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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The De-Leveraging of America

*** Dow down again...Nasdaq too...will IBM, MSFT and 
Intel come to the rescue?
*** TIME's Man of the Year getting poorer...
*** Another 'must own' stock to sell now...buying 
votes...and more... 

*** "Homicide," answered one Wall Street broker to a 
reporter's familiar question yesterday, "we're getting 
killed." Another referred to the "devastating blow to the 

*** Both were exaggerating the damage in yesterday's 
trading - in which the Dow fell 1.46%, equal to 149 
points...and the Nasdaq lost 76 points. Both averages 
seem to be heading for decisive, psychological breaking 
points - with the Dow soon to fall below 10,000 and the 
Nasdaq perhaps dropping below 3,000.

*** And they are not likely to stop there. The big 
surprise to today's investors will be that stocks can go 
down as much as they go up. In his commentary yesterday, 
Richard Russell reminded us that the Dow tends to go down 
in real bear markets until stocks yield 6%. That would 
put the Dow at about 3,000. In 1932, though, the Dow fell 
to a 10% yield. 

*** Also, the bear market psychology can take a long time 
to take hold and work itself out. The Tokyo stock market, 
for example, fell below 15,000 this morning - nearly 11 
years after than market hit a high of almost 40,000. 

*** And John Myers sent me these number on the 
unemployment picture following the '29 crash: 

1929 3.2%
1930 8.7%
1931 15.9%
1932 23.6%
1933 24.9%
1934 21.7%
1935 20.1%
1936 16.9%
1937 14.3%
1938 19.0%
1939 17.2%
1940 14.6%

Is it possible that we will once again see 24% 
unemployment? I don't know. But unemployment today is at 
its lowest level in 30 years. The unemployment picture - 
like the stock market picture - could darken considerably 
before it brightens again.

*** AOL lost 17 dollars to close at $43.60. Yahoo dropped 
$6 - closing at $49. 

*** And TIME's Man of the Year, Jeff Bezos, lost another 
9% of his wealth. dropped more than $2 to 
close at $21. It's down about 80% from its high of last 
December. But even here, the stock still has a capital 
value of $7.8 billion - a lot of money for a company that 
has earnings per share of negative $3.37.

*** 807 stocks advanced on the NYSE yesterday. 2134 
declined. 35 hit new highs. 239 hit new lows.

*** "The next 24 hours are critical," wrote Bill 
Fleckenstein, after the market closed. "If Intel, IBM, 
and MSFT can save the day, maybe we can have a rally for 
a little while....But if they are unable to do so...then 
things are liable to get very ugly..."

*** Alas, instead of saving the day, IBM announced 
yesterday evening that while earnings were up 18%...sales 
had risen only 3% in the latest period. Investors were 
disappointed. In after-hours trading, Big Blue got 
knocked down $14 - to below $100. 

*** "One of the things that I've been doing for about a 
year," writes Porter Stansberry this morning, "is 
attacking AT&T, Kodak and IBM. AT&T and Kodak have 
capitulated. IBM looks to be doing the same. I shorted 
Kodak at $85 after Barron's predicted the stock was going 
to $100 in 1998. Today it's at $36. I shorted AT&T...and 
the put options ...have gone up 400%. I warned in July 
that IBM was in serious trouble..." 

*** The euro rose slightly yesterday. Gold fell 50 cents. 

*** Oil rose a trifling 7 cents a barrel in yesterday's 
trading, but then the API came out and said U.S. crude 
inventories had slipped another 3.11 million barrels last 
week, after having dropped 3.9 million barrels the week 
before. In overnight trading oil rose 67 cents.

*** Magazines are great sell signals. Worth Magazine, the 
same publication that once said I was a "genius" - 
really, I'm not making this up - this week lists the "5 
Tech Blue Chips You Must Own." The list: CSCO, EMC, AOL, 
MSFT, INTC. Daily Reckoning readers know that when 
something becomes such a popular sensation that the 
financial media describes it as a 'must own' investment - 
it is time to sell. More below.

*** Also, watch for the November issue of MONEY, which is 
said to mention the Daily Reckoning - favorably, I hope.

*** "It was even worse than I had thought," writes Ray 
Devoe. He recently updated a list of dot.coms he has been 
following since March. "The median decline from their 
highs for the 65 stocks was 90.5%, and the arithmetic 
mean showed a slightly smaller loss of 87.8%. If you took 
out the five stocks that were down "only" 57.8% to 69.8% 
(some only marginally Internet related), the mean and 
median loss would be almost identical." (see: The Dot.Com 
Shakeout: Fallen Angels, Still Falling

*** Finally, the debates are over. Not that I saw any of 
them on TV - but I read about them. And the candidates 
seemed to have defined each other in the traditional 
terms - pandering to envy, avarice, fear and collective 
mumbo-jumbo as the opportunities presented themselves. 
Gore accused Bush of being a brainless pimp for Big 
Business. Bush accused Gore of being a soulless shill for 
Big Government. Both are probably right...

*** But the worst part of the whole campaign is the nags 
who urge you participate in the fantasy of democracy by 
voting. "It's time to get serious about the U.S. 
elections," writes International Herald Tribune columnist 
and Gore supporter, Ellen Goodman. "I venture this 
thought," writes the woman who rarely has one, "because 
the world has begun to intrude." Goodman worries about 
the mideast, Slobodan Milosovic, and other remote news 
items, and comes to the silly conclusion that what 
matters most is who is in the White House. 

*** Meanwhile, an addled Internet entrepreneur has set up 
a web-auction site where you can sell your vote. The 
going rate is said to be $19.61 in California and $12.38 
in Illinois - perhaps reflecting the difference in 
available loot between the Silicon Valley and the Chicago 

*** No matter what its creators may think, the site is a 
spoof - because there is no way for the buyer to take 
delivery of his votes. And yet, the very idea of buying 
votes is so disturbing that election officials are 
threatening legal action with "felony charges and prison 
terms." Buying votes, said one democrat, threatens to 
"undermine democracy." What it really threatens is the 
illusion of democracy - that a majority, bribed with 
money or just promises, have the right to tell other 
people what to do. 

*** The dreaded "digital divide" is widening. In August, 
32.6 percent of blacks and 33.7 percent of Hispanic 
households owned computers, compared with 51 percent of 
households nationally.

*** Today is my son Will's 22nd birthday. Happy birthday, 

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

Natural Gas Squeeze - Headed Our Way! 

One company is up 168% - it's stock has already doubled 
and is set to double again...

Natural gas prices are up almost 70% in the last five 
months, and there are serious concerns about natural gas 
supplies for the winter. Even if you don't use gas to 
heat your home, the shockwaves from this "crisis" could 
mean serious money in your wallet. 

In this week's Free Investor's Library we'll take a look 
at textbook profits from a commodity squeeze. You'll 
learn how these markets operate... and why "supply 
volume" isn't the issue at all. You'll also learn about 
the company whose stock is up 168% since January, and 
stands to double again before the "crisis" subsides. 

Read your report today:
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * 


From an e-mail sent to the now defunct web company

"You are all a bunch of spoiled, arrogant, 
conceited thieves who robbed your investors blind. 
So how much missing equipment IS in your 
apartments? Go to hell all of you."

"They don't give us enough information," said Brian at 
last week's meeting in Baltimore.

"I checked the package they sent out..." he continued, 
"and then went to the documents filed with the SEC...but 
it is impossible to figure out how much the business is 

We were sitting around a conference table trying to 
figure out how much to offer for a publishing business 
that was up for sale. The company had put together a 
thick package of documents and asked for a bid. But a 
careful study of the figures revealed missing items...and 
confusing details...that might have made millions of 
dollars worth of difference. Even in the Information Age, 
we labored in ignorance.

"Well, Brian," I challenged, "surely the disclosures to 
the SEC will tell the tale. Otherwise, why would so many 
people, including underwriters and large institutional 
investors, have paid so much money for the stock?"

"They didn't know what they were getting," was his reply.

The company was a public company. On the basis of the 
published information - less extensive and less detailed 
then what we had in front of us - investors had spent 
millions to buy the shares. And yet, 4 people with about 
80 years combined experience in the publishing business 
were unable to figure out if the company were worth $10 
million - or perhaps nothing. One thing was clear - 
whatever the company may have been worth - it was a lot 
less than the public shareholders were paying.

Nietzsche's distinction may be useful - if not for 
understanding this paradox, at least for elevating the 
intellection pretensions of today's letter.

"Wissen" describes the kind of abstract, collective 
knowledge of public shareholders and voters. "Erfahrung" 
is another type of knowledge - the kind you get from 
direct personal experience. 

"Wissen" is what makes overpriced stocks in dubious 
businesses "must own" investments. "Erfahrung" is what 
you get after you buy them and watch them get killed.

The latest list of "must own" investments includes a 
company Daily Reckoning readers will recognize - Cisco.
As the Promethean light of the New Era spread its warmth 
across the entire continental U.S. nowhere did it shine 
more brightly than San Jose, California...and nowhere 
more intensely than the headquarters of the Cisco Kids.

A lot of people have gotten rich on Cisco stock. Many 
more hope to do so. After B2C, B2B, content plays, and 
other Internet disasters - Cisco is thought to hold the 
key to Internet success. The company is an infrastructure 
play - manufacturing the switches and routers that make 
it possible to send this message to you. 

I don't know what happened to the companies who made 
electrical switches during the electricity boom of the 
20s, but I doubt that millions of people got rich from 

And I doubt that many people will get rich from Cisco.

One can imagine how a small accounting department could 
produce numbers that don't make sense. But you would 
think that one of the biggest companies on the face of 
the earth could get its numbers right - if it wanted to. 
But Cisco's numbers are almost as confusing as Maria's 
geometry homework or Edward's sentence structure. 

The Grant's team went to work on Cisco's latest 10-k 

"What might be a simple matter is anything but. To the 
forthright question, By how much did earnings per share 
increase in the latest fiscal year? There are at least 
three answers."

The increase of earnings per share is not a trivial 
matter. Upon it rests a market value of $384 billion, 
which comes to 151 times earnings. A multiple that great 
only makes sense - if it does at all - if the company is 
growing so fast that its future earnings may soon be 10 
to 20 times greater than present ones.

But on that point, James Grant is less than sanguine:

"[W]e believe," he writes, addressing the issue of EPS 
growth in the latest fiscal year, "the correct zero. Nil is exactly the rate by which net 
income per share would have increased if the company had 
given effect to the cost of employee stock options."

If earnings are not really growing, a more reasonable 
price for the firm might be gotten by multiplying 
earnings by an ordinary number - say 10 - rather than by 
an extraordinary one like 151. Instead of being worth 
$384 billion, Cisco might only be worth, say $23 billion. 

But even that may be generous. Because once the Cisco 
Kids realized that they could print their own money - 
that is, use shares in CSCO to pay employees, it seems 
also to have dawned on them that they could use the 
currency for other things. Pockets bulging, they have 
been on a buying binge for the past several years... 
buying up technology companies all over the country - and 
paying with the CSCO paper.

As if to prove that the habit of inflation is not limited 
to central bankers, Cisco stock multiplied like Wiemar-
era deutchsmarks. "In August 1994," reports Grant's, "a 
split-adjusted 4.6 billion Cisco shares were outstanding; 
today, the fully diluted share count tops seven billion."

In addition to buying companies of uncertain worth, Cisco 
raised huge amounts of cash, which was used to buy T-
Bonds of much more certain worth. This produced the 
rather curious situation of a company that now earns 
about 15% of its total earnings annually from its bond 
portfolio. But buying a share of Cisco is not a very 
efficient way to own T-bonds. In fact, it transforms a 
bond yield of about 6% into an earnings yield of 3/10ths 
of 1%. But at least that portion of Cisco's earnings is 
relatively straightforward and reliable. The rest is not.

For example:

"Word for word," writes Grant, "the most mysterious 
passage in the Cisco 10-K is one concerning unfilled 
orders: 'The company's backlog at Sept. 25, 2000 was 
approximately $3.83 billion, compared with a backlog of 
approximately $922 million at Sept. 20, 1999,' it says on 
page 10. Yet, in the fourth quarter, inventories climbed 
to the equivalent of 52.85 selling days, up from 45.21 
days in the April period."

Inventories rising at the same time as backlogged orders? 
It doesn't quite add up. But Grant's reports that "our 
Cisco contact had no ready answer."

In the popular imagination, in analysts' reports, and in 
the wissen of the financial media Cisco is a buy - maybe 
even a 'must buy.' But the erfahrung of bubble 
veterans...and those who look long enough and hard enough 
at Cisco's actual business...leads them to a different 
conclusion: Sell Cisco.

Until tomorrow... 

Bill Bonner

P.S. The de-leveraging of America will not be a smooth 
and easy process. People who jump on bandwagons feel the 
right to hold the driver responsible for where they end 
up. As the details of Cisco's reporting emerge - and 
people lose money - look for lawsuits and recriminations.
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...

"My small portfolio has followed true to my wife's description of my
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"

" Your Daily Reckoning is the best in business commentary... mixing
serious warnings and the state of the market with gentle humor"

"It is actually better than some of the newsletters that I pay to

"Your statements and philosophy have kept me from storming into the market and in fact [I'm] making some money in put options" (Frank)

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Last modified: April 01, 2001

Published By Tulips and Bears LLC