

So strong is the desire to collaborate rather than battle 
it out that it proved a problem as WWI developed. Bogged 
down in the trenches, the soldiers on both sides began to 
cooperate with each other - and ignore the orders of 
their superiors. Informal truces were declared and 
respected. Rules of behavior - about when you could shell 
an opponent, fair warnings, and the treatment of 
casualties - developed. The rules were backed up, just as 
they were in the Tit for Tat program - by retaliation.

Usually, retaliation was followed by reconciliation. But 
sometimes, unscheduled battles broke out.

Eventually, generals discovered they had to put a stop to 
the anarchy developing in the trenches by moving troops 
around frequently, so they did not develop friendly ties 
with the enemy. This allowed the slaughter to continue as 

It is this drive to cooperate...and the development of 
trust, and rules of the road...that enables the expanding 
division of labor. Francis Fukuyama noticed that 'high 
trust' societies were also the richest. No wonder - they 
allow the division of labor to expand.

But even in high trust societies, it's risky to leave 
your keys in the car...and your money in paper currency. 
And even the division of labor has its limits - as we 
will discover in tomorrow's letter when, I promise, I 
will finally reveal the inner workings of marriage...and 
explain how Tit for Tat has a romantic side too.

Your ever-puzzled pen pal,

Bill Bonner
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 01, 2001

Published By Tulips and Bears LLC