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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Great Debate

In Today's Daily Reckoning:
*** Tough times in the New Economy...Caribbean cruise 
canceled...MicroStrategy fires employees...
*** Spending rising twice as fast as earnings
*** $36 Billion of IPOs in the pipeline...who's going to 
buy them? Henry and Edward, back to school... and more

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*** Remember Michael Saylor, CEO of MicroStrategy? He was 
back in the news yesterday, announcing a layoff of 234 
employees - 10% of his workforce. Not only that, the 
company cancelled its annual Caribbean cruise for 
employees and their families. Things must be tough in the 
New Economy.

*** But even in adversity, Saylor took care of the 
workers (at capitalists' expense, of course). Each laid-
off employee will get accelerated options and $10,000 
worth of Saylor's own stock.

*** Saylor's business has been unprofitable from the get-
go. The stock traded as high as $333, but in March, he 
was forced to restate earnings. Then, down it came - 
reaching its latest resting point at $27 yesterday.

*** There are a lot of no-account New Economy companies, 
but Saylor attracted attention by the evangelical way in 
which he shilled for the New Era. "Information should be 
as cheap and free-flowing as water," he remarked. He 
maintained at an on-line university would revolutionize 
education, and that free information would move economic 
growth ahead at warp speed.

*** But the rocket fuel of the New Era is not 
information. It's cash and credit - both of which are 
still rising. MZM (cash) is going up at about a 6.3% 
annual rate. And personal spending for July rose at about 
a 7% annual rate. Both of these numbers are about twice 
as big as the number for personal income growth. 

*** Meanwhile, in Japan, the personal spending numbers 
came out and showed that the average Japanese person is, 
true to recent stereotype, not spending more, but 
spending less. Personal spending on the island of 
perpetual darkness fell by 3.6% in July.

*** What the numbers tell us is not, I believe, something 
fundamental about the difference between the Japanese 
character and the American one. Spending is not, at least 
I don't think, directly correlated with, say, height...or 
inversely correlated to the desire to eat uncooked 

*** Instead, the numbers reflect an episodic shift in 
confidence. Reuters reports that U.S. investors are 
enjoying a "growing confidence" - which is in itself 
remarkable, inasmuch as confidence and self-esteem were 
already at the highest levels ever recorded. Americans 
seem to have cornered the market on self-esteem...and 
maybe there is some subterranean Smoot-Hawley Act 
prohibiting the exportation of it - particularly to 
Japan, where confidence hasn't been seen in more than a 

*** Yahoo fell almost 10% yesterday after an alert 
analyst noticed that Internet advertising revenue, which 
is Yahoo's income source, may be softening. 

*** But it was a good day for most stocks. The Dow rose 
60 points. The Nasdaq stumbled upwards by 27 points - 
putting the index in barely-positive territory for the 

*** The dollar fell against the yen...and rose against 
the euro. Nothing important.

*** Oil rose 77 cents. 

*** The German economy rose at a rate of 3.1%. This is a 
slower pace than the U.S. figure - but the number is more 
reliable. German number crunchers are not (at least yet) 
teasing up their calculations with 'hedonic' measures.

*** And here in France, things are looking up too. 
Laurent Fabius, the finance minister, said he would soon 
announce the biggest tax cuts since WWII. He said he 
recognized that high taxes in France were a structural 
impediment to growth and aimed to do something about it.

*** Gold fell 10 cents...but platinum rose $5.90. "The 
world is running out of gold reserves, and faster than 
you think." This is a quote from Chris Thompson, CEO of 
the world's second largest gold producer, recorded by 
Harry Schultz in a recent newsletter (
"Central banks will soon realize it's not smart to either 
sell gold or lend gold they may have trouble getting back 
in a gold-scarce market." 

*** There are still a lot of IPOs in the pipeline. A NY 
Times piece says that about 280 companies are waiting to 
go public this year - hoping to raise about $36 billion. 
That's about as much as for the whole of 1998.

*** In addition to the IPOs there is also a huge supply 
of insider stock that is coming out of 'lock-up' 
restrictions. Typically, insiders can't sell their shares 
until at least 6 mo. after an IPO. Millions of shares 
from IPOs of last year and early this year are now coming 
on the market. The sale of these shares, as well as new 
supply from IPOs, seems directly related to the Nasdaq. 
The NY Times piece: "In May, according to, 
insiders at 63 companies were free to sell 2.7 billion 
shares. Nasdaq fell 12 percent that month. In June, the 
shares available for sale dwindled to 1.3 billion shares, 
and the Nasdaq rose 17 percent."

*** "Now, however," the Times piece continues, "the lull 
is over. By the end of the month, some 1.7 billion
shares issued by 53 companies will have been unlocked. 
And in September, 1.8 billion shares in 45 companies will 
be free to trade for the first time."

*** Henry and Edward head back to school in Paris today. 
Poor things. The summer went by so quickly. And we were 
all so busy. I don't remember spending any time with 
them. Could I rerun the tape, please, in slow motion?
Ah...but that's the problem. The Internet may have 
destroyed many of the limitations of space. But time has 
become even more precious.

*** I'm still down here in the country - with Jules, 
Maria and Sophia. The older kids don't start school until 
next week, so we're enjoying one last week of vacation. 
Jules is fishing. Maria is swimming. And Sophia is on the 
Internet trying to figure out where to go to college next 
year. (I've been discouraging her...but more about that 
another time.)

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The Great Debate I refer to in today's letter has nothing 
to do with the two candidates for America's highest 
office. Instead, I am talking about the debate between 
digital and analog. Analog or Digital? Which are we? 
Could we be both? And the it completely 
digital? Or purely analog?

"Like many people," writes Jim Davidson, moved by the 
spirit of democracy, "I have a cell phone which mainly 
operated on digital signals. But it also serves as an 
analog device when a digital signal is not available. In 
that sense, I feel that our thinking should be both 
"digital" and "analog." We should pick up the strongest 
and most useful signal that comes available."

On one hand, some people say that the Internet changes 
everything. On the other, there are people who say it 
changes nothing. I'm going to go out on a limb here...but 
I firmly believe both are right.

Let, me try to tidy up around the edges of the discussion 
to see if I can reconcile this paradox.

Many people, fascinated and impressed by the Internet, 
routers, optic fiber, chips and the other paraphernalia 
of the New Era, are quite sure that these advances must 
lead to good new businesses...and must also undermine old 

In this, they are certainly right. We already have a 
great number of very good businesses of the New Economy 
persuasion. Intel, Microsoft, Cisco - these are all 
fairly new companies, and very profitable. (For whom they 
are profitable - the workers or investors - is another 

These companies - and many others - benefit from the 
tremendous economies of scale in the new information 

Rick Ackerman sent me this explanation: "The 
technological leap forward made possible by our brand-new 
computer and communications technologies creates a large 
host of winner-take-all markets. If you are producing an 
information good-a computer program, a piece of online 
entertainment, or a source of information-the work only 
needs to be done once and then it can be distributed to a 
potentially unlimited number of consumers for pennies: 
producing at twice the scale gains you nearly a 50% cost 

Specialization produces better goods and services at 
lower costs. The Internet makes it easier to select the 
best deal - giving the best company a huge advantage. 
Plus, in all markets where Metcalfe's Law applies - that 
is, where the more widely used a particular product is, 
the more useful it is to each user (like the telephone) - 
economies of scale give the largest-scale producer an 
added advantage. Who wants to own a computer that is not 
compatible with the most common software?

So, the companies - such as Microsoft, Cisco and Intel - 
that enjoy these huge economies of scale, can be expected 
to become very good businesses. You only have to make it 
once - and you can sell it everywhere at very low extra 
production cost. In that sense, these products are like 
the Daily Reckoning. It costs no more to send it to 
100,000 people than it does to send it to 10 people.

By contrast, there are a lot of companies that operate on 
the Internet but fail to benefit from specialization 
and/or economies of scale. 

The most familiar example is our old favorite river-of-
no-returns, Ackerman continues: "Here the 
logic of reduced frictions takes over: for without a 
large scale economy-driven cost advantage, the effect of 
the new economy is not to increase but to reduce 

Selling books is not a high margin business, anyway. In a 
world where the customer can click on a search engine 
( to find the best price, margins nearly 
disappear. Amazon sees the problem too. Its solution is 
to try to be something else - a place where you come to the parking lot of a suburban mall. Amazon 
hopes to make its money by getting a little piece of a 
great number of transactions. Will it work? Who knows., an example cited by James Cramer in 
today's column, is a similar case. It was described as a 
'category killer' and was backed by a parent with 60 
stores and $132 million in sales. It came out in October 
at $11 and promptly fell to $9.75. But then, it was named 
the #1 Top (a little redundancy helps get the point 
across) E-commerce site. And its daily unique visitor 
traffic increased by 337% according to Media Metrix. 

The stock roared up to $16. 

But was it a good business? Well, no. The company could 
bring in a lot of visitors, but it had no way of taking 
advantage of the Internet's economies of scale. Vitamins 
are not an information product. Like books, and unlike 
software, they're tangibles that cannot be replicated at 
negligible marginal cost. The only way VitaminShoppe 
could bring in and retain customers was by competing on 
price...which meant squeezing the margins.

Soon, no one cared what Media Metrix said. Investors 
realized that the whole B2C - business to consumer - e-
tail industry was a loser. Amazon continues to struggle 
to hold its stock above $ investors hope the 
company will figure out how to realize some economies out 
of its enormous scale. has fallen down 
to just $1.16 - with negative $2.60 of earnings for each 

Microsoft, Cisco and Intel, however, are recognized as 
good businesses. Not only are the recognized as such, 
they are practically canonized. 

But a good business is not necessarily a good investment. 
It depends on what price you have to pay to acquire it. 
No matter what kind of business you buy, you're paying 
for a stream of income. In the end, that's all there is. 
A digitally-oriented man could do the arithmetic. Simply 
make reasonable assumptions and discount the expected 
stream of income from any of the Big Techs to present 
value and see what you get. You will get a number much 
lower than the current selling price. 

The typical man may think digitally when he writes 
software code, or builds a computer switch. But when he 
calls his broker, he reverts to more analog behavior. He 
is gripped by fear, greed, confidence or anxiety - 
depending up the temper of the times and his own mood. A 
stock may shout BARGAIN to him one day and whisper "sell" 
to him the next. Going along with the great mass of other 
investors, he responds to these suggestions with the 
enthusiasm of a Republican with a defense contract. 

Cisco is a good business now. It will probably be a good 
business 5 years from now. But it will only be a good 
investment when most investors no longer think so.

Your correspondent...

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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investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"

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serious warnings and the state of the market with gentle humor"

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Last modified: April 01, 2001

Published By Tulips and Bears LLC