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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Arithmetic of Desire

In Today's Daily Reckoning:

*** What, do they make up these numbers? I'm referring to 
the CPI, which came out yesterday. The market expected an 
increase in the core rate of inflation of 0.2% -- and 
that's what it got. But how?

*** "The BLS (Bureau of Labor Statistics) must have 
conducted the CPI survey in La La Land," said an item on 
Bloomberg. "Fraudulent" is how Bill King describes the 

*** BLS had natural gas rising 0.7% in May, and gasoline 
prices supposedly fell 3.5%. If they fell, only the BLS 
noticed. The Dept. of Energy said gasoline rose more than 
10% in the same period. Gasoline prices are now at record 
levels. And natural gas futures rose 40% while the BLS has 
the gas itself up less than 1%.

*** Investors didn't seem to know or care. Stocks rose and 
fell, higgely-piggely, with no destination in mind. The Dow 
ended the day up 66. The Nasdaq ended down 53. 

*** But gold seemed to know where it was going. The yellow 
metal rose a stunning $6.10. August contracts closed above 
$290...which, if I recall correctly from yesterday, Harry 
Schultz said would be confirmation of a bull market.

*** And while gold got harder, the dollar got little 
softer. Don't be surprised if you see a lot more of this 

*** The dollar, you will remember, depends on the 
willingness of global investors to keep financing 
Americans' spending spree, which has reached epic 
proportions. "On a net basis," Alan Abelson reports in 
Barrons, "Europeans alone have bought over $33 billion 
worth of U.S. equities" so far this year. They only bought 
$46 billion in all of '99.

*** Meanwhile, Americans keep pouring money into mutual 
funds. On a net basis, $154 billion has gone into the funds 
so far this year. 

*** But even this flood of money cannot seem to raise the 
general level of stocks. The Dow is lower today than it was 
a year ago. The smart money is draining out the hose. 
Insiders are selling out - like Dr. Koop, the former 
surgeon general, who sold stock in his start up 
while it was still worth something. 

*** Investors Business Daily's index of mutual funds shows 
equity funds producing a return of only 3% this year. That 
is not going to be enough to feed the meter. Whether people 
are investing borrowed money, or savings, the market will 
have to do better than that...or the money will go 

*** The meters of and many of the other Internet 
companies are almost out of cash already. The companies are 
consolidating. was bought by for 
$13.7 and Ebay bought for $374 million in stock. 
Advice to shareholders: sell the stock as soon as 
you can.

*** Defense stocks have been mentioned here - and in the 
Fleet Street Letter ( as 
a contrarian opportunity. War may be out of style, but 
styles change. Bell bottoms and mini skirts seem to be 
coming back; maybe war will come back too. In any event, 
"after 14 years of defense-procurement budget cuts," writes 
George Putnam III in the Turnaround Letter, "the U.S. is in 
its second year of defense-budget increases." Putman 
mentions several of the companies we've talked about here: 
Raytheon, Litton, Northrop Grumman.

*** "[W]e're in the first phase of a bear market that could 
be long, tedious, grinding and very painful," says Richard 
Russell, interviewed in this week's Barron's. "Before it's 
over, I believe we'll see pig pools of money moving out of 
stocks and into cash. I also believe we'll see absolute 
slaughter in that dinosaur industry, mutual funds. There 
are now an absolutely ridiculous number of equity funds. In 
time they'll be decimated, with literally hundreds of them 
closing down as investors bid them good-bye."

*** But for now...there is a lot of optimism in the 
marketplace which will take a while to wear out. Al Gore is 
betting that this good feeling about the economy will last 
beyond the November election. He's staking his election on 
his kinship with the Clinton administration's economic 
record. But the Clinton regime can no more claim paternity 
of the economic performance of the last 8 years than Gore 
can claim to have fathered the Internet. A blood test would 
show that the current boom was sired by Reagan's tax cuts 
and Volcker's tight monetary policy, followed by "Easy Al" 
Greenspan's loose policies...

Like a wilding in Central Park, Greenspan was assisted by a 
gang of fortuitous events - the collapse of Communism, the 
bear market and recession in Japan, the baby boomer's need 
to finance their retirements and the rise of the Internet 
- which held off inflation and focused attention on the 
excitement of the New Economy.

*** "If you are an extreme contrarian who likes 
astronomical dividend yields on extremely beaten down gold 
stocks," Dan Ferris writes... "here's a stock that just 
paid a $1.25 dividend on May 30, 2000. The share price just 
before then was around $2.68. So you could have had 
yourself a nice, fat 45% dividend. Every $10,000 invested 
turned to $14,500 in the blink of an eye...They pay 
dividends semi-annually, not quarterly. But man, do they 

"Throughout 1998, the stock traded for less than $2. That 
year, it paid $0.4166 in regular cash dividends -- 20%. 
...And actually, shareholders in 1998 earned a lot more ... 
Total dividend payments to shareholders of
record in 1998 were $11.6163 per share. No typo, Bill. 
$11.6163 PER SHARE, a little under 600%. Ever heard of 
anything like that in your life?"

I had not. The company: Gold Fields of South Africa. 

*** Yesterday, the Manhattan U.S. Attorneys made the 
biggest securities fraud bust in history... 120 people were 
hauled in. Members of five NY mob families were among the 
suspects. "They go where the money is," said U.S. Attny 
Mary Jo White. Where is the money? Need you ask? As part of 
the overall scheme," says a journalist on the AP wire "the 
Internet was... used to promote stocks and companies were 
falsely touted as Internet or '' companies to induce 
investors..." who lost an estimated $50 million.

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"Desire and necessity" said my friend Michel at lunch 
yesterday, "have no clear boundaries. People only really 
need a few calories per day...and a little heat when it is 
cold. Everything beyond that is want, not need."

Needs follow wants, like my daughter following me into a 
department store. I wanted to take her shopping, but soon 
discovered that she needed a new jacket for summer, and a 
dress for the wedding, and a pair of shoes to go with the 
dress, and a purse to go with the shoes...and of course, a 
new hat to go with the shoes.

A man wants to buy a bigger house in a better neighborhood. 
Then, his wife informs him that they need new furniture, 
and a new washing machine, and someone to tend the garden.

Wants end up being more expensive than you expect. The 
needs trailing behind them expand proportionately.

This is why (I will come to the point right away) desire 
needs to be controlled. That is what interest rates, 
ticking meters, investment strategies and marriages do for 

"Without discipline," wrote Mark Hulbert in his AAII 
Journal article, "we are all too likely to dump a strategy 
at the wrong time - and then compound the problem by 
jumping on the bandwagon of a winning strategy just at the 
time it is about to lose its "hot hand."'

So it was the Stanley Druckenmiller, George Soros' partner 
decided that he had to abandon the value-oriented strategy 
that had served the team so well for so long. In the 1999s, 
value investing looked like a loser. Value investors were 
dinosaurs, hopelessly retrograde in their thinking, and as 
out of style as a Nehru jacket.

I have already recounted Mr. Druckenmiller's cautionary 
tale. Mr. Druckenmiller did not like being out of style. He 
wanted to be ahead of the curve, not behind it. Then, 
following the TNT (techs, nets, and telecoms) bandwagon, he 
walked right over the edge of a cliff in April.

One of the most popular bandwagons of stock market history 
is the remarkable case of the Cisco Kids. This too, is a 
story already told in these letters. 

"The Industrial Age is over. The Computer Age is over. The 
Internet Revolution is five years old in the U.S. and just 
beginning in Europe, Asia, China and Japan (wherever they 
are, ed.)," thus writes another veteran of the newsletter 
investment advisory business, Donald Rowe.

Rowe, editor of the Wall Street Digest and a man who once 
liked gold but now likes capital letters, believes that 
"the Wireless Revolution is just beginning in the U.S., but 
will spread rapidly to the rest of the world. Selling Cisco 
to purchase GM is backward thinking. Cisco is the bluest of 
the blue chip Internet stocks, a company you should own and 
hold for at least five years or more. I see Cisco's 
revenues increasing 30% a year for the next five years 
because of the worldwide wireless/telecommunications boom."

The 30% per year figure is the result of analysts' 
guesswork. But even if it were right, what would be a 
reasonable price for the company? You don't even need a 
calculator to figure it out. A municipal bond will bring 
you, say, 6% per year. You would expect to do at least as 
well with Cisco, wouldn't you?

Currently, even if all Cisco's earnings were paid out, 
you'd get less than 1% per year. But hey, it's growing 
fast. By the fifth year, says Stephen Kofler of First Union 
Securities, Cisco's revenues will be triple what they are 
today. So, in year 5 - assuming earnings kept pace -- you'd 
get, well, less than 3%. 

The meter is ticking. It makes no sense to own the stock - 
unless you could buy it at 80% discount. Every year you 
hold it, you lose money - unless there is some bigger fool 
willing to pay an even daffier price for it. 

But the argument against Cisco is not merely a matter of 
arithmetic. It's a matter of desire.

People will pay a lot of money for something they really 
want. And what they really seem to want right now is to 
feel that they are a part of this great new world...and 
that they won't Miss Out or be Left Behind in the march 
into the Next Millenium.

Owning Cisco stock satisfies the desire, even if it is very 
unlikely that it will make an investor any money. 

But there's an arithmetic of desire too. People will pay a 
premium for something they really want to own. A classic 
Corvette...a fine bottle of Taitinger wine...a Rolex 
watch...a Harley-Davidson motorcycle. If you can control 
the brand, you can enjoy a generous profit margin for many 
years. Cisco has no way of controlling the "hot stock" 

Who wants a Cisco? What is a Cisco anyway? I don't think 
I've actually ever seen one. And who could pick one out of 
a pile of trash - even if their life depended on it?

I don't know about you, but I've never seen anyone with 
"Cisco" tattooed on their arm. Nor has anyone ever taken me 
into his garage to show me the new Cisco he just bought. No 
one is proud to own a Cisco product - just the stock.

That's because Cisco products, whatever they are, are not 
"want" products...they're "need" products. They're 
commodities: the useful, anonymous nuts and bolts of the 
digital age. But I don't recall anyone making a fortune 
producing nuts and bolts in the industrial age? 

Cisco has competition. And the very attractiveness of Cisco 
and its stock price will draw other competitors. And some 
of them will do whatever Cisco does, but better, faster, 
and cheaper. People will substitute other devices for those 
of Cisco. Price competition will be devastating. Whatever 
margin Cisco enjoys today will become smaller. People will 
not need Cisco's products.

Finally, owning Cisco stock will no longer be cool either. 
It will be the mark, not of someone who is on the cutting 
edge of the New Economy, but someone who is being cut down 
by it - someone who is unaware that Cisco's time has come 
and gone...someone who sticks to old ideas long after they 
have been discredited...someone who has no vision...and no 

In short, somewhere in the not too distant future, 
investors will neither want nor need Cisco. For the moment, 
it may be one of those things investors desire, but will be 
harmful to them in the long-run.

Your very disciplined correspondent, sticking with the 
program, day in and day out, no matter what...

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...

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Last modified: April 02, 2001

Published By Tulips and Bears LLC