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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
TUESDAY, 24 OCTOBER 2000 

 

Today:  The Sunny Side of Life

*** Dull day on Wall Street...but am I a 'sourpuss?'...
*** Cisco's accounting under fire...and bond investors 
are betting that Amazon will go belly up...
*** Three Darned Cheap stocks...Prometheus still 
suffering...Why Americans love gridlock...and more.

*** Not a very exciting day on Wall Street. Blue chip 
stocks rose. Techs fell. 1278 stocks advanced on the 
NYSE; 1574 declined. There were 50 new highs registered, 
78 new lows.


*** The Dow ended the day up 45 points. Half of that gain 
came from acquisition target Honeywell. But the buyer, 
GE, saw its shares fall $2.50...below $50.


*** Sellers did better than buyers, in other words. But 
that is the way it works in a bear market. It is time to 
be a seller, not a buyer. Sell the rallies. Don't buy the 
dips.


*** The Nasdaq fell 14 points. Cisco dropped $1.50. 
Microsoft fell $3. Amazon fell below $30 again.


*** I reported on the curious accounting practices at 
Cisco last week. This week's Barron's follows up with an 
article on the Cisco Kids' habit of 'pooling' acquisition 
expenses. 


*** "Just to refresh your memory," writes Abe Briloff in 
Barron's, "under the pooling method of accounting for a 
business combination, if Company A acquires Company B 
paying, say, $100 million in stock, it would show as its 
cost a mere $10 million, assuming that was the amount 
listed on Company B's books as its shareholders' equity."


*** In 1999, for example, Cisco bought GeoTel for $2 
billion in shares. How much did the Cisco Kids report as 
the acquisition cost? Just $41 million, reports Briloff.


*** When you print your own money - as Cisco did with its 
share certificates - you become pretty casual with the 
way you spend it. Thus did Cisco pay out $6.9 billion 
worth of shares for Cerent in June 1999. In the five 
previous months, Cerent had revenues of less than $10 
million...and lost $2 for every $1 in sales. Hey, but 
with this kind of funny money, who really cares?


*** A similar acquisition of ArrowPoint cost the company 
$5.7 billion in shares - and showed up as only $40 
million in costs on Cisco's books.


*** The funny money is also useful for disguising labor 
costs. Employees get options that are not recognized as 
current operating costs. What would the P&L statement 
look like if they were forced to account for the options 
correctly? "If Cisco had treated the exercise of options 
as they should be treated - that is, as a charge to 
income," concludes Briloff, "the company would have 
reported not the $2.1 billion in earnings it did report, 
but a loss of $363 million..." I don't mean to be a 
sourpuss, but investors should know what they're getting.


*** Elsewhere in Barron's I noticed what could be a much 
more interesting company. Federated Dept. Stores is 
selling at just 7.2 times estimated forward earnings. 
Shares were recently at a 5-year low. Well, it's not 
technology, but earnings are rising at about 30% from 
last year to this. 


*** "Compared to other 'value of a dollar' retailers like 
Wal-Mart, Family Dollar, Target and Ames," writes Grant's 
Investor Jay Akasie "Consolidated Store's price to equity 
ratio of 13.3 is the lowest of the bunch. Because 
discount retailers deal in a business with razor thin 
margins, the close-out guys have a bit of an advantage. 
Aided by acquisitions, Consolidated outpaces all its 
competitors with a five-year average gross margin of 41% 
and a five-year sales growth of more than 20%. If 
discount retailing becomes more popular with the masses, 
Consolidated is ready for a lead role." (see: 
Consolidated: Value Play At A Bargain Price)


*** And yet another Darned Cheap stock: "...the absolute 
antithesis of so-called New Era stocks. It's in the most 
beaten-down, unglamorous sector in the market," says The 
Fleet Street Letter's Ned Harper. "Its average one-year 
revenue growth is a gargantuan 2,042% higher than the 
industry average. And at about $11 per share, this stock 
is a steal - and priced to gain 70-100%. Despite 
increasing cash flow of 20% or better for six years 
running, it's ridiculously undervalued: a P/E of 5.2 and 
a price-to-sales ratio of less than half a percent." 
(see: Crushing the Steel Sector)


*** Meanwhile, Bridgewater Associates notes that Amazon's 
junk bonds are now yielding 16.5%. They are trading at 
about 50 cents on the dollar - implying, according to 
Bridgewater's analysis - that bond investors give the 
company about a 54% chance of going bankrupt. Why then 
does the stock market put a $10 billion value on the 
company? Who will be right - bond investors or stock 
buyers? Stockholders might want to remember that in 
bankruptcy, the bondholders get to pick through the 
wreckage first. Maybe they will get to wander through 
Amazon's warehouses, pulling their favorite books off the 
shelves.


*** "Don't say anything bad about Amazon," urged my 
friend Michel, with whom I am in the book business in 
France. "Amazon just made a major purchase of our books. 
But we don't get paid until December." Okay. Amazon - 
great company. Great future. 

*** "The only bad publicity is in the obituaries," said 
Sid Vicious. So, I guess the MONEY magazine mention of 
the Daily Reckoning wasn't all bad. The author described 
himself as a 'fan' and described it as 'charmingly 
mordant.' But he also called me a 'sourpuss.' Gee, I 
didn't feel like a sourpuss, until I read that.


*** George Gilder, herald of the 'Promethean Light' of 
bandwidth plenty, warns in an editorial in the WSJ that 
Al Gore, the father of the Internet, may turn out to be a 
abusive parent. Well, metaphorically speaking, of course. 
A billion new Internet servers are expected in 10 years, 
which will require "an estimated total of four thousand 
trillion watt-hours, or close to half of the world's 
current electricity use. With the restrictions negotiated 
in Kyoto, a global broadband Internet cannot happen." 
Gore backs the Kyoto agreement restricting the use of 
fossil fuels.


*** Another thing investors might want to remember: 
progress does not come without cost. Prometheus, who 
stole fire from the gods, was punished. He was chained to 
a rock in hell, where the crows peck at his pancreas for 
eternity.


*** Investor's Business Daily reports that between them, 
Circuit City, Xerox, Polaroid, AT&T, Lucent, Motorola, 
Gap and Amazon have lost more than a half trillion 
dollars of value this year.


*** The NY TIMES reports that the cost of the average 
apartment in Manhattan has fallen in the 3rd quarter by 
7.7% - from $850,000 to $780,000. 


*** Gold fell to $272. Oil rose 81 cents. The euro...oh 
la, la...fell below 84 cents as the dollar index rose to 
a new high of 117.44. Rick Ackerman - who has been right 
about the euro since the get-go - says it will drop to 73 
cents before it reverses, or disappears altogether.


*** One of the curiosities of the presidential campaign 
is that both candidates are promising to 'get things 
done' in Washington. Yet, this is just want Americans do 
not want. Jim Bianco, president of Bianco Research, 
explains why Americans love gridlock: "When the federal 
government is divided, regulatory growth grinds to a 
halt. Under unified government - when the executive 
branch and both houses of Congress are controlled by the 
same party - regulatory growth is 2.5 times greater than 
in all periods." 


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THE SUNNY SIDE OF LIFE


"There's a dark and a troubled side of life
But there's a bright and sunny side too...
Keep on the sunny side, always on the sunny side,
Keep on the sunny side of life."

The Sunny Side of Life



Pere Marchand took up another interesting Bible passage 
on Sunday. Again, I listened carefully.


James and John had come to Jesus to ask for a favor. They 
wanted to sit at his right and left hand - positions of 
power, authority and prestige.


Naturally, the other disciples caught wind of the 
discussion and were annoyed with James and John. 


Jesus turned to them all and said, in effect:


Politicians, lords and rulers set themselves up one over 
another, "but so shall it not be among you...for 
whosoever of you will be the chiefest shall be the 
servant of all."


Jesus understood the difference between politics and the 
market. In politics, people tell others what to do. They 
threaten and murder...and in modern mobocracy, invoke the 
first person plural, we, to cloak tax rates and 
regulations that the Sun King would have envied. Grand 
larceny is okay, as long as the majority approve of it.


But in the rest of life things don't work that way. You 
only get ahead by serving others, rather than ordering 
them around. In marriage as in mass-marketing, it is 
service that brings rewards, not bullying.


Mankind is sufficiently diverse and complicated that 
service can take many different forms. Mother Teresa 
might have been 'chiefest' for her service to the poor. 
Bill Gates is 'chiefest' for serving more people with 
software than any person who ever lived. Ray Kroc may not 
get to sit at the right hand of Jesus, but you might 
imagine that he'd at least get invited to the dinner 
table. No one ever served more burgers to more people 
than the man who built Golden Arches all over the world.


This distinction between politics and the rest of life is 
one of the things that made America different from 
Europe. In every European country, for example, politics 
and religion were intertwined. The Queen of England is 
still the head of the Church of England. In France, the 
church is officially separate, but there are a number of 
ambiguous connections. My children, for example, go to 
Catholic schools, but the schools are supported and 
controlled by the state. They get the same brainwashing 
as all public school students, with Papism thrown in at 
little extra cost. If they are lucky enough or quick-
witted enough to get into a "good" school - such as 
Henry's St. Jean de Passy, they are encouraged to believe 
that serving God and serving the French state are as 
compatible as whiskey and branch water.


The things that are most admirable and charming about 
America are the things that reflect the simpleminded 
optimism and the quirky spirit of adventure of its 
people. Americans will try almost anything. They are as 
free from shame and embarrassment as a poodle. They aim 
to 'stay on the sunny side' and ignore life's dark and 
troubled side.


Anyone can imitate the European building styles...or 
affect Parisian manners. But it takes real chutzpah to 
build a mobile home out of rolled aluminum or to serve 
fried chicken wrapped so thickly in batter that even 
Colonel Sanders himself remarked contemptuously that 
"it's not but a damned fried dough-ball."


Even evangelical Christianity probably has its roots 
somewhere in the Anabaptists or other European 
schismatics. But the sects flourished and bloomed nowhere 
as in America. Today, the evangelical churches - mainly 
in the South and West - are overflowing. Some have 
thousands of members. And all offer a very simple message 
of pure optimism - everything will be all right if you 
remember your ABC's, reject the devil and follow Christ. 
'Keep on the sunny side, always on the sunny side.'


You may be wondering, dear reader, what this possibly has 
to do with investment. That answer: little. Still, it is 
a part of our attempt to understand collective thinking 
and how it affects investment markets. 


I am leading up to something that I think is important: 
what to do in a world of ignorance, and what to do with 
your money now. Pardon me for taking such an indirect 
root...but the scenery on the back roads is so much more 
interesting. 


Evangelical Christians do not share the European idea of 
the unified church and state. They believe that they 
should be free men, answering only to God - and guided by 
simple principles, such as the Bill of Rights and the Ten 
Commandments. Everything else is free for 
experimentation.


The Eastern Liberal Establishment, now bi-coastal, has a 
very different idea of the way things should be. The dour 
Yankees were perfectly happy to go along with Jefferson's 
Declaration of Independence - where he proclaimed that 
people have the right to decide for themselves what kind 
of government they would have. Getting free of England 
was good for New England's business. But scarcely 4 score 
years later, the Yankees were imitating King George...and 
willing to kill hundreds of thousands of men to maintain 
their hold over the Southern colonies.


"In work, in game or play, 
Suppress all fear and hate.
Show forth a spirit generous
True, for God and for the State."


David Ignatius, executive editor of the Washington Post 
and former school chum of Al Gore at St. Albans, a "good" 
Episcopalian school for the sons of movers and shakers in 
Washington, remembers the school song. It "must sound 
ridiculous to modern ears," he writes in the state media, 
I mean in the Washington Post, "especially the part about 
serving God and state." 


Even Ignatius, card carrying member of the Eastern 
Liberal Establishment, Gore supporter, and collective 
thinker, didn't have the cajones to capitalize the 's' of 
state. 


Like the Europeans they would so love to imitate, 
Ignatius and Gore, see no distinction between God and the 
state. 


"This is a man," he writes of the Eastern Establishment's 
wooden champion, "who wants to do good, to make his 
headmaster proud, to serve God and the state."


Jesus knew this was rubbish. You can't order people 
around while serving them at the same time.


At least George W. Bush has managed to appeal to that 
strain of evangelical Christendom which is so popular in 
Texas. Like Ronald Reagan, he espouses simple principles 
and a distrust of Big Government. 


It is a fraud, of course. Dubya is almost as much a part 
of the Eastern Liberal Establishment as Gore. But at 
least he didn't go St. Albans, has no desire to make his 
headmaster proud, and he has the good sense to recognize 
major league bleeps when he sees them. And he offers to 
help voters stay on the sunny side. 


Your correspondent...trying to avoid being a sourpuss,


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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Last modified: April 01, 2001

Published By Tulips and Bears LLC