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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Fool Me Twice

*** Americans and financial ignorance, maybe it ain't 
just a theory... your home is your - "margin account"; 
your personal IPO?

*** Dow trades "sideways", again... SOX up 3%, must be 
time to load up on "rocket chips"...

*** McAll-Natural sandwiches... wine getting spendy... 
by mid-August holders of the US $ will be able to "paper 
their toilet stalls" with them... and, of course, 

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*** Americans are woefully ignorant of the "financial 
facts of life." At least that's what a touchy-feely 
article in the Detroit Free Press tells me, suggesting 
that a non-profit organization get involved with 
educating America's youngsters. 

*** And with good reason, I suspect. "Personal debt in 
the U.S. has reached an all-time high," the article 
relates. "The amount of their incomes Americans are 
dedicating to paying down that debt is at levels unseen 
in 15 years." Moreover, "mortgage delinquencies and 
writeoffs by credit-card companies are rising, and 
personal bankruptcy filings could hit a record this 

*** Many are still feverishly gripping the last great 
savior of the American family balance sheet: the home. 
"Today your home isn't your castle, it's your margin 
account," says Scott Burns, of the Dallas Morning News.

*** For now, real estate markets around the country are 
still rising...average homes in... 

Boston: up 13.9% to $345,000

Denver: up 14.9% to $210,000

Fort Myers: up 14.4% to $111,100

Los Angeles: up 11.5% to $225,000

Sacramento: up 22.9% to $163,000

*** Will it be long before layoffs and the illusory 
corporate profit mirage of the late '90s takes its toll 
on the real estate bubble, too?

*** Greenspan before the Senate two weeks ago: "I think 
one of the things that's occurring in this country is 
the evolution of housing into a very sophisticated, 
complex industry, in the fact the market value 
of homes continues to rise, even in a period when stock 
prices are falling, we're observing a rather remarkable 
employment of that so-called 'home equity wealth' in all 
sorts of household decisions." 

*** "The bothersome fact is that home mortgage borrowing 
is becoming a handy finance tool," writes Burns, "the 
equivalent of your own personal IPO." 

*** Eric, what happened yesterday on the Street?


Eric Fry reporting from New York:

- Booorring! The Dow fell one point yesterday. The 
Nasdaq offered only slightly more thrills by posting its 
first positive close in seven days - up 25 points. The 
Nasdaq owed much of its advance to the on-again, off-
again semiconductor index (SOX), which gained almost 2% 
on the day. 

- It seems Goldman Sachs analyst Terry Ragsdale woke up 
Monday morning and decided semiconductor stocks aren't 
so bad after all. He placed Intel on the firm's oh-so-
prestigious "Recommended List" and upgraded a slew of 
chipmakers on the belief (read: hope) that fundamentals 
will improve in the fourth quarter. 

- "We think the stocks are headed up for now," Ragsdale 
opined. "The recovery writing is on the wall, and we 
don't see how investors will be able to resist." Yeah 
Terry, we can see how it'll be pretty tough to resist 
shares selling for 60 times collapsing earnings.

- What inspired Ragsdale's call, I wonder... A prophetic 
vision during the night? An uncontrollable urge to be 
bullish on something...anything? Perhaps a plump new 
underwriting deal from Intel? Who knows. One thing's 
for sure. It wasn't tangible evidence of recovering 
semiconductor demand. There isn't any.

- "Don't be suckered by the Street's latest tech-stock 
hype," warns Fred Hickey's High-Tech Strategist. The 
semiconductor industry is still in the midst of the 
worst downturn in its history and semiconductor stocks 
remain grossly overvalued. 

- "Virtually all its major end customers - Compaq, H-P, 
Sun, EMC, Nokia, Ericsson, Cisco, Nortel, Lucent, etc. - 
are in turmoil," says Hickey. "[And yet] the average P/E 
ratio for the semiconductor stocks in the SOX index, 
based on analysts' estimates of 2002 84. 
The absolute lowest P/E ratio for any of the stocks is 

- "Before you act on Merrill's - or Goldman's - latest 
urging," Hickey cautions, "I ask you to think about this 
Chinese proverb, 'Fool me once, shame on you; fool me 
twice, shame on me.'" (More in a Daily Reckoning Guest 
Essay below...)

- Gold keeps on edging higher as it tries to muster 
another of its infamous mini-rallies. One of these days, 
the mini-rally will blossom into a full-fledged maxi-
rally. Given the dollar's recent weakness, we shouldn't 
rule out the possibility. The AMEX Gold Bugs Index 
climbed nearly 3% yesterday - not too shabby for a 
financial relic.

- But the relics that really "rocked" yesterday were the 
coal stocks. Peabody Energy soared an eye-popping 13% 
after announcing that its earnings could rise briskly on 
the back of surging Appalachian coal prices. Shares in 
Massey Energy, another leading U.S. coal company, also 
jumped about 13% on the day.

- "Coal prices for Appalachian coal on the spot market, 
where 20 percent of coal is sold, doubled this spring 
and have held onto those gains through the summer," 
Reuters reports.

- John Myers of Outstanding Investments suggests coal is 
still at historical lows. Myers: "Coal has been a 
crucial source of energy since the time of the 
Pharaohs... and used extensively for fuel since the 
Industrial Revolution. But since 1975 or so, the greens 
have beaten the coal industry silly. 

- "At the height of the energy crisis, the price of coal 
hit $100 a ton," Myers continues. "In constant 2001 
terms that would put the price of coal close to $300 a 
ton. By 1999 the price of coal had fallen to just $20 a 
ton. That was just one-tenth of its price during its 
heyday. Even after a revival, the price of coal is 
selling for only $40 a ton, a fraction of what it was 
fetching 25 years ago."  (See: Suffocation, War or Coal)

- Pr�t-A-Manger, the all-natural sandwich shop I 
frequent down on Broad Street, did a cool $1 million in 
sales last year. Maybe my eyes were bigger than my 

- Emboldened by its initial success in the hyper-
competitive Manhattan restaurant market, the Britain-
based operation is "ready to blitz New York with 40 
stores selling cheap gourmet eats to lunchtime crowds," 
says Crain's.

- Ironically, the unnatural McDonald's owns one-third of 
the company and an option to acquire all of Pr�t A 
Manger over time. Maybe we should keep our eyes on 
Ronald & Co... First McCafe coffee bars...then gourmet 
sandwiches. The innovations seem to be working. What's 
next, McHedge Funds?


Back to Addison Wiggin, in Paris...

*** Yesterday evening I went down to the Franprix, my 
local grocery store here in Paris, and I noticed that 
there's a disturbing trend afoot. The liter of wine I've 
grown accustomed to sipping with my sup has grown 
noticeably more expensive. Once less than $2... it's now 
closer to $3. (okay, so it's not the finest issuance 
from the vine...)

*** Still, "the market seems to be ignoring poor euro 
data and focusing more on the not-so-good U.S. data," a 
UBS Warburg currency strategist told the IHT. The euro 
traded briefly over 90 cents yesterday. The franc, 
pegged loosely to the euro, has been trending towards 7.

*** Uncle Harry Schultz, curiously following the Russian 
press, points out: "Outspoken economist Tatyana 
Koryagina said in testimony to Sergei Glazyev's State 
Duma hearings on June 29 that 'holders of dollars will 
soon be able to use them for wallpapering their toilet 
stalls.' She also forecasts a world financial system 
blow out in mid-Aug." Maybe so... more below.

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The Daily Reckoning Presents: A Guest Essay. Fred Hickey 
warns: "Don't be suckered by the Street's latest high-
tech hype." The semiconductor industry is still in the 
midst of the worst downturn in its history - and 
semiconductor stocks are still grossly overvalued. 

by Fred Hickey 

The sell-side - brokerage house - analysts are at it 
again, urging investors to hop on board the tech stock 
train before it leaves the station. 

Merrill Lynch recently warned that the semiconductor 
train was pulling out and raised ratings on a dozen 
semiconductor chip stocks and another seven 
semiconductor equipment companies. Shortly thereafter, 
in monkey-see, monkey-do fashion, W.R. Hambrecht used 
the same train-pulling-out phraseology as an excuse to 
upgrade a different set of semiconductor names that 
Merrill had somehow overlooked.

Last year, the trains brought the dupes to the 
slaughterhouse instead of the promised land of plenty. 
Trillions of dollars of wealth were destroyed and 
trillions more will be destroyed later on this year, 
once the train cars are packed full.

[As we mentioned in the Daily Reckoning yesterday], NBC 
cheerleader extraordinaire, Maria Bartiromo, titled her 
August 2000 column in her hubby's Individual Investor 
magazine: "Ready for a Rebound." Column subheadings 
were: "Nasdaq 6000?" and "Soaring Semis."

All Maria did was parrot what the "experts" of the time 
were stating. Dan Niles, the hottest semiconductor 
analyst in August 2000, provided most of the quotes for 
Maria's "Soaring Semis" section. 

This is what Maria wrote: "One sector showing no signs 
of a slowdown is that of semiconductors, which has come 
roaring back from its slump in 1997 and 1998, powered by 
explosive demand for everything from cell phones to Palm 
Pilots to the Internet itself. 'All those things require 
semiconductors and none of them has seen a slowdown, so 
it looks as if the gains will continue for at least a 
year and a half,' says Lehman Brothers analyst Daniel 
Niles." Maria also quoted DLJ analyst Boris Petersik, 
who predicted higher DRAM prices and a one-year 102 
target price for Micron Technology. 

Last year, Petersik was Wall Street's favorite analyst 
covering DRAM and Micron. But how accurate were these 
predictions from the leading analysts? 

Standard 128-megabit DRAM prices were $18 in the July-
August 2000 time frame. They are now less than $1.80. 
DRAM prices experienced their fastest decline in 
history, which is saying a lot, because DRAM prices are 
always falling. Research firm Dataquest predicts that 
the DRAM market in 2001 will suffer its worst revenue 
decline in history - down 55% year-over-year - from 
$31.5 billion in 2000 to $14 billion in 2001.

Micron's stock never hit the $102 target price, though 
it did break above 93 in late August before heading into 
a death plunge that saw it lose 70% of its value (nearly 
$40 billion) in just eight short weeks. 

That's another example of why over the years I've called 
Micron "The gift that keeps on giving" - for short 
sellers and especially put and LEAP option buyers. Note 
that at the peak stock price last year, Micron sold at 
nearly two times the total worldwide estimate of DRAM 

Historically, Micron has traded at two times its own 
sales, not the total industry's. Micron has a little 
more than 20% market share. Today, Micron is valued at 
$26 billion - nearly two times the total worldwide 
estimate of DRAM sales. I guess that's why Merrill Lynch 
made Micron one of its dozen semiconductor stock 
upgrades [recently]. Ha!

As for the overall semiconductor forecast, Maria, Dan 
and Boris couldn't have been more wrong. Research houses 
now admit that the semiconductor sales decline in 2001 
will be the worst since 1985's debacle, and I believe 
that when the final results are in, the collapse will 
exceed 1985's. Cell phone sales in 2001 - approximately 
400 million - are 200 million units short of the 
forecasts from last year. 

In 2000, cell phone vendors put about 100 million extra 
units into inventory due to a sharp sales shortfall from 
forecasts. Palm Pilot sales last quarter were one-fourth 
of what Palm had originally forecast, leading to a 
massive inventory bulge and brutal price war, which 
continues today.

As for the Internet as a driver of the semiconductor 
industry in 2001, what can I say? Online spending in 
June was 20% lower - $3.2 billion vs. $4 billion in June 
2000, according to Forrester Online Research. According 
to Nielsen/NetRatings, the number of U.S. users of the 
Internet has stagnated at 100 million since January. The 
average number of minutes spent online per month is down 
from the beginning of the year. 

According to, through June of this year, 
at least 555 companies shut down, with 60% of 
all failures since January 2000 having come in 
just the first six months of this year. More than nine 
times as many companies have shut down this year 
than in the first half of 2000. The failed companies are 
spewing enormous amounts of computing, storage and 
networking equipment into the used-equipment market.

Because some may argue that even 2002 earnings estimates 
are temporarily depressed due to price wars and the like 
- highly unlikely - I made some comparisons using 
price/sales ratios using analysts' 'optimistic' 
forecasts. Those comparisons show semiconductor stocks 
as more than two times overvalued vs. historical 

As always, I suggest that individual investors not sell 
short. While most of my money is tied up in cash and 
cash equivalents, I continue to play the downside 
through a combination of longer-term put options, LEAPS 
and shorts. With stock prices still egregiously too high 
- total market valuation at 140%-plus of GDP vs. its 55% 
historical long-term average - I remain in the bear 

When we finally get capitulation from investors, we will 
have cash at the ready to buy great tech stocks dirt-

I have short/put positions in Micron, IBM, Intel, 
Applied Materials, KLA-Tencor, Altera, Linear Tech, 
Maxim Integrated Products, Nvidia, Celestica and CDW 
Computer Centers...

While it's been frustrating to watch stocks like this 
rise for no good reason, Mark Twain provides some 
solace: "Let us be thankful for the fools; but for them 
the rest of us could not succeed."

Fred Hickey,
for The Daily Reckoning

Fred Hickey is editor of The High-Tech Strategist. This 
story is adapted from the August issue and a version of 
it appeared on the website.

Readers of the Daily Reckoning are cordially invited to 
try for 30 days. Simply, follow this 
link: and follow the 
menu provided for you there. Thank you.

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 14, 2001

Published By Tulips and Bears LLC