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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

MONDAY, 29 MAY 2000 


Today:  Teenaged Stocks

*** Stocks off on Friday...Stockbrokers off Today
*** A Lot More Supply Coming on the Market
*** 'Ledgerdemain' in Washington

*** Friday, the S&P futures opened up -- as has been 
their habit. But the market went the other way...closing 
down, as has been its habit.

*** The Dow fell 24. The Nasdaq fell too -- but so 
little it is not worth recording.

*** Advancing stocks beat declining ones -- 1493 to 1351. 
But new lows far out--paced new highs -- 98 to 38. 

*** So, not much happened on Wall Street...but it is a 
holiday weekend. Volume was very low. 

*** At the beginning of last week, Alan Abelson of 
Barron's reminded us of the "Q" ratio -- that is, the 
relationship between the value of the stock market and 
actual corporate net worth, or replacement cost/book 
value. "To cut to the chase," writes Abelson 
impatiently, "...q tell us right now that, the market is 
more euphorically priced than at any time in 
history...[and] indicates that the present downside risk 
is that the Dow Jones Industrial Average will decline to 
between 4000 and 4500."

*** By the end of the week, the markets were moving in 
the direction Abelson and q suggested they should -- with 
a more stocks falling than rising...many more hitting new 
lows than new highs...and the indices almost all down. 
The Dow fell 3% over the week. The S&P dropped 2%. And 
the Nasdaq was down 5.7%.

*** The Nasdaq decline may be explained, and further 
anticipated, simply by the increase in supply coming to 
the market. Bradley Alford, who provides a service 
called IPO, reports that 2.8 billion shares, 
worth about $121 billion, came onto the market in May. 
In June, the total is expected to be 1.3 billion shares, 
with a market value of about $40 billion. These are 
shares that were previously held off the market -- 
restricted, or "locked up," for a period following the 
IPO. These are shares that owners may have gotten for 
pennies on the dollar. Many of them will almost 
certainly be sold -- even at much lower levels.

*** The euro looks a bit healthier -- having risen 
slightly on Friday. Perhaps this is not so much a 
comment on the euro as on the dollar. If faith in 
America's miracle economy and its levitating stocks 
disappears -- so does the value of the dollar. 

*** Higher interest rates are "hurting the rest of the 
world more than [the U.S.]" said Ed Yardeni. He believes 
capital will continue to flow to the US and its currency 
-- thanks to Fed tightening. 

*** As we know, raising the cost of capital � point has 
no effect on investors who expect to earn 20% per year on 
their money. And it has no effect on companies whose 
sales are negligible and whose own cost of capital is 
zero. But even a quarter of a point has a significant 
impact on the rest of the world.

*** Homes sales, for instance, are off 6.2% March to 
April, and down 6.9% from the same period a year ago. 
And there are a few anecdotal references to real estate 
prices topping out in the S.F. Bay area. 

*** A few points make a difference to institutions with a 
lot of debt. The US Federal government, for example. 
Thanks to the 'ledgerdemain,' to coin a word, of the 
clerks and the mendacity, to use an old one, of the 
politicians, it is widely believed that the US will be a 
debt--free nation in 2013. Actually, total debt will 
increase by 21% by that time, but the debt holders will 
change. There will be fewer private holders of public 
debt, and a lot more debt in the hands of the Social 
Security administration. 

*** "The operating surplus in the US federal budget was 
$450 billion," according to H. Erich Heinemann, reporting 
in Barron's. The trouble with that is... "A spike in the 
federal operating surplus has preceded every US recession 
since World War II."

*** And I see Barron's has picked up on a theme I've 
talked about here frequently. Remember the "Esperanto 
currency?" Barron's labels it the goulash currency (taken 
from our own contributing editor, Rick Ackerman): 
"...blending so many politically and culturally disparate 
elements makes for an unappetizing stew prepared by too 
many cooks." 

*** Tolstoy said that all happy families are the same. 
But I can't imagine that there is another one like ours. 
In fact, our family is not even like itself. That is, 
the family one week seems completely different from what 
it was the week before. It is always like a screw--ball 
farce of the 30s and 40s...with the actors coming on 
stage in some state of desperation, panic, or madness. 
But the plot changes from day to day -- and so do the 

*** Maria, who used to be such a darling -- and had me 
wrapped around her little finger -- has changed her role. 
What is it about teenaged girls that causes them to lose 
their sense of humor -- at least while they are in the 
company of their parents? Everything is a crisis. Every 
event is a cause for despair. Every comment is either 
stupid or insulting. 

*** Well, she probably still has me wrapped around her 
little finger -- but the position is not as comfortable 
as it used to be.

Using Volatility for Capital Gains 
You could have nearly tripled your money on one 
investment in just 62 days. To be exact, your money would 
have increased 292%. It was a simple transaction, with 
very limited risk and nearly unlimited potential. For 
more details, see 
+ + + + + + 

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

Teenaged Stocks

Early in the 20th century a forgotten politician, Arthur 
Balfour, surprised England by stepping down from the 
leadership of his party. When asked why he had done so, 
a colleague replied on his behalf:

"Mr. Balfour says that there was an Ice Age once, and 
there will be one again."

You may recall the quotation from Oskar Lange which 
graced my letter from Friday. I will repeat it, but this 
time with a slightly different point in mind:

"The system of free competition is rather a peculiar one. 
Its mechanism is one of fooling entrepreneurs. It 
requires the pursuit of maximum profit in order to 
function, but it destroys profits when they are 
pursued by a larger and larger number of people."

A man makes a fortune in a business. Soon, a lot 
of men and women are trying to make their fortunes with 
dot.coms. Whatever profit margin might have been enjoyed 
by the first is soon competed away -- regressing to the 
mean. Once it has reached its mean, a simple, rational 
market would stop. Why should the business 
produce any lower -- or higher -- profits than any other 

But the world is neither simple, nor rational. What's 
more, it is subject to epochal trends. Anyone who has 
ever had a teenaged daughter...or been in the same room 
with one...will need no further proof of this statement. 
Every emotion is exaggerated. Every triumph -- and every 
setback -- is amplified to the point where it is life--
threatening. Ice ages come every week.

The conditions that were so fecund and flattering to 
dot.coms -- and the rest of the stock universe -- seem 
to be changing. and new tech IPOs are no longer 
assured of a favorable reception. Recent buyers of new 
economy stocks -- of even such mammoth, and celebrated 
IPOs as AWE, the wireless wonder -- have lost money. In 
fact, anyone who bought MSFT in the last 18 months is now 
in a losing position. The dot.coms have reached their 
teenaged years.

This is not merely because free competition destroyed the 
profits of the TNT companies. It also destroyed the 
profits of investors. Over the last decade, millions of 
new investors came into the stock markets. Like the 
companies whose stock they bought, as the number of 
pursuers increased, the amount of profits each could 
catch fell.

The whole process of starting companies and funding them 
seems to have many of the same elements as raising 
children. Both require incredible faith -- if not actual 
self--delusion, as Lange suggests. Entrepreneurs, 
investors and parents expend excessive amounts of time, 
effort and money -- almost certain to be frustrated. 

There are, of course, beneficiaries of these efforts. 
Joseph Schumpeter, famed economist and perhaps a parent 
too, noted that technological innovations do benefit 
society -- by lowering prices, improving quality, and so 
forth. But the outsized profits expected by investors in 
the new innovations, like the outsized hopes they have 
for their children, usually fail to appear.

One contributor to the massive influx of new investors 
has been the idea that no special expertise is required 
to make money in stocks. You may recognize this as a 
vulgate version of the Efficient Market Hypothesis -- or 
EMH -- which holds that, over time, all investors get 
about the same rate of return.

This produced the notion that a completely ignorant 
newcomer to the stock market should do about as well as 
Warren Buffett or George Soros. And in the perverse way 
of the world, and markets, over the last few years the 
amateurs not only did as well -- they did better.

The amateurs' money flooded into the market. The 
resulting tide of cash raised all the boats. But not all 
alike. The heavily--laden, value--oriented "Old Economy" 
stocks rose grudgingly, while the hollow, helium--filled 
offerings of the "New Economy" positively floated on the 
air itself.

"The market is high," wrote best--selling author Robert 
Shiller in Irrational Exuberance, "because of the 
combined effect of indifferent thinking by millions of 
people, very few of whom feel the need to perform careful 
research on the long--term investment value of the 
aggregate stock market, and who are motivated 
substantially by their emotions, random attentions and 
perceptions of conventional wisdom."

The conventional wisdom has two tenets: Hold stocks for 
the long term. And buy the dips. Of course, the two are 
contradictory, but who's going to quibble with the logic 
that, until recently, produced such spectacular rates of 

And as long as the market is rising -- that is, as long 
as the self--delusion and cash of the amateur investors 
holds up -- these convictions pay off. Too bad they 
can't last forever. Not only that, but as they 
reverse...the same amateurs who bid them up to absurd 
levels are likely to sell them down to equally absurd 
levels. Extraordinary profits will give way to 
extraordinary losses. 

If only nothing ever changed! If only Maria could remain 
an adorable little 12--year--old forever...and stocks 
would rise until the end of time -- or at least through 
the next presidential election cycle.

But that is not the way the world works. Ice Ages come. 
Teenagers and bear markets happen.

Your humbler and humbler correspondent,

Bill Bonner

P.S. Today's Memorial Day. The markets are closed. I'll have 
more to say about this holiday tomorrow. 
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 02, 2001

Published By Tulips and Bears LLC