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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Discounting The Future

*** The rally sputters...can it hold?
*** The bear market in the dollar may have begun
*** And gold! Glorious gold! Up again... 

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*** Richard Russell tells us that the halfway point 
between the Dow's most recent high and its most recent 
low is a critical level. He calls it the "50% 
Principle." If after making a low, the Dow can recover 
50% of its losses - and hold above that level - there is 
a good chance it will continue to rise. 

*** Yesterday, the Dow rose 20 points - bringing it 
decisively above the halfway point of 10,759. Can it 
hold? We'll see. Does it matter? Who knows...but it 
adds a little drama to our daily review of the numbers.

*** Last week's great bull explosion sputtered on Monday. 
The Dow and Nasdaq still had enough momentum to end the 
day in positive territory. But the advance/decline line 
fell back into loss - with 1329 stocks advancing on the 
NYSE and 1625 declining. 

*** The price of gold continued to rise yesterday - up 
$4. Gold, as explained in a research report by Paul van 
Eeden, varies inversely with the foreign exchange value 
of the dollar. The dollar goes down... gold goes up. 

*** So, the dollar fell yesterday...a very ominous trend, 
in my view. Every major sector and indicator of the bull 
market has topped out - including most recently, the 
Nasdaq. Et tu, greenback? 

*** The euro rose against the dollar to a value of nearly 
95 cents. A few days ago, financial journalists 
pronounced the euro dead. They may have been a bit 
premature. In fact, it may be the dollar that is ailing. 
If so - the US economy and its stock market will soon be 

*** The end of the bull market could be the biggest 
financial story never reported (except here). It would 
make imports more expensive and, thereby, begin the work 
of reducing the current account deficit.

*** Working on Wall Street was not always the high-
earning, high prestige career it is today. After the 
bear market of `73-'74, the Charles Schwab Corp. was in 
trouble. It had only 13 employees, many of whom were 
looking for other jobs. But the 80s and 90s were good to 
Schwab. It grew to 356 domestic offices, 7 million 
accounts, $823 billion in customer assets and a market 
cap of nearly $40 billion. But now, volume is falling 
and at least one company is offering to do stock trades 
for free. Schwab and the other discount brokers are 
being squeezed. Schwab's share price fell to 32 � 

*** Optimism dies hard. Bill King reports that Jose 
Conseco, baseball and stock market player, was on CNBC 
talking about his investments. He is 90% in tech stocks 
and expects the Nasdaq to hit 5,000 within 8 months. 
King opines that perhaps Conseco's judgement was impaired 
by the homer that "caroomed off his coconut."

*** Speaking of infections, there's a strange infection 
afflicting heroin users in Glasgow. Women drug addicts 
seem to develop abcesses and then about half of them die. 
Health authorities believe the infection may be a type of 
anthrax poisoning.

*** "A prolongation of the resistance would make for a 
useless loss of blood," wrote General Erwin Rommel to the 
besieged Free French forces at Bir Hakeim, North Africa, 
58 years ago. "You will suffer the same fate as the 2 
English brigades that were annihilated at Got Saleb the 
day before yesterday." The French refused to surrender. 
The Italian and German armies attacked, but the French 
held out, miraculously, until they were relieved.

*** Today is, of course, also the anniversary of the 
Normandy landings in WWII. 

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

Discounting the future 

"Why should we invest our money in our own business?" 
asked a business partner recently, "We could make more 
money in the stock market."

The publishing business has not been a high-growth, high 
profit industry in recent years. We have the opportunity 
to extend our product lines, or buy new ones, but the 
return on investment may be as low as 5%.

"It doesn't make sense," was the obvious conclusion, one 
that must have been reached by thousands of business 
people over the last few years.

I am grappling with a subtle, but important, point. The 
market discounts future earnings. The discount rate is 
the equivalent of society's `hurdle rate' - the minumum 
return you need from an investment to make it worth 
doing. The hurdle rate is usually roughly the same as 
the riskless rate of return that you can get from, say, 
T-bonds. If an investment won't do at least that well - 
why bother?

But stocks return 10% to 15% per year. Those numbers are 
taken as a minimum by investors and a benchmark by 
analysts. It is presumed that there will be periods - 
from a few months to a few years - in which stocks 
underperform the longterm averages. But, "over the long 
run," the mantra goes, "nothing beats a well-balanced 
portfolio of equities." 

There is short term volatility, we are told, but no real 
risk if you are willing to wait out the down periods. 
Thus, the return from stocks has come to be regarded as 
`riskless' - and establishes a new a `hurdle rate' for 
comparative investment. 

But at that rate of return, relatively few capital 
investments measure up. If you can build an office 
building and get only an 8% return - what would be the 
point? You could earn more by doing nothing.

Over the last few years, companies discovered that they 
could earn more money buying the stock of other companies 
than they can by developing their own business. And what 
better stock to buy than your own? Not only do you earn 
money from the general rise in stock prices, your buying 
helps to drive up the price, which coincidentally helps 
to put your own executive bonus options in the money.

Occasionally, corporations earned more from the increase 
in share prices than they earned from operations. IBM, to 
use one example, has been a massive purchaser of its own 
shares - spending more money buying IBM shares than the 
company earned. 

However, a company does not become a better company - 
with new and better products - by buying stock. It 
becomes a better company by developing its product line. 
So while IBM used its cash to bid up its own share price, 
the actual value of the company (at least, theoretically) 
must have declined.

If a company really could earn more from share buying 
than it could from operating, it would not only buy a few 
shares from time to time, it would fire its workers, lock 
the doors - and put all the money to work in the stock 

As Mark Hulbert puts it in his piece in the NY TIMES, "If 
the market's expected return is greater than a company's 
return on equity, the rational thing for the company to 
do is to close up shop and invest its assets in the stock 

Over the long run, stock market price increases cannot 
exceed corporate earnings. Otherwise, the companies 
would disappear - their capital values liquidated so 
owners could participate more fully in the stock market.

Disappear might be the right word. Because a company 
that can't produce a return on equity equal to risk free 
rate of return is not an asset - it's a liability. 

You find the value of a company by discounting (using the 
prevailing discount rate) the stream of income it is 
expected to produce. If the discount rate is greater 
than the return on equity, the capital value is negative. 
It has no value...or actually, negative value...since an 
investor could make more money in a risk-free, discount-
rate placement.

Any company that has not made at least as much return on 
equity as the average return from stocks should have been 
sold off. Yet, one of the strange trends of the last few 
years has been for stock in companies with negative 
capital value (that is, companies that are not likely to 
produce enough income to exceed the hurdle rate of 
return) to rise in price. This, of course, cannot 

Two professors - Eugene Fama at the University of Chicago 
and Ken French of MIT - have been researching the long-
term returns from stocks. They discovered that, for the 
last 50 years, corporations have been earning 11.9% on 
equity. But the stock market average has been increasing 
at 14.8%. How could that be? How come businesses knock 
themselves out for a 11.9% return, when the owners could 
have gotten 3% more without any real effort? How could 
America's corporations have been unprofitable, on a 
discounted basis, for half a century? Or, how is it 
possible that all the publicly-traded businesses in 
America would have, again discounted by the `risk free' 
returns of the stock market to net present value, a 
negative value? 

The professors answer the question by saying that stock 
market investors erred. They overestimated the gains the 
stock market should produce. The expected rate of return 
from stocks, say the academic duo, should be more than 5 
points lower than most people think. 

Looking further back, Fama and French discovered that the 
stock market returned an average of 8.8% for the 70 years 
from 1872 to 1949. They believe that period was more 
representative of the market's true capacity to reward 
investors. Their work has not yet been published, says 
Hulbert, but "word of it is beginning to spread."
More on the mysteries of the discount rate...soon.

Your correspondent,

Bill Bonner

P.S. I am the victim of a new syndrome...yet to be 
picked up by TIME or by the talk show circuit: road rage 
on the information highway.

Mark Hulbert wrote a piece in the NY TIMES on Sunday, 
which I had clipped. But between the time I read it and 
this morning, when I needed to refer to it for this 
article, the article was lost.

So, I asked my assistant, Addison, to go to the NY TIMES 
website to retrieve the article.

Easier said than done. The website asked for our zip 
code which, once given, was refused as "incorrect." We 
were sure it was the right zip code, but we tried a few 
others too. No zip codes were accepted. So we were 
unable to pay $2.50 for the article. 

So, we tried the International Herald Tribune website. 
IHT had run the article too. And IHT doesn't charge to 
view articles, so we would thus avoid the zip code trap. 
This, too, proved unavailing. The article which appeared 
in Monday's paper, for whatever reason, was not included 
among the articles that supposedly appeared in Monday's 

Finally, Addison picked up the phone and called the 
librarian at the IHT office across town. "No problem," 
said she, "just email me with what you want and I'll 
email it to you." After another phone to chase it 
up...the article finally arrived.

Things don't always happen the way they're s'posed to. 
And time is precious. That is why a dollar in the future 
is worth less than a dollar today. How much less? 
That's what the discount rate tells us. 

And "in the long run," said the economist John Maynard 
Keynes, whose birthday we celebrated yesterday, "we are 
all dead." So, if you're going to do something 
important, or something you want to do, you'd better do 
it now rather than in the future. Who knows what the 
future will bring?

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 02, 2001

Published By Tulips and Bears LLC