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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  A Christmas Letter

*** Big drops in the Dow and Nasdaq...earnings warnings from 

*** Debt problems...defaults...The Winter of Woe - only a 
week away

*** The dollar looks weak and vulnerable...

*** I have been expecting Mr. Bear to take a little end-of-
the-year holiday break. So far, he seems reluctant to leave 
his work on Wall Street.

*** The Dow dropped 119 points yesterday. J.P. Morgan and 
Chase Manhattan Bank announced that fourth quarter earnings 
would be well below expectations. Chase's venture capital 
arm, Chase Capital Partners, reported losses of $300 
million. The Street didn't like the news.

*** Yesterday, 1,183 stocks advanced; 1,695 retreated; 105 
hit new high; 77 hit new lows.

*** GE - a stock with a long way to go (down) - fell 3%.

*** The Nasdaq did even worse - losing 3.3% of its value, or 
94 points. This brings the Nasdaq to a loss of 32% for the 
year...compared to a 7% loss for the Dow. TheStreet's 
Internet index fell 4.5% yesterday - leaving the dot-coms 
with a loss of 66.5% for the year.

*** I will resist the temptation to say, "I told you so." 
Oops, I said it. 

*** The Wall Street Journal's latest stockpicking contest 
illustrates what kind of success investors are having this 
year. The professionals' picks lost 32% over the last six 
months. So did the public's choices. Random selections - 
'the dartboard' approach - did better. They only lost 19%.

*** The WSJ also provides a clue as to why holiday shopping 
seems subdued. Half of the families polled said they 
expected a recession next year. 

*** The dreaded Winter of Woe begins next week. People are 
losing their confidence. They know something is wrong. 
They're hoping that Alan Greenspan will make things right 
again. But they're not sure. Abby Cohen and other 
cheerleaders are still shaking their pompoms...but, somehow, 
the thrill seems to be gone. Cohen says stocks are 15% 
undervalued, by the way.

*** We are entering a period of major readjustment and re-
evaluation. It won't be easy...but at least it might be 
amusing. The bad ideas, bad loans and bad investments of the 
late '90s have to be cleared away before new growth can take 
root. Before it is over, people are not going to want to 
hear about stocks. And few people...sniff, sniff...will 
want to read the Daily Reckoning.

*** The Bank of England joined in warning about the risk of 
major defaults by telecom lenders. And Bloomberg reports a 
Moody's estimate that corporate bond defaults in the next 12 
months will be 3 times as great as those in the last 12 

*** "Credit risks have increased across the ratings 
spectrum," said a Moody's official. "Every day commercial 
paper costs creep higher," says another Bloomberg headline. 
Commercial paper outstanding - short-term lending to 
business - is at its highest level ever...$1.624 trillion.

*** The PPI came out yesterday. The annual rate of price 
increases at the wholesale level were unchanged - at 3.6%.

*** Could it be that inflation has topped out? Gold and 
gold shares seem unable to advance. And bond investors are 
paying less and less of a premium to buy inflation-adjusted 
bonds. The difference between the 10-year TIPS (inflation 
adjusted) and the regular 10-year treasuries is just 1.45%. 

*** The dollar seems to be at the beginnings of its own bear 
market. The euro rose again yesterday...with March futures 
at 89 cents. A guess: The Winter of Woe (and the next 
phase of the Great Bear Market of 1999-?) will get off to a 
rousing start with a sharp decline in the dollar. 

*** Yesterday, the European Central Bank announced that it 
would not change rates...and the U.S. disclosed another 
record current account deficit - $113.77 billion for the 
third quarter.

*** But maybe the news today will be better. Not likely; 
Wall Street starts business this morning with 3 strikes 
against it. Oracle announced last night that it missed its 
revenue targets. A key executive from Cisco resigned. And 
MSFT, mighty Microsoft, for the first time ever, warned that 
its numbers may not measure up to expectations.

*** So today should be interesting.

*** And the latest news from home: Maria, 14, wants to be 
an actress. Her career got a major boost yesterday, she 
believes, when she tried out for a part on a French TV show. 
Also, she reports that a man came up to her on the Champs-
Elysee and asked her if she would like to work for his 
modeling agency.

*** "Maria," I warned, "I hope you didn't fall for that 

*** "Oh no," she replied cheerfully, "I told him to get 
lost...but he gave me his card. It's Madison Agency on 
Avenue Hoche...the one that Laetitia Casta works for!"

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When we left off yesterday, the "gray-haired pinkos" were 
still adrift in the Caribbean...and I had revealed my secret 
weapon to you:


Most of the big mistakes made in this world are made by 
people who refuse to give ignorance its due. 

It is not necessarily what they don't know that hurts 
them...but what they think they know that ain't so, as 
someone artfully put it.

Thus, The Nation subscribers at the floating blab-fest have 
convinced themselves that they know the planet is warming 
up...and they know why...and they know what to do about it. 
The scientific evidence is inconclusive. The supposed 
remedy is even less sure. Nevertheless, on the basis of 
this "wissen" - the pretense of knowledge they get from big, 
abstract ideas - these people are willing to force the 
entire world population to do as they command. They not 
only organize their own lives (assuming it is not too 
inconvenient or uncomfortable), but those of billions of 
other people, according to the latest fad in collective 

Meanwhile, investors over the last 10 years found another 
big idea they liked: the Efficient Market Hypothesis. It 
told them that all they had to do was buy and hold 
stocks...regardless of how expensive they became.

Today, I return to the q ratio (the price of stocks divided 
by their book value or replacement costs) - and what it can 
tell us.

"There is no such thing as a free lunch," says Milton 
Friedman. And yet investors might have thought they were 
getting breakfast, lunch and dinner - all at no expense - 
over the past 18 years. Stocks went up. They went up so 
much that no other investment class came close. What's 
more, the EMH told investors that the returns were virtually 
without risk.

Since it was thought that stock price movements could not be 
predicted, there was no reason to try. Buy and hold. That 
was all you needed to know.

What a wonderful world it was for investors! They knew that 
stocks always go up...and that no other asset class can do 
as well...and that there is no long-term risk, only short-
term volatility.

And ain't so. 

Usually, there is no way to know whether stocks will rise or 
fall. Prices move around - like genetic variations - 
apparently at random. But that is not the whole story. 

When investors feel like they have a ticket for a free 
lunch, they take advantage of it. They buy stocks. Why 
not? They always go up. And there is supposedly no risk. 

But how is this possible? How could the stock market 
provide higher rates of return than other investments, 
forever, with no further risk of loss?

The answer: it couldn't. Risk varies inversely with the 
perception of it. The less risk investors saw in owning 
stocks, the more stocks they bought, the higher prices went, 
and the greater the actual risk of loss became.

The higher rates of return in the stock market are only 
possible because, periodically, the stock market corrects - 
bringing the longer-term rates of return down to levels that 
are competitive with other asset classes. Over the very 
long run - since the beginning of the 20th century - the 
real return on stocks has only been about 5% per year. But 
it has been nearly 17% for the last two decades of the 

"The quality that makes the stock market such a good place 
to invest, most of the time," write Smithers and Wright in 
"Valuing Wall Street," "means that it has to be a lousy 
place to invest occasionally. One of those times is now."

You may recall that a careful study of stock price movements 
found them almost random. I hope you recall...because I 
have forgotten the details. But it seems to me that I 
reported this to you last year - when describing Peter 
Bernstein's book, "Against the Gods." 

Academic researchers had discovered a wrinkle in the random 
price fluctuation hypothesis. When prices were extremely 
high or extremely low, the odds increased that they would 
revert to the mean.

Hmmm...this is exactly the common sense observation 
confirmed by Smithers & Wright in their examination of the q 

"Most of the time," they write, "when markets are neither 
extremely over or undervalued, q is not very important, 
since it cannot be used to make strong predictions about 
future returns. It is only in times of extremes that it 
provides vital information. The end of the 20th century is 
such a time. Q tells you that you are running huge risks if 
you remain in stocks."

Stocks provide handsome returns for long periods of time. 
This is only possible because, for other also fairly long 
periods of time, stock market investors give back their 
extraordinary gains. 

"The key point to remember..." observe the Smithers team, 
"is that for over one-third of the 20th century, we have 
been living in bear markets and that each bear market 
followed a peak in q...investors who lived through these 
periods would have found that these bear markets had a large 
negative impact on their living standards."

So brace yourself, dear reader. 

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...

"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)

Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

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Last modified: April 01, 2001

Published By Tulips and Bears LLC