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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Derriere Pensees

*** Very slow news closed...nothing much to 

*** More darned cheap 
more could you ask for?

*** Christmas endgame for the e-tailers...Cisco's money 

*** Not much news today. Markets in the U.S. were closed for 
Thanksgiving. Foreign markets barely budged.

*** The euro stayed about where it was on Wednesday. 

*** You may have noticed in the figures I gave you yesterday 
that stocks in builders have done pretty well this year. I 
suggested a few early in the year; I hope you were able to 
take advantage of them.

*** But there are still some `darned cheap' stocks among the 
builders. Fund manager Jeff Gendell, interviewed in Barrons, 
makes some recommendations: Kaufman & Broad, the biggest of 
them, is expected to earn $4.50 a share in the coming year. 
You can buy the shares for just $30 - a P/E of less than 6.

*** Meritage Homes stock almost doubled in the last few 
weeks. Still, the P/E on next year's estimated earnings is 
barely 5. Ryland should earn $6 and shares are selling for 
about $36.

*** Or how about an ugly, polluting coal producer? Coal is 
decidedly d‚mod‚. Ambitious young men do not dream of making 
their fortunes in coal. Nor do you find many coal 
billionaires on Forbes' lists of the richest people in the 
country. In fact, my own grandfather was in the coal 
business in the 1920s - and went broke in the depression. 

*** Still 55% of the nation's electricity is generated from 
coal. And with prices of gas and oil double and triple what 
they were a few years ago - coal is looking pretty good. 
Gendell mentions Arch Coal and Fluor - about which I have no 
further information, but they might be worth a closer look.

*** Related to coal is a Dickensian-sounding product called 
carbon black - used in hardening tires, toner for copiers, 
and so forth. A company called Cabot makes the stuff, and 
Gendell expects it to earn about $2 per share next 
year...and maybe $3 a share in the year following. At $23 
Cabot could also be a reasonable buy.

*** At least Cabot's management thinks the stock is a buy - 
they recently announced a 10 million-share buyback program. 
Buying your own shares makes sense - when the shares are 

*** By contrast, Cisco systems is setting new records for 
the number of shares it lets loose on the world. Currently, 
notes Jim Grant, the 7.5 billion shares outstanding is equal 
to "more than one share for each of the planet's 6.1 billion 
people." But printing your own `currency' is a hard habit to 
break. Even as the value of each of Cisco's reichsmarks, I 
mean shares, falls...Cisco's managers keep creating more of 
them. Analysts were told to expect further dilution of at 
the rate of 80 million more shares per month. 

*** DR reader, FM, wrote to tell me that another,, bit the dirt. The stock flowered at $13 last 
year, but withered to less than $1 this week. The company 
said it would close its doors and lay off all employees.

*** The future looks bleak for the Internets. Even Henry 
Blodget seems to have re-invented himself as a 
realist. The pure e-tailers, he notes, have a very hard time 
competing against the big `clicks and mortar' stores - such 
as Wal-Mart. "If they wanted to give away product for free 
for the next five years they could," said the Merrill Lynch 

*** This Christmas season probably represents a `make it or 
break it' period for many of the e-tailers. For the most 
part, they've stopped spending money on foolish image 
advertising. They are conserving cash, switching to more 
efficient direct marketing techniques - and hoping to prove 
that they can be profitable in this shopping season.

*** But meanwhile, reports suggest that sales growth online 
is slowing. And big, old-economy retailers - such as Wal-
Mart - are bound to be taking more of it.

*** "Retailers with well-established brand names and 
hundreds of stores in malls have a huge advantage over their 
purely Internet cousins," writes Leslie Kaufmann in the NY 
TIMES. After more than 3 years of insufferable boasting, 
warning and laptop-thumping from Gilder, Saylor, Bezos and a 
whole starry-eyed constellation of New Era prophets, 
Kaufmann concludes: "even big-name retailers, from Nordstrom 
Inc. to Barnes & Noble Inc. have not been able to show that 
Internet retailing is anything but a money-losing venture."

*** This day marks the anniversary of Darwin's publication 
of the Origin of the Species. 

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"Big bottom...big bottom...
How can I leave her behind..."
Spinal Tap

Of all the market events and chart formations that investors 
cherish, none is so appealing as the Big Bottom. It is like 
the moment in a dipsomaniac's life when he finally realizes 
that he cannot continue as he has. After what might have 
been decades of decline, he arises from the gutter... 
stumbles over to the nearest Presbyterian church, where at 
that very moment, if he is lucky, an Alcoholics Anonymous 
meeting is taking place. From that moment on, his life can 
only get better.

I had thought that Mr. Deshais, our gardener, had been 
through this process recently. Unshaven...rumpled...he had 
begun to look like a day trader... And in the spring, he 
reported that he had been thrown out of the house...and 
reduced to sleep in the fields. 

But since August he had seemed more alert...and more 
chipper. His pants seemed zipped up more often and his eyes 
were clear.

Then, one day recently, he came over - not on his moped, 
which has been his customary form of locomotion since the 
local gendarmes took away his driving license - but in an 
automobile. Along with him, a middle-aged woman who showed 
signs of considerable wear and tear but was otherwise not 
unattractive, emerged from the vehicle. 

"This is Madame Deshais," he introduced me.

Elizabeth and I were happy to see that Mr. Deshais had put 
his life back together and was once again living in conjugal 
harmony. life, as in markets, Big Bottoms, do not 
come along every day. Mr. Deshais wobbled badly last 
Sunday...suggesting that the Big Bottom is still in the 
future, and that his August to November rally is over.

"So where do we go from here?" asks Brian Durrant in the 
U.K. edition of our Fleet Street Letter. "There are two 
scenarios. The first is that the Nasdaq is undergoing a 
healthy correction and that bargain hunters will help form a 
platform from which the Nasdaq will recover as it did 
towards the end of last year. After all, Intel and Microsoft 
have touched multiples of 25 and 28 times earnings 
respectively, levels not seen for quite some time."

"The second scenario," says Mr. Durrant, "is that this is 
only the beginning of the meltdown in tech stocks."

Either we have seen the Big Bottom...or we have not, in 
other words.

At a bottom, everything gets better. It is a no-lose 
situation for investors. A no-brainer. A bottom is a bottom. 
It doesn't get any worse. So it can only get better. Prices 
improve. People make money.

On the backside is the best possible place for investors to 
be. There is no downside. Only upside. 

The bulls think they see bottoms everywhere. Stockpicker Al 
Frank on November 1st: "I feel that the bulk of this year's 
correction has run its course and that we will see a 
powerful November-December rally..."

Harry "Dow 35,00" Dent warns that we haven't quite gotten to 
the Big Bottom...but he can see it coming: "It will probably 
get worse before it gets better," he said to a Barron's 
reporter in early November. "We have been warning since the 
start of this year that the Nasdaq composite could test new 
lows, possibly dropping down to the 2300 level."

But at that point - it's Bottom City according to Mr. Dent: 
"...that would end up creating a tremendous buying 

According to Barron's, Dent's outlook did not stop his funds 
from making "major bets," at the end of August, on stocks 
such as Intel, Cisco, Nortel and Oracle. 

Dent must have confused his stock market anatomy. A bottom 
is the low point. A top is at the other end. Cisco, Intel 
and Nortel were selling as though they were at a top, not a 

A bottom is far better than top. In fact, it is the mirror 
opposite in every way. At a top, everyone is bullish. Happy. 
Optimistic. That's when they buy the market leaders - such 
as Intel and Cisco - at prices that can hardly even be 
imagined at a bottom.

At a top - all the good news is out. All that remains to be 
disclosed is the bad news. And the only way the market can 
react is negatively - downwards. An investor cannot win at a 
market top - unless he is brave enough to sell short. 
Contrariwise, at a bottom an investor cannot lose - that is 
unless, he is foolhardy enough to sell short.

Is Microsoft a bargain at 28 times earnings? Is all the bad 
news out? Is there only upside? 

"Microsoft's stronger-than-expected quarterly results do not 
necessarily make it a bargain," Mr. Durrant continues. 
"Closer examination of the accounts suggests that 
Microsoft's growth rate is maturing into the 10% - 15% range 
not untypical of successful, old-economy stocks."

Do successful, old-economy stocks sell for 28 times earnings 
at market bottoms?

P/E multiples tend to be very high at market tops and very 
low at market bottoms. In 1948 P/Es were at the bottom of 
the range - with a median multiple of 5.8. Then, the bull 
market of the `50s drove up the multiple to 19.4 by 1961. 

Stocks collapsed in 1968...but then something funny 
happened. By 1970, investors thought they saw a bottom. 
Ignoring most of the beaten-down stocks of the time, they 
bought shares in the leading growth companies. This created 
a confusing picture - the `two-tiered market' of the early 
70s. Most companies continued falling in price...and sank to 
P/Es of 5 and 6...but the top growth companies - known as 
the `nifty fifty' - soared. By the end of March, 1973, these 
50 companies had a median multiple of 48.4.

One of the great growth companies of that era was Avon 
Products, which at one point had a market value greater than 
the entire steel industry. But by 1973 Avon's growth rate 
had declined - like Microsoft's - to something rather 
ordinary, between 15% and 20% per year. 

What happened next?

"The destruction of the Nifty Fifty," writes Marc Faber, 
"which followed in 1973 and 1974, was extremely severe...a 
very large number of stocks...collapsed by 80% or more. 

"After 1968, the U.S. stock market sold off until May 1970," 
explains Faber, "from where it rallied to a new high for the 
Dow and the S&P 500 in January 1973...However, if we take 
into account inflation as well as the more than 30% 
depreciation of the U.S. dollar between 1971 and 1973, then 
the high of the US market was not in 1973, but in 1968."

The false bottom of 1970 proved deadly. David Dreman has 
pointed out that 150 money managers were asked to pick their 
top five stocks for the coming year. Their favorites: 
companies such as TWA, Polaroid, Burroughs and Levitz 

By early 1973, some of the top picks had fallen by as much 
as 60% and new choices were made. By the end of the year, 
they were down a total of 67%. Polaroid lost a total of 85% 
of its value. Levitz Furniture lost 95%.

Another way to search for bottoms is by looking at the 
returns stocks give investors. Over the past 100 years, not 
including dividends, investors have gained about 5.3% per 
year. But, as Richard Russell explains, the Dow has given 
investors an unusual rate of return of 24.6% for each of the 
last five years. 

Investors do not typically enjoy 24% annual rates of growth 
just before hitting a market bottom. Instead, such growth 
normally proceeds a top. The rate of growth you would expect 
at a bottom would be negative. After a few years of negative 
growth, you might expect stocks to hit bottom...and begin to 
recover. After years of above-average growth, on the other 
hand, you'd expect that they would top out...and slow down 
to the 100-year mean.

Getting back to the mean now, Russell points out, implies a 
one-year drop in the Dow of 54.6% or no Dow gains at all for 
the next 16.3 years. Thus, you could expect the bottom 
anywhere below Dow 5,000 - or, in the year 2016...whichever 
comes first.

With best wishes to you,

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..

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...

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Last modified: April 01, 2001

Published By Tulips and Bears LLC