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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Fatal Decisions

*** Record trade gap...but still the dollar, the Almighty 
Dollar, hallelujah...does not fall...

*** Still a massive weakness in tech...CMGI down 94%!...

*** Fund managers still bullish...what bull market?...and 

*** Yesterday's big news: the trade deficit hit a new 
record. Americans are exporting less and importing more. 

*** In September, the US imported a record $126 billion of 
goods and services, producing a gap between imports and 
exports of more than $34 billion - $3 billion more than 
economists expected.

*** Caterpillar, the world's largest manufacturer of heavy 
equipment for the construction industry, said its profits 
fell 1.4% in the 3rd quarter.

*** US manufacturing companies have only been able to 
increase profits 3.4% per year for the last three years - 
the peak years of the New Paradigm economy. Why the low 
profits? The strong US dollar makes imports relatively more 
attractive. US companies - faced with cheaper competition 
from abroad - have been unable to raise prices...which also 
explains why domestic inflation has been so low.

*** The total deficit through September came to $270 
billion, compared to $188 billion in the same period last 

*** There were big increases in imported energy - oil 
imports, for example, rose 16% in September. Natural gas, 
imported in volume from Canada, is at a record high price. 
Heating oil is near its highest level since 1979 - over $1 
per gallon.

*** Meanwhile, a snowstorm in the Buffalo area reminds us 
that there are cold winters as well as warm ones...and that 
nature, and her markets, are perverse. When better to have a 
cold winter than when heating oil supplies are low? People 
don't necessarily get what they expect or what they hope 
for, but what they need and deserve. More below...

*** You might think that the dollar would fall on the news 
of a greater-than-expected trade deficit. But no! The dollar 
rose. The euro fell about 1% - under 85 cents.

*** "The bottomline," according to Nick Sanger of JP Morgan 
Private Bank, "is: why are foreigners putting money in [the 
U.S.]? International and U.S. investors perceive that the 
returns on investment in the U.S. are higher than the rest 
of the world."

*** International investors, like their domestic 
counterparts, suffer from the momentum of sentiment factor. 
Ed Hyman, for example, reports that even though both the Dow 
and the Nasdaq are down for the year - with the Nasdaq close 
to losing half its value - equity fund managers are "record 

*** Perceptions will eventually catch up to reality. But it 
takes time. Rarely do you see the media discussing the end 
of the bull market. Why? Because they never recognized that 
there was a bull market. In the minds of these pilgrims 
stocks always go up in the long run and the stock market 
always acts pretty much as it has for the last 18 years. 
There is volatility...but no downward trends. 

*** Lucent warned investors that its 4th quarter profits may 
not be exactly what it had hoped for. The stock fell 16% on 
the news - dragging down a number of issues in the tech and 
net sectors. Lucent was $60 a share in July. Now, it's $17.

*** "The whole market on the tech side," said one analyst, 
"just has no support." "Still a massive weakness in 
technology," added another. 

*** One of the stocks noticeably weak was CMGI, the Internet 
incubus... I mean incubator. This was one of Henry Blodget's 
favorites back in the glory days of dot.coms. Blodget was 
undisturbed by the high price - $163 last January. Many of 
these stocks, he said, "perpetually look overvalued." But 
don't worry, buy them, he advised, and you will be "richly 
rewarded." Well...investors got the reward that they 
deserved, if not the one that they expected. In the last 
month, two of CMGI's sucklings have announced layoffs. Four 
said they were going out of business. The stock closed at 
$10 and change yesterday - down 94%.

*** The Dow rose 31 points yesterday. But the Nasdaq fell 4 

*** Yahoo hit a 2-year low, losing 14% during the day. 
AOL, which was $95 a year ago, can be bought for $43 today. closed down - at $24.25. A news report says that 
Amazon's 400 customer service people are trying to unionize. 
[Collective bargaining suggestion: forget pay hikes, ask for 
generous layoff and termination terms]

*** Gold fell 70 cents. Gold mining shares are among the 
ugliest securities you can buy. This may be a good time to 
buy a few shares.

*** "The strikingly popular earnings augmentation," writes 
Grant's Investor's Eric Fry, "is a delicate operation that 
typically requires the replacement of a company's GAAP 
earnings with a kind of financial prosthetic. Thanks to a 
nip here and an injection there, Flextronics Corp. has 
increased its gross profit size in the first quarter to a 
much sexier $169.2 million form only $85.5 million before 
the operation. Is it any wonder investors admire the 
company's well-endowed income statement?" (see: Financial 

*** "Imagine a company... that strip mines national forest 
land to get asbestos that it then puts in cigarettes - using 
sweatshop, child labor in India to roll the smokes by hand." 
I reprise this remark from yesterday's letter because Steve 
Sjuggerud found a company that might fit the bill.

Steve writes: "Gudang-Garam is the largest clove cigarette 
manufacturer in Indonesia...[it fills) nearly all your 
required ingredients, even the sweatshop Asian child labor
rolling clove cigarettes by hand (with 40,000 employees, 
many of them have to be underage by western standards) Maybe 
the paper mills are loaded with asbestos too! Gudang is at a 
P/E of 9, with little overall debt and zero long-term debt."

*** I cannot express the sadness that overcomes me as I read 
that the two sanctimonious sugar mongers, Ben and Jerry, may 
be leaving their trade. They sold out - but made an 
agreement with the buyers to devote a portion of the sales 
to "socially beneficial activities." What, wasn't making ice 
cream socially beneficial?

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

When The Greatest Credit Bubble in History Bursts...What 
Comes Next? 

No banks or brokerage houses went bust in the 1929 crash. In 
fact, many investors and businessmen prospered. The real 
damage was done later on - when popular sentiment turned 
against stocks altogether. Just as is happening in our 
markets today... 

Will you profit in the months ahead?

You will if you prepare yourself now - EVERYTHING that is 
happening in the markets today has already happened before. 
Click here to learn more about: 

The Hidden Logic of Credit Bubbles
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * 


People can believe what they want to believe. In the `60s 
movie, Closely Watched Trains, a man tells how his father - 
a magician - believed he could stop the invading Nazi tanks. 

"And so he stood in front of them," he says, "and using the 
power of his mind alone commanded the tanks to stop. And 
they did stop...for a moment."

We left off yesterday mischievously wondering whether there 
might be some over-riding principle - such as Emerson's Law 
of Compensation - which might give us a clue as to what will 
happen next in U.S. markets.

Markets, being instruments of poetic justice...or torture... 
always seem to find the Perverse Outcome - the result that 
inconveniences the greatest number of people at the least 
convenient time. As I am fond of saying, they give people 
what they deserve, rather than what they expect. 

There is a simple reason for this, of course. When people 
expect a particular outcome - they rush to take advantage of 
it. If a stock, for example, is expected to rise in price - 
they buy it. The very act of investors seeking to gain from 
predicted events almost guarantees that those events - in so 
far as they are market-based - will never happen as 

Thus, in the example given above, it was expected that 
buyers of CMGI stock would be "richly rewarded." CMGI was 
not merely an Internet company...but an `incubator' of other 
dot.coms and techs. Buyers of the stock could imagine their 
profits growing like little yellow chicks under a heat 
lamp...dozens...hundreds of successful projects - each one a 
potential AOL or Microsoft.

This expectation, alone - backed by analysts such as the 
infamous Henry Bloget and a chorus of financial media - was 
enough to destroy all hope of ever making a profit on the 
stock. The price of the stock soared to $163 in January - a 
level so unrealistic that an investor might just as likely 
sprinkle Miracle Gro on a pile of cash in the hopes that it 
would sprout additional $100 bills. Of course, you could 
have made money by speculating on how extravagant the 
hallucination would become...or when it might end...but that 
is a very different business...

"From a strict economic perspective," writes Dr. Kurt 
Richebacher in his most recent report, "it is hard to 
imagine a greater economic folly than buying low-yielding 
equity capital with much higher yielding indebtedness."

You could search high and low in the winter of '99-'00 and 
find no lower-yield investment than CMGI. There was no 
yield. Zero. 

And yet, if you look at the aggregate financial numbers for 
the entire U.S. economy, you see that buying very low-
yielding assets, with much high-yielding debt, was just what 
was going on. Corporations sold bonds - often at junk-bond 
yields - in order to buy their own stock...or the over-
priced stock of other corporations. People were mortgaging 
their homes - at 8% interest - in order to buy stocks like 
CMGI, that yielded nothing. 

This may have had a salutary effect while CMGI and other 
stocks were going up in price - the capital gains offset the 
cost of borrowing. But when CMGI stock went down, the full 
effect of the folly must be felt. The asset disappeared. But 
the debt used to acquire it remained. It is as if you had 
bought a new home with a big mortgage, and then the house 
burned down - uninsured. 

The way you become wealthy, generally, is by working hard, 
saving your money, investing it wisely, and waiting. People 
who do so deserve the wealth they get.

By contrast, when you spend more than you earn, go deeply 
into debt, and buy `get-rich-quick' stocks, you deserve 
something else. What? We will find out soon...because that 
is what American businesses and consumers have been doing. 
Where they should have been saving - they were spending. 
Where they should have been investing in real businesses 
with real products and real profits - the money went into 
foolish projects - such as CMGI.

"After paying out dividends and covering their investment 
expenditures," explains Dr. Richebacher, speaking of what he 
calls `degenerate U.S. capitalism', "the U.S. corporate cash 
flow overall is in the red. So in reality the huge stock 
repurchases have to be financed by borrowing at interest 
costs that are generally several times higher than the rock-
bottom equity yield. How can a corporate manager in his 
right mind do this?"

Why would they do such a dumb thing? Because investors as 
well as superstar CEO's became obsessed with fast, easy 
money. Building a business...and making real money...takes 
time, effort, expertise, and forbearance. It was much easier 
to `unlock shareholder value' by jimmying up the share 

Dr. Richebacher provides an example: "IBM is a case study of 
how to delude investors," he writes. "Over the last four 
years, Big Blue has managed to increase its revenues by a 
modest 5% and its gross profits by an even more anemic 1.3%. 
However, thanks to a massive $34 billion share buyback 
program, it managed an average annual rise of 10.5% in the 
one number that Wall Street treasures above all others: per 
share earnings."

While per share earnings were rising, so was per share debt. 
But the per share debt number is not even noticed. No one 
cared about debt - neither consumers nor businesses - as 
long as they could keep the share prices rising. Balance 
sheets suffered - from those of powerful multinational 
corporations such as IBM down to those of people who live in 
trailer parks. 

People now owe a lot more money than they did 20 years ago. 
So do corporations. They expect that they will not need 
xsavings. In the last two years, for example, personal 
savings collapsed from $265 billion in 1998 to less than $50 
billion this year. And they think stocks will soon resume 
their upward move.

"The old joke about 'Where does a 600 pound gorilla go?' 
gets answered by: 'Anywhere it wants to go!'," wrote Ray 
Devoe recently, referring to the effect of momentum buying 
on big techs like Cisco, Sun and even GE. "...these '600 
pound gorilla stocks', with total market caps of just under 
$2.6 trillion at their highs, still represent a major supply 
of stock in the hands of 'true believers' or momentum 
players." (see: The Untouchables: Taken Out And Shot

The true believers, like the man who thought he could stop 
trains with his mind, were able to drive the price of their 
stocks to nosebleed heights... for awhile.

We know what these people expect. What do they deserve? 

"If I am right," Marc Faber observed recently, "and the next 
recession is a deflationary bust, then corporate America 
will have made a fatal decision...[to go so deeply in 
debt]." Non-corporate America, having made the same 
decision, will suffer too.

Your correspondent... 

Bill Bonner

P.S. Tomorrow is Thanksgiving. But it is not a holiday in 
France. So I will write, anyway. My apologies in advance
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
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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...

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Last modified: April 01, 2001

Published By Tulips and Bears LLC