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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Cashing Royalty Checks

*** Light action on Wall Street...where will this rally go?

*** The dollar is going down...the dollar asset boom has 
come to an end...

*** Is this a typical downturn? Greenspan is no miracle 
worker...W R Grace at a P/E of 1... and more!

*** How long will the rally last? How far will it go? 
Probably not very long...and probably not very far.

*** Trading was light on the day after Christmas. The days 
between Christmas and New Year's normally produce a good 
move to the upside. But yesterday, the techs started out in 
the wrong direction. 

*** Broadcom, for example, was down about 12% by noon. Then, 
a guest on CNBC mentioned it as one of his Top Picks, and 
the shares went back to where the began the day. The Nasdaq 
even managed a small gain for the day - 23 points. Still, 
the Nasdaq is facing a 38% loss for the year - its worst 
year ever.

*** The Dow did better - up 56 points. 

*** And in the humor category, TheStreet's Internet Index 
fell another 3 points or so yesterday...bringing it down 72% 
for the year. 

*** The most significant market event yesterday was the 
continued decline of the dollar. The euro rose over 93 

*** All the things that went so right for the dollar a year 
ago, seem to be going in the other direction now. A year 
ago, a European investor might exchange his euros for 
dollars and send the money to Wall Street. He might 
reasonably expect a 17% capital gain on stocks - plus 
another 10% from a rising dollar. 

*** But now, what can he expect? A 20% loss in the average 
leading mutual fund - as measured by Investors Business 
Daily - and a falling dollar! So, what does he do? He sells 
his U.S. dollar assets and converts the money back into 

*** This causes stocks to fall on Wall Street...and the 
dollar to fall too...which makes U.S. investments even less 
attractive to foreign investors.

*** Foreign investors, who cares about them? Well, $682 
billion of capital flowed into the U.S. in the first 9 
months of this year - a record. It funded the trade deficit, 
pushed up stocks and bonds, and levitated the dollar. Now, 
the tide has turned. The inflow is turning to outflow.

*** "The last 10- to 15- year period, in which U.S. dollar-
denominated assets outperformed all others around the world 
has come to an end," said Ray Dalio of Bridgewater 
Associates, interviewed by 

*** Dalio had a number of things to say that seemed 
important, even prescient. The prevailing opinion is that 
the world faces a typical slowdown which will be managed by 
the Fed in the typical way. But, says Dalio, "we have a 
situation here that is a whole different has a 
life of its own. It is not as managed by the Fed as a 
typical business cycle and so when we talk about a recession 
this really won't be one of those typical recessions."

*** The typical way to manage a downswing is by lowering 
interest rates. The idea is simple enough: the cost of money 
(the interest rate) is supposed to be like the gas pedal on 
an is like fuel...the more readily 
available it is, the faster the economy runs.

*** This quaint mechanical metaphor lodges in the mass mind 
like a campaign slogan - simple, memorable and moronic. When 
the economy turns sluggish, people imagine that Greenspan 
and his fellow central bankers need only press harder on the 
monetary pedal. And often, this appears to be the case.

*** But "25, 50, or 75 basis point cuts do not pull 
economies out of recessions," says Dalio. The minimum rate 
cut necessary, according to Dalio, is 290 points (2.9%). The 
average recession since WWII took 550 basis points to fix. 
But there was nothing average about the boom of the last 15 
years...nothing average about stock market valuations...and 
nothing average about the slowdown that lies ahead.

*** "There are 650 basis points between here and zero" says 
Ed Yardeni. But even that may not be enough. As I point out 
with tedious regularity - the Japanese took their interest 
rates down to zero - and still could not get their economy 

*** Alan Greenspan, says Dalio, "is viewed as a miracle 
worker...and he isn't. Events are likely to turn out worse 
than the conventional wisdom..."

*** You may recall, also, the dominant idea of `90s 
investing - that since price movements were random...and 
since stocks always go up over the long run...the thing to 
do was to buy and hold, regardless of price. Dalio's 
comment: "History shows that investors who have bought 
growth stocks without regard to the price they pay for 
growth have done very poorly."

*** IBM rose sharply on Friday, after an analyst urged 
investors to "back up the truck." But by Tuesday, rumors 
were flying that the company would warn of softer sales and 
earnings. So, it turned into a Big Blue day - with the 
shares down 5%. 

*** "Overstocked Retailers Must Slash Prices" proclaims an 
Atlanta headline. Wal-Mart said that its sales too were 
coming in "below plan." Investors took a 4% discount on WMT 

*** Amazon, meanwhile, believes it will hit its $1 billion 
sales target for the year. But only, as one analyst put it, 
"by selling stuff below cost." Amazon is now down 85% since 
Jeff Bezos was named TIME's Man of the Year last January.

*** Anyone interested in an extremely ugly stock might want 
to take a look at W R Grace. "GRA," reports a recent issue 
of Grant's Interest Rate Observer, "was quoted at a P/E only 
slightly greater than one." Even more shocking... 
"multiplying Tuesday's closing price, 1 5/8ths, times the 65 
million shares outstanding," continues Grants, "yielded a 
market cap of about $100 million. Grace had year-end assets 
of more than $2.5 billion."

*** Red Herring reports that 260 of the 350 IPOs of the year 
2000 are in the red. IPOs from the nation's top 16 
investment banks lost an average of 28% from their offer 
price. If you'd bought them at the end of the first day of 
trading, your loss would be 48%. Goldman Sachs' 47 IPOs, for 
example, are down 16%... Forget buy and hold. The trick was 
to buy at the offer price...and sell into the first day 
trading hype. If you'd done that with all of Morgan 
Stanley's 30 IPOs you would have mad a 93% profit. If you'd 
held them until Dec. 20, you'd have lost 24%.

*** Insiders sold tech and shares when they hit 
their peaks back in March. Now those shares are down 80% and 
more. And guess what? The insiders are selling even more! 
The Richmond Times Dispatch reports that insiders unloaded 
shares in Vignette Corp. in March at $100. Recently, 
insiders dumped even more shares - at prices as low as $15.

*** The New York Times reports that law firms are building 
up their bankruptcy departments. "Demand is soaring" said 
one lawyer. "A huge wave is coming," said the surfer 
attorney, "and we want to make sure we catch that wave."

*** Natural gas is selling at its highest price in 10 years. 
Oil gained 46 cents yesterday, following OPEC's announcement 
that it would cut production by 500,000 barrels per day.

*** "Whether or not OPEC realizes it," writes John Myers of 
Outstanding Investments, "the biggest factor impacting oil 
prices is not a conspiracy by Western governments but a much 
more direct threat that cannot be blackmailed into 
submission - a North American recession." (see: Gaddafi and 
Chavez' Fatuous Bluff

*** Nothing much to report on the home front. I am stumbling 
on roller blades, scooters, and remote controlled cars - or 
getting run down by them. One of the few advantages of a 
chateau is that there are long corridors and big rooms, in 
which the kids race around as though they were in a skating 

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Today's letter begins at the end of line of thought, the 
beginning of which is littered with woe.

I refer to mushrooming evidence that things are not going 
well in the financial world. The dollar is going down. And 
when it goes down, it drags behind it, like climbers roped 
together on Everest, all its fellow wayfarers: stocks, 
bonds, the economy, pensions, well as the 
pretensions, conceits and fantasies of the New Era.

This Winter of Woe may herald a green and fulsome 
spring...or it may be the beginning of many months, or even 
years, of despair and depression. I don't know. But I am 
beginning to explore the dark, nether reaches of human 
economic history... "Could this be the beginning of 
something really big?", I woke up asking myself the other 
day. Could it be big the way WWI was big - marking the end 
of one way of life and the beginning of the new one? Could 
it be result of mass communications and collective 
thinking... of big words and big empty thoughts?

Maria reminded of the big words that got the blame for WWI - 
militarization, nationalization, mechanization. Could 
another trio of Latinate abstractions - securitization, 
globalization, and derivatization - be the source of another 
sort of calamity...a financial one?

There is something about Latinate words in English - they 
are linguistic lies that hide more than they reveal. But 
that discussion is for another day... 

Today's very modest goal is to make that discussion an 
amusing and entertaining one. The world financial system may 
experience a catastrophic meltdown, but your appreciation of 
it will depend on your perspective. The collapse of the 
dot.coms, for example, is comedy to us. But it is tragic to 
those who hold the stock.

Likewise, we want to be entertained, rather than chagrined, 
by the next stage of this drama. To that end, I direct your 
attention to a study of the gold price done by Paul van 
Eden, quoted here many months ago. Van Eden noted that the 
price of gold varies inversely with the foreign exchange 
value of the dollar. As the dollar goes down on global 
markets, the price of gold goes up. Gold is the dollar's 

Gold is an enigma. It is is a store of value... 
and it is a useful commodity - all at the same time. When 
people have confidence in paper money - they don't need gold 
as money, and it trades like a commodity. But when they 
begin to lose confidence in paper money and paper assets, 
gold's monetary features become attractive.

"Gold is the only asset," says Doug Casey, "that is not also 
someone else's liability." Recently, it was disclosed that 
Paul Allen, Bill Gate's fellow multi-billionaire at 
Microsoft had placed a "collar" on $3.5 billion worth of his 
shares. In effect, Allen had a put option that protected him 
on the downside. Unlike the fantasy "Greenspan Put," the 
Allen Put was real. But it meant that someone on the other 
side of the trade was taking a big loss. The speculator's 
"asset" (the right to profit as MSFT shares rose in price) 
turned into a huge liability. As the credit bubble deflates, 
many of these speculators will go broke. Genius will fail. 
The speculators will go broke and be unable to make good on 
their commitments. Thus, not only the speculator's asset 
will turn into a liability...but Paul Allen's asset could be 
at risk too.

There are, of course, people who are long gold...and those 
who are short the metal. But unhedged gold has no bills to `burn rate' balance of 
payments to worry about. 

It is its eternal lifelessness that makes gold a valuable 
asset. It may go nowhere...but neither does it disappear. 
This quality is especially valuable when other forms of 
money run into the trouble and wealth disappears. Already, 
more than $3 trillion has disappeared from U.S. capital 
markets. Yet, except for a roll of coins I seem to have 
misplaced, not a single ounce of gold has been lost. 

But how to invest in gold? How about a gold mining company 
that has no debt, a half billion in cash and which you can 
buy today for only about a half as much as it would have 
cost you a year ago? At a recent price - about C$15 - the 
company had cash and securities to cover nearly 50% of the 
market capitalization. 

The company is Franco-Nevada, recently the subject of a 
review in Grant's Interest Rate Observer. "The most 
prominent feature of the Franco-Nevada income statement," 
report the Grants team, "other than its 45% net profit 
margin, is that its single largest expense is income taxes."

A handy comparison chart provided by the interest rate 
observers shows that Franco-Nevada can hold its own in any 
company. Comparing the figures for the 9 years ending 
calendar 1999 (or fiscal 2000), Franco, at 27.4%, has 
greater annualized revenue growth per share than Intel and 
only slightly less than Microsoft. Its net income per share 
growth rate is three times Coca-Cola and 50% more than 
Fannie Mae. And its growth in book value per share is 
roughly the same as Fannie Mae, more than Intel and more 
than twice Coca Cola's. 

Yet, the share prices are hardly comparable. Recently, you 
could have bought five shares of Franco-Nevada for every 
share of Microsoft or Intel.

"What exactly does this enterprise do?" asks Grants. "It 
cashes royalty checks. It owns a portfolio of more than 60 
royalties in six countries (some 87% of its revenues are 
derived from U.S. mines). Precious metals constitute almost 
90% of the royalty-producing resource base, of which gold 
amounts to 75% to 80%. Platinum and palladium fill out the 
balance of the metals resources. Other assets include five 
million acres of undeveloped land...This land the company 
makes available for exploration and development by contract 

"Even one meaningful success," Grants quotes Steven Bregman 
of Contrarian Research, "could be enormously additive to the 
Franco-Nevada future cash flow and current net asset value."

Cashing royalty checks must be a good business. "In the 
years 1991-2000," Grants continues, "its average after-tax 
profit margin was no less than 57.1%." And, Franco, "if it 
were ever blessed with a gold bull market, would earn 
considerably more than the already stunning returns it has 
managed to generate in a gold bear market."

No one can predict the future - a point I make often and 
demonstrate frequently. But if this is one of those times 
when people lose confidence in paper assets - holding 
Franco-Nevada shares should make the whole spectacle more 

Bill Bonner, 

Your unreconstructed gold bug

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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For nearly 62 year, The Fleet Street Letter, the oldest investment
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Last modified: April 01, 2001

Published By Tulips and Bears LLC