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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
WEDNESDAY, 11 OCTOBER 2000 

 

Today:  Theory and Experience

*** Tech investors are 'freaking out' all over the 
world...
*** Biggest bankruptcy in history...
*** Oil up...heating oil supplies down...The Big 
Surprise...

*** Poor Ms. Wu. You may remember, the Korean investor 
demanded that her government 'do something' to stop her 
tech stocks from falling. But again yesterday, the 
S.Korean stock index - led by the techs and telecoms - 
fell by 5.3%. 


*** Of course, misery loves company and Ms. Wu at least 
has plenty of that. If you look at the Financial Times' 
list of World Stock Markets you see a column on the left 
hand side that is nothing but red numbers - indicating 
the change from the last session. From New York to Tokyo, 
stocks are falling.


*** Tokyo hit an 18-mo. low this morning - down almost 2% 
to 15,513. The index, for the benefit of readers with a 
sense of history or a sense of humor, was near 40,000 in 
January of 1990.


*** Earlier this week, Japan was rocked by the biggest 
bankruptcy in Japanese history...perhaps in world 
history. Chiyoda Mutual Life went belly up owing an 
estimated $27 billion. 


*** "US investors are pulling their money out of Japan," 
speculates the Reuters article. If so, what are they 
doing with it? 


*** The Nasdaq fell 3.4% yesterday...dropping down near 
the low of May 24th of 3,164. "Techs Savaged" read the 
headline in Reuters - a bit hyperbolically. "People have 
freaked out," said one broker. 


*** The focus of the problem in the tech sector was 
weakness among the chipmakers. Xilinx dropped 21%. Altera 
lost 27%. 


*** Other techs suffered similarly - including Broadcom, 
down 5% and Intel, which lost $1.50. Lucent, the world's 
largest supplier of telecom equipment, announced late in 
the day that it was having trouble - and lost 26% of its 
value. 'Freaking out' investors are nervous and 
unforgiving. 


*** The Nasdaq has lost almost a quarter of its value 
since September 1st. Birinyi Associates' figures were 
given in Monday's Wall Street Journal: "Some 1,364 Nasdaq 
stocks are down 20% or more since Sept. 1, of which 830 
are down 30% or more." 


*** "Intel..." the WSJ report continues, "has lost 45% of 
its market capitalization since Labor Day; Dell Computer 
is down 40%; Oracle is down 25%, and Microsoft is down 
21%." That was on Monday morning. The figures are worse 
today. 


*** According to Kevin Klombies, Oracle's Larry Ellison 
lost $1.2 billion in net worth yesterday.


*** The Dow fell too as the 'Autumn of Anxiety' seems 
have turned more quickly than the leaves. The Dow was 
down 43 points yesterday, with 1132 issues rising and 
1688 falling. 35 stocks hit new highs on the NYSE; 111 
hit new lows.


*** The brokers - such as Morgan Stanley and Lehman Bros. 
- fell sharply yesterday. Bear markets mean lower trading 
volumes and lower profits for the brokers. Most investors 
and practically all the financial media now believe that 
the bear market they never saw coming, and whose 
existence they refused to recognize, is now over. Still, 
the smart money seems to be betting that there are leaner 
days ahead for Wall Street.


*** A word of caution: Mr. Bear doesn't like to do things 
in an obvious way. I would not be surprised to see him 
lighten up in the days ahead, in order to let the 
citizens of Nasdaq Nation recover their mood of 
complacency. Then, the Big Surprise, as I mentioned 
yesterday...may be how aggressively Mr. Bear attacks. 
When that happens, investors will not merely 'freak out' 
- they will get out.


*** National heating oil supplies are 35% below last 
year. Also below last year's measure at this time is the 
temperature. Oil rose 4% yesterday, to over $33 a barrel. 
Oil has recovered half the ground it lost after the 
Clinton Administration opened up the strategic oil 
reserve. It has since been revealed, however, that many 
of the bidders for that oil were speculators, not oil 
men, and that much of the oil will be sold to Europe. 


*** The euro was up a little yesterday. Gold rose a bit 
too. 


*** "The global Yahoo! franchise is stronger today than 
ever before," said Tim Koogle, Yahoo's chairman, in the 
NYTimes. The company announced $82 million, in quarterly 
earnings. The figure represents 13 cents a share... one 
penny more than analysts expectations. The company, 
however, warned that 40% of its advertising comes from 
pure Internet companies, which will be a drag on revenues 
in the next quarter. "If companies like Yahoo! are 
feeling effects of a pullback in on-line spending," said 
an analyst at Deutsche Bank Alex. Brown, "then second- 
and third-tier companies must really be struggling." 


*** One of those struggling businesses is reviewed in an 
article in Advertising Age: "Pets.com as a business is in 
dismal shape. Since the ad campaign kicked into high gear 
in the fourth quarter of last year, the company has spent 
more than $3.50 on marketing and sales expenses for every 
dollar it's generated in revenue. That's $76.6 million in 
marketing and sales spending from October through June 
vs. $21.6 million in revenue. 


"Pets.com's second-quarter loss-$24.1 million on revenue 
of $8.8 million-shrank from the first quarter's eye-
popping loss of $39.1 million on revenue of $7.7 million. 
The company had little choice but to slow spending: Even 
with its lower marketing spending last quarter, it still 
burned through nearly half of the $70 million cash it had 
in the bank as of March 31." 


"Pets.com VP-Marketing John Hommeyer left in May-right 
after finishing his one-year vesting period..."


*** Many analysts believe Pets.com will not survive the 
year as an independent company. Ironically, the only 
value the company may still hold for potential investors 
is the brand image created by an ad agency: a sock 
puppet. Company officials have declined to reveal how 
much of their website sales consist of the sock puppet 
replicas they are selling for $20.


*** And just how long Harry Potter's brand of wizardry 
will continue to beguile the crowds is anybody's guess...
but stock in Enesco - the company responsible for this 
particular popular sensation - might be worth a look. 
GrantsInvestor.com's Eric Fry: "Since June 1, KDE 
insiders [purveyors of the Pokemon phenomenon] have sold 
107,900 shares for $2,261,012. Meanwhile, since April, 
eight separate Enesco insiders, defined as management and 
directors, have purchased 144,400 shares at a cost of 
$665,568, or $4.60 apiece on average. None has sold." 
(see: Spellbound: Magic Profits from Adolescent Fads)


*** I walked downtown yesterday to the Motor Vehicle 
Administration to get my driver's license renewed. The 
office is in a Baltimore subway station. But what a 
strange place it is. Hundreds of millions have been spent 
to build the system - and it is practically deserted. I 
felt like the Omega Man, stalked by dark shapes of 
creatures who were once human. Maybe no one really wants 
to come to downtown Baltimore. 


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In this edition of the INVESTOR LIBRARY, former central 
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THEORY AND EXERIENCE


"The New Economy," writes Jim Davidson, "is increasing 
productivity by more than conventional methods can 
analyze, resulting in structurally lower inflation, which 
should continue to surprise on the downside..."


Nasdaq Nation is a strange place. People seem to have 
almost unbounded confidence in things they will never see 
nor could ever understand. Theory trumps experience.


So great is their faith in these unseen powers that 
people are willing to subordinate the evidence of their 
own senses. They discount their own "erfahrung" - first-
hand, direct knowledge - while putting a premium on 
"wissen" - abstract, collective knowledge...to use 
Nietzsche's terms.


Take, for example, consumer prices.


"No matter how good the next report on consumer prices 
may be," writes Jim Grant in the current issue of Grant's 
Interest Rate Observer, "it will likely pale before the 
previous one, which featured the first monthly decline in 
the CPI in 14 years."


According to the Bureau of Labor Statistics - the font of 
collective knowledge on inflation - prices fell, at least 
for one month. And the general rate of inflation is so 
low, according to the official number-keepers, that it is 
of no real concern to the market. Otherwise, writes 
Grant, "there would be no explaining the remarkably low 
yields attached to government securities in the past 20 
years, below the nominal rate of GDP growth), or the high 
dollar exchange rate, or the low prices of gold and 
silver."


Even the great inflation-fighter and former Fed chief, 
Paul Volcker said of the official CPI on public 
television: "I have the cynical view that maybe it's 
understated."


The first hand evidence is, of course, mixed. Many 
commodities are at very low levels - and seem to be 
falling in price. The charts I referred to yesterday, for 
example, show that gold, cocoa, nickel and even oil - 
until recently - have been in bear markets for decades. 


But the 'until recently' qualifier may be an important 
one. Especially in the case of oil. Oil rose again 
yesterday. And while the capacity of the world's oil 
producers to keep up with worldwide demand may or may not 
be in question - there is little doubt that the people at 
the Bureau of Printing and Engraving...the Federal 
Reserve system...Fanny Mae, Freddie Mac...and Wall Street 
brokerage houses...will be able to keep up with the 
demand for dollars and credit. They have even been known 
to work overtime on occasion...and to sometimes overshoot 
their stated production targets.


MZM - which measures cash - is rising at a rate of about 
11% per year. This is at least twice as fast as the 
nominal rate of GDP growth...and probably at least 4 
times the real rate of GDP growth.


Credit is growing fast too. In fact, according to the 
most recent report from Dr. Richebacher, it's being added 
to the national ledgers at the rate of $4 for every $1 of 
extra GDP.


Anyone who buys a gallon of gas or a house - two things 
most people find indispensable - knows that the CPI 
numbers don't seem to match his actual, first-hand 
experience.


That is why the CPI numbers are such a "surprise on the 
downside." You don't expect them...because prices do not 
seem to be falling, they seem to be going up.


Davidson's point is that the falling cost of data-
transmission makes possible an exponential growth in 
wealth. This he likens to the Industrial Revolution, 
which "made an anachronism out of Malthusian economics." 


Yet in the Industrial Revolution, the evidence of a major 
change was easy to see. Machines produced things more 
quickly and more cheaply than they could be made by hand. 
It was obvious that the prices of goods would fall - in 
real terms. You could see the prices falling and you 
could easily understand why. Wissen and erfahrung 
...theory and experience...converged.


One problem with measuring price increases today is that 
the measuring stick is itself one of the elastic 
variables. This was not true during the Industrial 
Revolution. The money system of the last century was less 
hospitable to manipulation. Gold still backed the world's 
money. And gold, for all its faults, is not nearly as 
accommodating as Alan Greenspan.


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..

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Last modified: April 01, 2001

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