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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Retired In Order

*** Another rate cut? Why not!

*** Sell Cisco...better late than never...

*** The Fear Economy...Indian stocks...Manhattanites 
flee...the $3 million baseball...and more! 

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The Fed meets today. Most likely, another rate cut 
will be forthcoming - the 9th so far this year. Will this 
one do what the other 8 have thus far been unable to do? 
Or, will the Fed have to take rates all the way down to 
zero, as they did in Japan, and still not get a positive 

In the wake of the September attacks, the Fed, 
Congress, consumers, investors - everyone has been 
mobilized to fight against terrorism, bear markets, and 
recession. Rates have been cut, liquidity injected into 
the system, and new spending programs approved by 
Congress. Hundreds of billions of dollars in new credit 
have been created.

In the popular mind, all this new loot can't help 
but trigger a victory for the American economy. And just 
to make sure it happens, consumers are encouraged to 
plunge, once more into the breach, with their credit 
cards in hand...and investors, like Wellington's 
infantry at Waterloo, are urged to hold their ground.

"If you believe in the strength of American 
resolve, hard work, and innovation," writes Peter Lynch 
in an ad in the Wall Street Journal, "then take a long-
term view and believe in our economic system. I 
certainly do."

Thus are the gullible lured into debt and 
investing at what might turn out to be one of the worst 
moments to do so in history. The entire world economy 
seems to be slowing down and growing cautious. Trillions 
of dollars worth of paper wealth are being destroyed. A 
single company - Cisco - has been reduced in value by 
$500 billion. 

Eric, what's the news from Wall Street?


Mr. Fry in Lower Manhattan:

- The stock market was so sedate yesterday it scarcely 
resembled the same manic-depressive creature that has 
been tormenting investors for the past two weeks. A 
token early morning sell-off pushed the Dow down more 
than 100 points. But stocks clawed higher throughout the 
rest of the day to close only slightly in the red.

- The Dow finished 11 points lower at 8,834. The Nasdaq 
had a little rougher go of it, weighed down as it is by 
the ever-falling semiconductor stocks. The index fell 
1.2% to 1,480.

- Worldwide semiconductor sales dropped 42% in August 
from a year earlier, according to the Semiconductor 
Industry Association. On a month-to-month basis, the 
trade group reported that August sales fell 3.4% from 
the July level.

- The semiconductor sector's woes typify a widespread 
phenomenon in the U.S. stock market: Earnings are 
falling faster than share prices. The result is that 
even though stock prices have dropped substantially, 
valuations remain very high. A year ago the S&P 500 
Index was selling for just under 29 times its trailing 
12-month earnings. Since then, the index has tumbled 
more than the S&P 500's PE ratio is a point 

- Yet, the famously bullish Abbey Joseph Cohen thinks we 
should put 75% of our savings in stocks like those that 
make up the S&P 500. A question for Ms. Cohen: Why?

- Several thousand miles away in India, stock prices are 
falling even faster than the S&P 500's. But there's a 
difference. Corporate earnings are rising in India. 
Given that the Indian stock market has fallen more than 
50% from its all-time high, sits on 8-year lows, and 
sells for less than 12 times earnings, Indian stocks 
might be a good thing to own.

- What's more, since exports account for just 13% of 
Indian GDP, the country enjoys some insulation from a 
global economy that grows gloomier by the day.

- German, Italian, and French manufacturing all touched 
new multi-year lows in September. Greg Weldon of 
Weldon's Money Monitor observes that the European 
Purchasing Managers Index contracted for the sixth 
straight month. The news out of Japan was even worse, as 
the so-called Tankan report of Japanese economic 
activity fell to its lowest level in more than 2 years. 
The large manufacturing companies surveyed for the 
report predicted that profits will fall 18.7% in the 
year ending March 2002.

- Meanwhile, Valero, a new edition to the DR Blue 
portfolio, "is one of the first companies to benefit 
from the new war on terrorism," says Dan Denning. 
"Earlier this week the company announced it had been 
awarded $142 million in jet fuel contracts by the U.S. 
military. The contract more than triples what Valero had 
previously been providing the government." 

- "Scores of lower Manhattan residents plan to flee to 
leafy suburbs to distance themselves from the threat of 
more terror," the New York Post reports. "Brokers in 
Westchester, Long Island, and New Jersey say [the 
exodus] is causing business to boom." One New Jersey 
real estate broker has inked a staggering $40 million 
worth of new contracts for home purchases just since 
September 11th.

- The Oxford Club's C.A. Green, echoing a point I made 
yesterday, says some REIT's stand to weather the 
slowdown fairly well. "It's the first time in 40 years," 
Mortimer Zuckerman, head of Boston Properties, told the 
WSJ, "that I have been in business where there is no 
excess supply going into an economic decline." Boston 
Properties has holdings, among other locations, in mid-
town Manhattan. (Green suggests three REIT's worth 
looking at in the October 1st Oxford Alert:

- Perhaps it is no coincidence then that shares of 
American Home Mortgage, a local New York mortgage 
lender, soared more than 12% yesterday to a new 52-week 
high of $19.62. Mortgage lenders are among the stock 
market's brightest lights these days. Nationwide, a 
resilient housing market together with a Federal Reserve 
that can't seem to cut interest rates fast enough, adds 
up to good times for mortgage lenders. The stocks are 
trading so well that they seemed to be almost lighter 
than air - you know, like a bubble. 

- The Fed is expected to cut rates another 50bps to 2.5% 
today at roughly 2:15pm. To what end? "Lower rates allow 
businesses to borrow more money," suggests Gary North, 
"but businesses don't want to borrow more money. Despite 
all the cheerleading on TV and in the financial press, 
businesses decided a year ago that the consumer was 
tapped out."

- San Francisco Giants outfielder, Barry Bonds begins 
the final week of the baseball season with 69 home runs 
- just one shy of Mark McGwire's one-season record of 
70. Most baseball fans are pulling for Bonds to break 
the record. Todd McFarlane is not. 

- In 1998, Mr. McFarlane spent $3 million to buy 
McGwire's 70th home run ball. No doubt, McFarlane 
assumed the record would stand for a while. After all, 
Babe Ruth's record 60 home runs held up for 34 years and 
Roger Maris's 61 home runs went unchallenged for 37 

- It would probably take at least 37 years to make $3 
million seem like anything other than a ridiculous sum 
to pay for an historic baseball. But then, wasn't $3 mil 
merely "chump change" back in 1998 - when the mere idea 
of a "B2C e-commerce platform" was worth about $50 
million? Today, however, it is doubtful that Bond's 71st 
home run ball (if he hits that many) would even fetch 
$500,000. McFarlane's ball would be worth something 

- We Americans still love baseball, just as we still 
love stocks. But that doesn't mean that we will still 
pay any amount of money for either one. Times have 


Mr. Bonner, back in the City of Lights:

*** Among the Forbes 400 richest families in America 
alone, $250 billion of paper wealth has been lost in the 
last 12 months. The nation's stock market wealth is down 
$5 trillion from its peak last year. And this doesn't 
count the billions of dollars worth of employee stock 
options that vanished when stock prices went down.

*** "The late boom in stock prices created wealth for 
the stock owners," writes Dr. Richebacher, "but for them 
only, not for the economy as a whole. Generations of 
economists would never have thought of rising stock and 
house prices as 'wealth creation.' They would have 
derided it as pseudo or paper prosperity."

See: False And True Prosperity 

*** Mr. bin Laden cannot be that hard to find. A friend 
of mine, it turns out, had tea with him a few years ago. 
His letter: 

"...Back in '95. In those days, the Pakistani border 
guards went home at night, so you could cross into the 
Nuristan region of Afghanistan by horse - when it comes 
to landmines, better the horse gets it than you. Anyway, 
I got sick over there with a nasty case of typhoid and 
ended up camping on the local mullah's (a heavy hash 
smoker, by the way) front porch (closest part of the 
house to the latrine). Ol' Osama came by with a band of 
what were then known as "Black Turbans." Not much of a 
conversationalist. He kept stroking his beard and 
muttering something about killing Canadians. Not the 
sort of fella I'd go fishin' with."

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


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Wall Street's "gurus" are pushing defensive stocks. 
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* * * * * * * * * * * * * * * * * * * * * * * * * *

by Bill Bonner 

The 3rd millennium began so well...

You will recall, that on the first of January 2001, the 
world was in pretty good shape, and America stood on top 
of it, unchallenged and invincible.

Nasdaq stocks had already begun their decline, but 
otherwise, all of the illusions of the late 20th century 
were still in place - New Era, the New Paradigm, the 
Peace Dividend, the Productivity Miracle, Long term, 
buy-and-hold investing, the Social Security "lock box", 
the Federal Surplus, Full Employment, The Golden Age, 
The U.S. dollar...and so forth.

And now look at it. All of a sudden, the scales have 
dropped from our eyes. 

"So many of the various things that had made for the New 
Paradigm aren't what they were..." notes Jeffrey 
Applegate of Lehman Bros.

Even Henry Blodget has come to wonder. He loved at $100. But at $6, he has his doubts. 

"At $6, or 1.4 times estimated revenue for fiscal year 
2001," says he, "the stock is still not inexpensive 
enough to provide solid downside protection. Although we 
believe the stock is undervalued on an intermediate and 
long-term basis, it has not yet reached a valuation 
'floor' - especially in this market."

Markets make opinions, as the expression has it. After 
$5 trillion of market losses, Blodget, Lazard Freres, 
and perhaps the rest of the world are now looking for 
"downside protection."

"You know, there are so many illusions in life," said a 
friend at lunch the other day. "It's always painful when 
the illusions are destroyed. But it is is 
a good thing.

"I thought about that the other day when I was standing 
on the platform of the subway," he went on. "Anyone who 
wanted to do so could push dozens of people in front of 
an oncoming train. But we all felt safe. We all had the 
illusion of security."

And yet, occasionally, something comes along and reminds 
us how unsafe we are. If it happens during a bull market 
in confidence, it is quickly dismissed and forgotten... 
like the Gulf War or the Crash of '87. But if it happens 
when confidence has reached an epic flood...when it has 
scarcely anywhere to go but down...then the great tide 
of confidence and bullish sentiment ebbs...and soon 
becomes a dangerous rip of fear and bearishness. 

"We have lived in a fool's world," writes Gary North. 

A year ago, Americans thought they had nothing to fear. 
No more wars. No more bear markets. No more recessions. 
Now, they have them all...3 out of 3. The illusions of 
the late 20th century have all retired in order, as they 
say in baseball... 

"The psyche of private sector decision-making has been 
dealt a lasting blow by the events of 11 September," 
adds Morgan Stanley strategist Stephen Roach. "Like 
grief, time will heal. But I suspect the healing will 
leave the mindset in a very different place. Matters of 
personal, corporate, and national security can no longer 
be taken for granted. That will cast a lasting pall on 
the values that shape risk-taking strategies - for 
consumers and businesses alike. Increasingly risk-averse 
investors may be more satisfied to realize moderate, but 
safe, returns in a less secure world. In economic terms, 
this could well reduce the preference for leverage and 
tilt the balance away from the excesses of spending and 
back toward a long needed rebuilding of saving."

The preference for spending over saving has a life cycle 
of its own. Young people do not typically care to save - 
even though a dollar saved at 30 years of age will be 
worth many times more in retirement than one saved at 
50. Older people, more fearful of the future, will save 
whatever comes their way - including old newspapers and 
rubber bands. 

Even without the terrorist attacks, or the post-bubble 
economy, the 3rd millennium was destined to be less free-
spending and more fretful than the end of the 2nd. The 
simple reason: people are getting older.

As people age, they work less and spend less. Economies 
do not charge ahead when people cut back their working 
hours and spending habits. They retreat.

And stocks tend to go down too. War or no war, investors 
typically switch from growth stocks to bonds and income 
stocks as they grow older. Just as the record boom in 
U.S. equities in the 1990s can be attributed to the Baby 
Boomers' attempt to build capital gains, so might the 
collapse of stocks in the next 10 years be blamed on the 
Boomers' new concern for income.

"The demographics of an aging population have long been 
pointing [towards a shift towards caution and 
frugality]...", Stephen Roach explains, "and The Shock 
could represent a real wake-up call for saving-short 
Americans. A similar jolt might effect the risk-taking 
mindset of entrepreneurs and venture capitalists."

Who knows where it will lead? Stocks could go down for 
10 years. The U.S. economy could imitate the Japanese 
one - with recession, bear market and stagnation until 
2011. The "war" on terrorism, too, could drag on for a 
decade. And what if the war is lost? 

What kind of world has this new millennium brought? We 
don't pretend to know. But we can feel the water running 
between our toes...

The bubbly tide that once bore American investors to an 
epic level of super confidence...may be going out. 

Bill Bonner, with his pant legs rolled...

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: October 05, 2001

Published By Tulips and Bears LLC