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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 15 MAY 2000 



*** Is Dell a growth company?
*** Big news tomorrow...a bigger rally ahead?
*** Cash machines down and out in Paris...

*** Not much action on Wall Street. Dell announced its 
latest figures -- which, as always, "were better than 

*** But William Fleckenstein says that, "if you backed 
out non-operating income and then adjusted for taxes, 
you'll find that Dell made 16.4 cents versus 16 cents 
last year." This is a growth company? What justifies a 
P/E of 70?

*** The PPI figures -- which shed some light on inflation 
at the wholesale level -- came out, too. They were 
benign, showing the price of energy down by 4%. But the 
same day, the price of oil rose to nearly $30. 

*** So the market didn't have much to go on...and didn't 
go very far. The Dow rose 63 points. The Nasdaq went up 
29 points. 

*** There were 1,593 stocks advancing; 1,325 declined. 
There were 82 stocks that hit new highs, while 75 hit new 
lows. I continue to report these numbers, but the clear 
pattern has disappeared.

*** Hanging over the entire affair is the threat of a 
rate increase by the Fed tomorrow. Greenspan is widely 
expected to raise rates by 50 basis points. A Reuters 
headline tells how even this is spun as good news: "Big 
Hike Seen Bringing Bigger Rally." The logic of it is that 
a 50 bps increase will put the Greenspan Fed "ahead of 
the curve." The bad news will be over. (Don't count on 

*** The two largest IPOs in history are now both below 
their issue prices -- AWE and Palm. Palm is 84% below its 
first day high of $165 -- set on March 2.

*** Another big IPO -- the Dutch Internet service World 
Online -- fell from a flotation price of 43 euros on 
March 13 down to 16 euros on Friday. In a move that I 
predict will become more and more fashionable -- 
shareholders are suing the issuers.

*** The hurdle is being raised. "It's getting tougher and 
tougher for smaller companies," said one analyst quoted 
by Reuters, to raise money. "There's a lack of liquidity 
and demand for those deals; the market is really 
squeezing the smaller issuer."

*** The cash dispensers didn't work in Paris over the 
weekend. Y2K strikes? A hacker in the system? A high tech 
breakdown? Nope. Turns out, the digital economy is 
vulnerable in an unexpected way. Someone has to stock the 
machines with cash. And the union that represents the 
cash handlers went on strike. 

*** Let's see...what else is going on in the world?
I'm sitting in the first class section of the Eurostar on 
the way to London. When I began making this trip a couple 
years ago, the cars were almost empty. Now they're full. 
All businessmen. 

*** The English newspapers are disappointing this 
morning. Not much happening in Britain, I guess. I've 
heard of people not getting enough slack, but here's a 
story about someone who seems to have been cut too much. 
An unfortunate American went bungee jumping in 
Switzerland. He went right to the ground without even 
slowing up.

*** And here's a story about a pair of gay guys who got 
some woman to have a baby for them. Turned out, she had they've got a pair of twin girls -- Aspen and 
Saffron -- who were baptized on Sunday. 

*** There's still time. This Wednesday The 15th Annual 
Premier Offshore Advantage Seminar begins in the Bahamas, 
and runs through Sunday (May 17-21). Enjoy the sunny 
Bahamas and learn about tax-deferred earnings and 
financial privacy. Only two days left, so if you're 
going, you better make arrangements. Send Michael 
Whitstine an e-mail at right 

* * * * * * * * *


"So, what do we do then?" asked a DR reader. 

"Should we, like Buffett, simply not buy stocks that we 
can't value? Isn't that a bit naive, to simply not take 
any risks on companies or ideas that could realistically 
have a huge earnings stream? Consider Yahoo. From the 
very beginning this company was a potential blockbuster. 
Gross margins of 86% and almost zero capital cost."

Lack of earnings history and high prices make the typical 
Internet stock inappropriate, if not abhorrent, to a 
value investor. But does this mean that value investors 
are doomed to miss out on all new tech opportunities?

To make a long story short, the answer is, "yes."

In fact, Internet companies are not only out of reach of 
value investors -- they are beyond the reach of any 
serious investor. 

But the lure of great wealth, near the peak of a mania, 
is so strong that most people find it impossible to 

"The mark of a mania is when the general public senses 
that it has been left out of the cornucopia," writes Gary 
North in a recent letter. "They begin to get frantic, 
looking for a way to get onto the one-way road to Easy 
Street. They follow the trends. They buy whatever has 
already gone up by three or five to one."

It is not merely by mistake that these "investors" lose is by design. That is the way the system 
works, in other words. For it to end up any other way 
would be an affront to the money gods...and a challenge 
to human nature.

An investor bidding on an Internet stock may feel that he 
is playing on a level field. And maybe it is 
a marsh. You sink down a little further with each step 
you take, until there is no hope of ever getting out. All 
investors, though, get the same treatment.

Tech stocks are widely thought to represent the wave of 
the future. Jim Davidson has written that it is only by 
betting on these "New Economy" companies at a very early 
stage that one can hope to get rich by investing. Others 
have complained that if you try to apply "old-fashioned" 
investment approaches, you'll find yourself sitting out 
the biggest wealth explosion of all time.

Of course, whatever dynamite there may be in the Internet 
revolution, it has yet to detonate. But it may someday. 
And the genome project may produce huge, almost 
miraculous benefits. Even so, could an investor put in 
money with a reasonable hope of a return?

Professor Hal Varian, dean of the School of Management, 
UC Berkeley, maintains that there are five stages in 
technology revolutions: experimentation, capitalization, 
management, hypercompetition and consolidation. "We are 
probably in stage two of the Internet revolution," writes 
Gary North. "In previous revolutions, the 
hypercompetition can last a decade or more. Example: the 
reduction of the telegraph companies, 1855-61 -- 88%. It 
happened again to the large electrical companies later in 
the century: 87%."

"The odds are that the typical investor will not be 
heavily invested in the 10% to 15% of the Internet firms 
that survive. He will also have bought in late. Easy 
Street is always a dead-end road for most investors..."

So, if you were a serious investor, and you were able to 
calculate a reasonable price for a start-up company -- 
that is, what the company would be worth if you expected 
it to succeed -- you'd have to discount it by 85% or so. 

However, it is almost impossible to figure out how much 
it should be worth. There are two many unknowns. Each 
opportunity requires much more intense study than an 
"investor" can give it. 

That is why these deals are typically given to 
speculators to fund, not investors. Speculators usually 
specialize in a given area -- say biotech -- and get to 
know the area well. They are able to calculate the odds 
of success of a given project - roughly -- and negotiate 
the terms of their involvement so they have a decent 
chance of making money. They know that most projects will 
fail. So they make sure that each investment they select 
has huge upside potential.

This is what Jim Davidson and his team are doing in the 
high tech area. It's what Doug Casey has done for many 
years in the mining sector. But it is clearly not 
"investing" in the normal sense of the word.

The average investor has neither the information, the 
training, the expertise nor the temperament for real 
speculation. He is so far down the financial food chain -
- below the promoters, founders, entrepreneurs, venture 
capitalists, brokers, touters and smooth-talkers -- that 
he is almost certain to be swallowed whole. For not only 
has he no way of separating a good speculation from a bad 
one, his inability to do so almost guarantees that the 
deals he is offered will be bad. 

Gresham's Law operates in the world of Internet stocks, 
too. It is easier to create bad companies than good ones 
(they have fewer requirements). In a market that can't 
tell the difference, Gresham's Law predicts, the bad ones 
will push out the good ones. Soon the only ones available 
to the average investor will be bad ones.

That has already happened. Even good Internet stocks -- 
assuming there were some -- rose to such levels that they 
were bad for whoever bought them. Even experienced 
speculators -- such as Julian Robertson -- lost money on 
them. Can the average investor hope to do better?

Bill Bonner

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

The Daily Reckoning is a FREE e-mail service of The Fleet 
Street Letter -- If you'd like practical advice about 
profiting based on the ideas in this e-mail, then simply 
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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 02, 2001

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