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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
FRIDAY, 8 SEPTEMBER 2000 

 

Today:  Endless Summer

In Today's Daily Reckoning:

*** Yet another increase in oil yesterday. Up to $35.39. 
High oil prices are beginning to cause some slips and 
spills on Wall Street and elsewhere.


*** Dupont announced yesterday that its earnings would be 
hurt. Higher oil would cost the company about $1 billion, 
it said. Dupont shares lost 11% and dragged the Dow down 
50 points.


*** William Fleckenstein, at SiliconInvestor.com, recalls 
that this is the not the first time Dupont has slipped up 
on oil: "Dupont bought Conoco at the top of the oil cycle 
in 1980 when oil was about the price it is today-on its 
way to $8. The company sold Conoco a couple of years ago 
when oil's price was on its lows. So, here's a company 
that has managed to shoot itself in the foot at two 
different inflection points and now is being squeezed by 
the very costs it sought to avoid when it bought Conoco 
in the first place."


*** Other forms of energy are rising too. "The Internet 
Begins With Coal," says a research study on electricity 
by physicist Mark Mills of the Greening Earth Society. 


*** Dan Ferris reports: "Mills' thesis is simple, having 
been previously stated right in the title of a report 
called 'Coal: Cornerstone of America's Competitive 
Advantage in World Markets.' Mills shows once again in 
'The Internet Begins With Coal' that U.S. GDP and 
electricity demand have tracked one another perfectly for 
over 20 years now. No coal, no electricity. No 
electricity, no economic growth. We are very much a coal-
based economy." 


*** "Mills saw years ago," Dan continues, "what the rest 
of us are only now beginning to understand: that our 
ongoing economic growth is tied directly to electricity 
usage, and that nearly 60% of our electricity comes from 
coal. Since GDP has been skyrocketing since 1995, so has 
electricity demand. Where electricity goes, coal will 
follow. The whole thing could lead you to riches, if you 
stick with it." Dan's stock recommendation - Consol - is 
up 17% since he picked it in June. 
(see: The Internet Begins With Coal)


*** European companies, meanwhile, are getting caught 
between rising oil and a falling euro. Oil rises in 
dollar terms - while the companies earn revenues in 
euros. 


*** The euro bounced a tiny bit yesterday. It is still at 
record lows against the dollar. But it got some relief 
against the yen after Moody's downgraded Japanese debt. 


*** Japan runs the largest public deficits in the 
industrialized world - in an attempt to raise the animal 
spirits of the Japanese economy. Currently, public debt 
is at 130% of GDP.


*** In the U.S., meanwhile, public debt as a percent of 
GDP is falling. But private debt is rising. Last year, 
reports Dr. Kurt Richebacher, "the American credit 
machine produced $2.2 trillion in new credit." Savings 
rates fell to their lowest point ever - 0.3% in February.
(see: The Most Important Ill Effects of Savings Collapse)


*** Yesterday was a bad day for the Old Economy, but a 
good day for the new one. Intel gained $1.40. Cisco was 
up a couple bucks. Sun Micro rose more than $6. These Big 
Techs are the popular sensation of the year 2000. They - 
like Pokemon and Harry Potter - are the result of what 
Robert Prechter calls a "mental contagion." Prechter 
believes that fads and major market moves can be 
explained by "unconscious herding behavior" in which such 
mental contagions propagate, brain to brain, like 
infectious viruses. 


*** Once something 'catches on' in the stock market, 
investors rush to it. This has the effect of increasing 
the price, which confirms the delusions of the trend-
setters and attracts still more investors. 


*** And more "...bad news for the West," writes Gary 
North. "In the last 30 days, Col. Hugo Chavez - president 
and of Venezuela and disciple of Castro - made a personal 
tour of the Middle East, meeting with the heads of state 
in Saudi Arabia, Kuwait, Iran, and Iraq. Saddam Hussein 
personally drove him around Baghdad in his limo. After 
returning to Iran, he flew to Indonesia. What he got was 
assurance from the leaders that they will personally show 
up at the OPEC meeting this month [in Venezuela]. If they 
do, it will be a major show of force." And could present 
a major problem for US oil supplies. (see: OPEC's 
Revenge: Oil at US$40 a Barrel?)


*** The summer vacation is over. But so far, there is 
little sign of Mr. Bear. Confidence is high - perhaps the 
highest levels ever. More stocks are advancing than 
falling back - 1506 to the upside yesterday, as opposed 
to 1302 moving downwards. There were 138 stocks hitting 
new highs; only 38 hit new lows.


*** More ordinary Americans are getting into stocks - via 
mutual funds. The number of households with mutual funds 
increased 4.5% so far this year. "US investors' love 
affair with mutual funds is unlikely to end any time 
soon," opines Reuters. But how do they know?


*** Only Internet stocks seemed to buck the trend on the 
Nasdaq yesterday. Internet retailers are out-of-style. 
They are yesterday's fad, not today's. Yahoo lost ground 
- so did Amazon and many others.


*** Reading the newspapers is depressing. There are 
occasional moments of unintentional hilarity...such as 
the report from Mattoon, IL, that a retired electrician 
named Clyde had conned more than 10,000 people all over 
the globe out of about $12 million by offering them a 50-
to-1 return from a mutual fund investment. Investors were 
instructed to send cash - wrapped in tin foil!


*** But overall, the news is so boring that I have to 
remember to keep breathing as I read it. Especially, the 
campaign coverage - which is so banal, moronic and hollow 
that it is challenge to read it without nodding off.


*** Washington Post editor, David Ignatius, asks us "Whom 
Would You Trust Most" in a financial crisis. The English 
language has a lot of adjectives, Ignatius can find only 
one that seems to describe the Clinton team's slick 
handling of the LTCM blow-up and Asian currency crisis: 
'prudent.' So apparently apt is this word that he uses it 
more than once in a short piece, pushing aside the other 
modifiers that come to my mind - such as asinine, 
numbskull, dangerous, foolish, self-serving, cynical, 
short-sighted and lame-brained. 


*** Was it really a "prudent rescue" as Ignatius says? Or 
just more air in a dangerously-inflated bubble? We will 
see. But, alas, perhaps not before the November 
elections.


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ENDLESS SUMMER


What can you do? Over the summer I have subjected you to 
a series of letters reflecting on our inability to 
predict the future.


We read a quote from Nobel-prize winning economist, 
Friedrich Hayek, explaining how progress was not steady, 
not linear...and not even the result of a specific 
design. Instead, it proceeds by trial and error and 
consists chiefly in discovering what doesn't work.


We heard from philosophers - such as Kierkegaard, who 
believed that progress was the result of unforeseeable 
jerks that pointed people in an unexpected direction.


We saw how WWI was triggered by an accident (Archduke 
Ferdinand's driver took a wrong turn)...how an error by a 
German general (von Kluck) cost the Germans a quick, 
decisive victory...and how poor judgment (at least that 
is how it looks 86 years later) by Britain and America 
jerked the world into a long, dark night...a dead-end of 
war, Marxism, Nazism, holocaust and assorted miseries... 
that lasted for 7 decades!


We've seen how technology accumulates - little by little, 
discarding failures, pushing aside even the 
breakthroughs...to make room for new breakthroughs. 


And we've noted how the human limbic system reacts 
emotionally, and episodically, to whatever external 
stimulus it confronts. Humans get charged up for war - 
full of 'war fever', which excites them to acts of 
bellicosity and self-sacrifice. And then, they are 
demoralized and depressed - so fed up that they turn 
away, not just from the war itself, but from the whole 
culture that created the war - its art, literature, 
architecture and codes of conduct. That is the history of 
the 20th century.


We've also looked at the way fads, fashions, and popular 
sensations develop. Harry Potter, Pokemon, running shoes, 
bare-headedness, and Big Tech stocks - all share many of 
the same symptoms...like infectious viruses, they grow 
quietly and pass, almost undetected, from person to 
person - sometimes for many years. Then, suddenly, they 
flare up...and everyone has to have one. 


It is a world of sin and sorrow...of jerks, surprises, 
illusions...with a future that is always unknowable and a 
present that is almost impossible to understand. Even our 
own powers of logic and reason often lead us astray - 
rationalizing, persuasively, what we want to believe 
rather than what we should believe. 


What can you do in such a world? 


Since I am in a philosophic mood, I offer a philosophic 
tip: push ahead. In business, in romance, in passions and 
pastimes - simply go forward, do your best. Recognize 
that you will probably not end up where you expected to 
go...but who knows? Maybe you will end up somewhere 
better.


But while you are pushing, try to remember the first rule 
of all human interaction: reciprocity. Push others as you 
would like to be pushed.


I mention this merely to introduce my investment theme. 
There are rules to investing, too. Basic, simple - 
though, often hard to follow - rules. 


Recognizing the boom and bust character of the human 
personality, you can expect investment prices to follow a 
similar pattern. Occasionally, you will also see certain 
investments become popular sensations. 


You can make money buying investments before they become 
popular sensations, but it is very difficult to make 
money after they have run up. And it is almost impossible 
to tell what will become the next sensation. 


Also, try to invest in the things you understand. 
Otherwise, you will find it hard to know when things are 
solid investments - and when they are merely the products 
of hype and wishful thinking.


And since you can't predict the future, all you can do is 
to buy investments that are priced at levels where they 
are not likely to go much lower...and which you wouldn't 
mind owning even if they didn't go much higher.


This is a very modest goal. But it comes with the hidden 
wish that a very cheap stock will not be very cheap 
forever. Every dog has his day, as they say. You just 
want to be sure that you do not buy it on that day...but 
before.


I'll give you an example from a recent issue of Grants 
(http://www.grantspub.com). "Finmeccanica," says Jim 
Grant, "is Italy's high-tech crown jewel." It has 
interests in energy, transportation, and many of the old-
economy sectors. Among other things, it makes weapons - 
competitively. I cannot un-fog the future any better than 
Harry Potter's Professor Trelawny but I do not think 
weapons are going completely out of style. 


Compared to other weapons' producers, Finmeccanica is 
preposterously cheap. Lockheed Martin and Northrup 
Grumman, for example, sell for a bit less than one times 
sales. The Italian arms maker, by contrast, sells for 
only 0.05% of sales.


But what makes Finmeccanica especially interesting is its 
22.4% interest in another company - a maker of electronic 
chips, in fact, Europe's largest chipmaker. That 22.4% 
interest has a current market value of approximately $13 
billion. But all of Finmeccanica - including aerospace, 
energy, weapons, transportation and information tech 
operations - has a market value of, well, a bit less than 
$13 billion. These other operations are not marginal. 
They are spectacular - bringing in more than $5 billion 
of revenue and $312 million in operating income last year 
even without the chipmaker. 


So, in other words, this is a chance to buy a $5 billion 
company...and a profitable one...for, uhhh, less than 
zero.


There is no guarantee, of course, that its price won't 
descend even further below zero in the months ahead. But 
Finmeccanica is no popular sensation. It is, in fact, an 
anti-popular sensation. Investors are embarrassed to 
admit they own it. Without being able to predict the 
future, we can nevertheless anticipate better times for 
this Italian company sometime before the earth cools.


Lynn Carpenter of Fleet Street Letter, 
(http://www.fleetstreetletter.com) offers some other 
examples:


"Centex (CTX:nyse) A company with a five-year average 
earnings growth of 27% ought to be worth a P/E of 30. If 
it were a dot.com, it would go for a P/E of 200 or more. 
So why is Centex, the largest homebuilder in the United 
States, trading for a P/E of 7? Because the market just 
gets stupid every now and then. It's going for 90 cents 
on the dollar when you look at its assets (P/B 0.9). Each 
share costs just one-third the annual sales per share. 
So, is it a dying company? Not with income growth of 23% 
this year (and a 10-year rate of 28% per year) and sales 
growth of 21.6%." 


And another Italian company:


"Industrie Natuzzi S.P.A. (NTZ:nyse) an Italian company 
that sells on the New York Stock Exchange as an ADR. This 
will give you some nice global diversification without 
wrestling with foreign brokers of currency exchanges. 
Natuzzi has come a long way from one carpenter looking 
for extra income. It is now an ultramodern, successful 
and self-reliant business. It pours its own foam, builds 
its own frames and tans over 90% of its own leather. The 
company employs 20,000 workers and makes 400 models of 
chairs, recliners, sofas, sofabeds and sectionals. Of 
these, over 200 are patented designs or patent pending. 


"And by the way, you can get this great company now at a 
P/E of 7 and collect a nice 7.7% yield as well."


Unless we are enjoying an endless summer...where good 
times remain forever...a modest investment approach might 
be to sell the Big Techs...and buy these underdogs.


Your correspondent... still trying to figure things 
out...


Bill Bonner
 
 
 
 
About The Daily Reckoning:
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Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
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Bonner writes his email letter from Paris, France, each morning --
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