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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Timber

*** "We Believe!" stocks at bargain basement 

*** Where was the "visible hand"?...Oil market heating 
up...time to sell financials...

*** "Dracula bites" a model's bum...and more!

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"The United States historically has had a perfect 
record when it comes to rebounding from the most 
difficult times," writes Peter Lynch in a double-page 
spread in Barrons. "In the past 50 years, we've had 9 
recessions and we've had 9 recoveries...If you believe 
in the strength of the American resolve, hard work and 
innovation, then take a long-term view and believe in 
our economic system. I certainly believe."

"Rate cuts, tax relief and fiscal stimulus will 
aid the rebound in consumer spending and corporate 
investment," writes market strategist Joseph V. 

"The catastrophe could turn out to be the catalyst 
for an economic and market recovery," adds my old friend 
Robert Carlson.

Barrons, eager to give readers a way to take 
advantage of this great opportunity, gives readers a 
"shopping list" of "solid stocks...marked down 75% and 

On the list, we find Sun Microsystems, down 84%, 
and now available at just 88 times earnings. There is 
also EMC, down 87%, at the bargain price of 74 times 
earnings. And Yahoo! priced at only 113 times 
earnings...after the market knocked off 95% of its 

Are these great bargains, or what? And, as we all 
know, corporate earnings are going to bounce back in 
2002, right?

Well, maybe not. 

"It seems inevitable that for a long spell to 
come, we'll be a nation looking over its shoulder," 
writes Alan Abelson. "To illustrate the potential 
economic impact of a more apprehensive consumer, let's 
suppose he or she chooses to save a little more, spend a 
little less, not an unreasonable disposition in the 

Abelson then does the same math we have done in 
the Daily Reckoning, but uses a rounder number: "By one 
reliable reckoning, [not ours], every 1% increase in the 
savings rate is equivalent to $100 billion. So if 
savings rise by only 1%...all the fiscal stimulus that 
Washington is proposing, and then some, would be 
canceled out."

What if baby boomers get in a panic about having 
money for retirement...and savings go back to early 1980 
levels? I would still believe in our economic 
system...but I wouldn't want to own Yahoo!.

Eric, what's the news from Wall Street?


Eric Fry in New York:

- Another day, another anthrax sighting. Or two. Or 
thirty. This ubiquitous bacteria is proving to not be 
bullish - except perhaps for the oil market. (More on 
that in a moment).

- The stock market jumped higher from the opening bell, 
thanks to some not-horrible earnings reports from IBM 
and Intel. But early morning glee gave way to anthrax-
induced gloom, when the news hit the wires that the 
deadly spores had turned up in Governor George Pataki's 
midtown Manhattan office.

- Trying to explain the inexplicable rallies in the face 
of continuing crisis, Options Underground's Adam Lass 
writes of "Two things that I can see...One is the 
inverse of the panic selling we saw at the top: 'Panic 
buying' driven by the fear that one would miss out on a 
wartime rally. While there are certainly gains to be 
made...early entry into these rallies is frequently 
punished by the bottom." 

- The second is what Lass calls the "visible" hand, or 
"someone buying like mad in the last 30 minutes of 
trading...regardless of news or even sanity. Moves like 
this were the hallmark of the Clinton era 'Plunge 
Protection Team.'" 

- Even if there is such a beast in place with the Bush 
administration, he was nowhere to be seen yesterday. The 
Nasdaq, which had gained almost 2% to start the day, 
tumbled 4.4% by the closing bell. The Dow fell 151 
points to 9,233.

- The bio-terrorism wave sweeping over Manhattan is 
making this thriving metropolis feel more and more like 
a vast petri dish. And yet, anthrax or no, I had lunch 
yesterday at the Oyster Bar in Grand Central Station. My 
Pemaquid oysters from Maine were delicious - and, I'm 
delighted to report, contained neither marine bio-toxins 
nor bio-terrorist toxins.

- But fear and anger are in the air, if not on the menu. 
And that is likely to have a major effect on world oil 
prices. In the Middle East temperatures are rising. In 
Washington, even Democrats are sounding hawkish. There's 
an old saying that a conservative is a liberal who's 
been mugged. How true this is turning out to be: Al 
Gore's former sidekick, Democratic Senator Joseph 
Lieberman, has taken the lead in the U.S. Senate in 
calling for the ouster of Saddam Hussein. 

- Not that Lieberman is alone. Each new anthrax attack 
unifies "both sides of the aisle" in Congress in their 
approach to terrorism: Bomb the bastards.

- Iraq's Hussein is clearly the next target of choice - 
and that may mean that anthrax is bullish for the price 
of oil. "If [U.S.] intelligence agencies find an Iraqi 
link to the anthrax attacks, that would obviously 
increase the chances of a major military offensive 
against Saddam Hussein," says ISI's political analyst, 
Tom Gallagher. "Iraq exports more than 2 million barrels 
of oil a day, which could be directly disrupted. In 
addition, our coalition partners in the Middle East, 
including Saudi Arabia, could be expected to strenuously 
object to an attack on Iraq and might be less 
cooperative on keeping oil prices lower."

- Our man in the resource sector, Outstanding 
Investments editor John Myers, has been cautioning for 
weeks of the simmering instability in the global oil 

Just days before the World Trade Center attack, Myers 
wrote, "Even as you read this letter, the clock is 
ticking down on Middle East peace. Soon a bomb could 
erupt that will blow the lid off of energy prices and 
put a premium on North American oil and gas supplies... 
North America's vulnerability is that conventional oil 
supplies in United States and Canada have fallen 
dramatically over the past two decades. That means there 
is a critical reliance on Persian Gulf oil." 
(see: Wolf At The Back Door)

- For now, complacency rules in the oil market. 
According to Tuesday's American Petroleum Institute 
inventory report, the country is swimming in crude oil. 
But if our national cross hairs train on Iraq and Saddam 
Hussein, we could expect to see a little less crude oil 
in inventory and much higher prices.

- Suddenly inflation doesn't seem so far-fetched a 

- For those investors who anticipate resurgent 
inflation, or even the possibility of it, but still 
can't bring themselves to buy gold - you know who you 
are - Jim Grant proposes an alternative: The Treasury's 
inflation-protected securities (TIPS). A recent issue of 
Grant's Interest Rate Observer noted that TIPS were 
priced to reflect an implicit CPI inflation rate of 1.6% 
a year over the next 10 years, even though, since 1970, 
the CPI has never averaged less than 1.9% over even a 
three-year time-frame. "TIPS [are] a bargain." 

- The flip-side of buying TIPS is to sell financial 
service stocks. That's because inflation leads to the 
kind of rapidly rising interest rates that shrink or 
eliminate the profit margins on lending. "There's a 
developing opportunity in short selling and put-option 
buying on U.S. financial and banking stocks," DR Blue 
editor Dan Denning writes this week.

- Mr. Denning might be on to something; mortgage lender 
Washington Mutual dropped 11% yesterday. When Grant's 
Investor analyst Robert Tracy examined this financial 
stock last month, he concluded, "Wall Street looks at 
Washington Mutual and sees a safe haven. We see 
worsening asset quality with insufficient reserves and 
riskier loans with paltry returns. Take a long look at 
WM's stellar results - they won't last."


Et Voil�...Mr. Bonner:

*** Back in Dublin...I'm just passing through, on my way 
to visit the International Living worldwide headquarters 
in Waterford Ireland. 

*** The anthrax hysteria has reached Ireland...a man 
called police after receiving a letter with white 

*** But by page 3 of the Irish Times, the paper has 
found its stride. It reports that a woman is suing her 
employer, the prison system, after accusing her boss of 
"breaking wind and belching" in her presence. Later in 
the paper, a model has also sought justice in the 
courts, after falling upon a board with two nails 
sticking up. She claims that she is left with what she 
describes as "Dracula bite marks on my bum."

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by Bill Bonner

A report in the Figaro yesterday brought good news. 
Europe is enjoying a baby boom, with France leading the 
way. Birth rates had fallen so low that it looked as 
though Europeans might be exterminating themselves. But 
the world wasn't going to end without a bang, it 
appears. Now birth rates are rising sharply. Europe is 

Another article in Figaro included a photo of a forest 
being burnt off so that the land could be used for 
farming. This, along with the baby boom, served to focus 
our attention on a subject we promised to address many 
weeks ago: trees.

Jeremy Grantham has surveyed the investment landscape of 
the last 100 years. He noticed that every bubble - 
wherever, whenever and in whatever it occurred - had 
sooner or later reverted back to trend. He also found 
that one investment - trees - had provided fairly 
consistent healthy yields throughout booms and busts, 
bulls and bears, inflation and deflation.

What about war? The interview pre-dated the terrorists' 
attack and so no mention was made of it. But we presume 
that, even during wartime, trees - like children - still 

We promised to look into the matter. In the following 
letter, we keep our promise.

Our research took us back to an issue of Grant's 
Interest Rate Observer from December 1999, a month in 
which the Grant's team had evidently decided to shrug 
the burden of watching interest rates and go back to 

There, we discovered that throughout the last century 
"trees beat stocks," as Grant's put it. A chart shows 
real growth in timber prices rising at twice the rate of 
the real rise in S&P prices, 12.8% compared to 6.4%.

There, too, we found Jeremy Grantham, discussing what 
must be a favorite subject: "Since 1910," said Grantham, 
citing U.S. Forest Service data, "real timber prices 
have compounded at 3% per annum." Compare this to the 
real price per share of the S&P 500, which compounded at 
2.2%, he suggested, or real earnings per share of the 
S&P 500, which compounded at 1.4%. And though timber 
pays no interest, it does produce yield: on average 6%.

But here at the Daily Reckoning, we are suspicious of 
very long periods of above-market performance. They are 
often followed, we've noticed, by very long periods of 
below-market performance. 

"The risk in timber," Grantham explained, anticipating 
by two years our objection, "is that it stops raining, 
or the sun stops shining. [Or] if we have a meteorite 
hit and we get several years of dust." In addition, 
there are man-made disasters, such as bear markets. 
"There were three this century for American 
stockholders," Grantham continued. "In each of them, 
however, timber prices were as stout as oak."

But we Daily Reckoning readers are skeptical. Nature 
does not give something away without taking something 

"What's the catch?" we ask ourselves. "The catch is that 
it takes patience to grow a tree," we answer our own 
question, "and the expectations are modest, after all."

Grant's article was written at a time when the world had 
little patience and very immodest expectations. 
Investors greatly preferred the fast growing weeds of 
the "new economy" to the great oaks of yesteryear. Two 
timber companies were featured in the article. Evergreen 
Forests was then selling at a 38% discount to net asset 
value, with a market cap of just $32 million.

Sino-Forest, another timber company with large holdings 
in China, was compared to a with interests in 
the same part of the world:

" is valued at 191 times annualized nine-month 
revenues; Sino-Forest at 0.88 trailing 12-mo. revenues; at no multiple to nonexistent earnings, Sino-
Forest at a multiple of 4.2 to fast-growing earnings. 
Sino-Forest has a website, too."

What happened to might have been predicted. It 
is now trading at a little over $2 - down from a split 
adjusted peak of $166 (which occurred, ironically, a 
month after the Grant's article was published). What's 
more, has a big N/A in the P/E column. 

What about the timber companies? 

I turned to my old friend, Rick Rule, who discloses that 
he is a major shareholder in Evergreen, for an update: 
"The timber markets are headed broadly lower," Rick 
writes, "with Evergreen being no exception. Globally, 
pulp and paper demand is soft and getting softer, while 
dimensional lumber (used in frame construction) demand 
is plummeting." 

Rick tells me that "Wild Harvest" supply - timber from 
non-cultivated sources - enjoys an implicit subsidy in 
many areas. It is often owned by governments that 
distribute cutting rights below fair market value as 
economic development incentives...or for other less 
popular reasons. 

"My belief is that the next two years will be lousy for 
log pricing," says Rick, "except in the good old U.S.A. 
where quasi-protectionist legislation shields U.S. 
producers from formidable Canadian competition, NAFTA 
not withstanding. In New Zealand (Evergreen's domicile) 
the near-term woes are compounded by the impacts of 35 
years of direct and indirect government subsidy to the 
silvicultural industry. Timber plantations that are 
currently maturing have substantially more timber 
available than the milling and processing industries 
have either markets or physical processing capacity for. 
The situation is so extreme that the standing inventory 
- unharvested trees - is referred to as 'the wall of 

So why play in such a decimated sector? 

"Because two years is not such a long time," suggests 
Mr. Rule, "and because the assets are of extraordinary 
quality and CHEAP." The finest timber play on the globe 
for most investors, he says, is right there in the good 
old USA... 

"Plum Creek Lumber: a REIT owning about 7,000,000 acres 
of fee timberland, making it the second largest fee 
landowner in the country. The company's enterprise value 
(market cap + net debt) values the land at roughly $800 
per acre...very cheap. The company sells at a steep 23 
times trailing earnings and 12 times trailing cash flow 
to yield 8.4%. 

"Longer term the company's superb timber assets will pay 
for a lifetime. If panic selling brings the price of 
this company down to 22 this will be a legacy buy."

Of the Grant's recommendation from '99, Rick has this to 
say: "Evergreen is a special case. They control some of 
the finest cultivated timber in New Zealand. The short 
term outlook for New Zealand timber is lousy, but 5 
years out it is superb..." 

Evergreen currently sells for about a third of what Rick 
estimates its replacement value to be and half of his 
estimates for the discounted value of its future after 
tax cash flows. 

"Timber land is the only 'developed' real estate asset I 
know that truly grows over it's productive life," says 
Rick, "but this game is not appropriate for the 
impatient speculator."

Bill Bonner, biding his time...patiently.
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 21, 2001

Published By Tulips and Bears LLC