--- Begin Message ---
-Caveat Lector-
* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you receive
Bill Bonner's DAILY RECKONING. This will help you to keep
pace with the changes in the markets. Bonner and I agree
on most things in the field of economics, so the two letters
reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The Paper Age
THE DAILY RECKONING
PARIS, FRANCE
WEDNESDAY, 5 JUNE 2002
* * * * * * * * * * * * * * * * * * * * * * *
*** Back to reality...but what reality? 42 times
earnings?...
*** Tycoons are sick people, not bad people!...
*** Consumers still spending...but investors buying
fewer U.S. stocks...Big Brother is watching...and
more...
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-- Been to the Daily Reckoning Marketplace Yet? --
If not, you ought to see what you've been missing.
Want to read more from our regular contributors? This
is the place to find it.
We've collected some of the best financial advice and
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all in one place. Take a look:
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"Logic suggests," writes Newsweek's Wall Street reporter
Allan Sloan, "that for the next decade or so, stock
prices won't increase much faster than corporate
earnings, which typically rise about 7 percent a year.
Throw in an additional 1.5 percent or so for dividends,
and you end up with a return - dividends plus stock
price increases - in the high single digits. And getting
that return depends on price-to-earnings multiples
staying at their current high levels..."
"Welcome to reality," says Sloan. But Sloan's reality is
not necessarily Mr. Market's reality. The 20% per year
gains of the late '90s are gone, he says. Instead, it's
back to "normalcy," in which investors only get what
they've gotten for the last 56 years - about 9% per
year, including dividends.
Mom and Pop Investor are probably just now coming to
terms with this 'reality.' They liked the big gains of
the '90s...but they're not greedy. Stocks always go up
in the long run, they still believe; it's just too bad
they only go up at 9% per year. But, hey, 9% ain't so
bad. Wouldn't it be a darned shame, dear reader, if Mr.
Market pulled one of his perverse tricks...and stocks
lost 9% this year? Or 19%? Or 49%? Or 69%?
Even Mr. Sloan notes that getting 9% in the coming years
"depends on price-to-earnings multiples staying at their
current high level, which is no sure thing." The reality
is that P/E ratios are currently about 3 times the
normal level - depending on how you calculate them.
Over the sweep of history, the vernacular wisdom of
generations of investors was that stocks should trade
for only about 15 times earnings. Why should they be
worth more today?
But let's turn to our own eyes and ears on Wall Street,
Mr. Eric Fry, for an up-to-date report:
******
Eric, adroitly reporting from New York...
- As anticipated in yesterday's Daily Reckoning, the
"obvious trades" stopped working...for one day, anyway.
- The stock market and the dollar stopped falling and
gold stocks stopped going up. Although stocks and the
dollar both dropped early in the day, they reversed
course in the afternoon. Conversely, gold stocks climbed
early before falling in the afternoon.
- By mid-morning yesterday, the Dow had dropped more
than 100 points. But the blue chips recovered to finish
the day with a slim 21-point loss at 9,687. The Nasdaq
fared even better than the Dow. Despite falling about 1%
in the morning, the Nasdaq ended the day with a 1% gain
to 1,578. Interestingly, at its nadir, the Dow traded
below its September 10, 2001 closing level of 9,605,
thereby joining both the Nasdaq and the S&P 500 in
erasing - temporarily - all of the "Patriot Rally."
- The dollar also reversed course mid-day. After sinking
to a 28-month low against the Swiss franc, the U.S.
currency pared its loss to nearly unchanged. Gold stocks
reversed in the opposite direction - up 2.7% in the
morning, down 1.4% by the closing bell.
- Judge not Dennis Kozlowski, the newly indicted former
CEO of Tyco International. The man deserves our
sympathy, not our scorn. He is clearly suffering from
Acute Avarice Syndrome (AAS). He might like to be
magnanimous, but his disease prevents it.
- "During his rise to become one of the nation's chief
executives, Mr. Kozlowski persuaded his board to give
him hundreds of millions of dollars of cash, stock and
[perks]," the New York Times reports. "He took home tens
of millions of dollars of pay that supposedly reflected
his improvement of the company's performance. Yet, Tyco
still lent him millions of dollars...Incongruously, Mr.
Kozlowski also looked for ways to save amounts of money
that represented a pittance of his wealth. Rather than
waiving the fee to sit on his own board, as most
executives do, he received $75,000 last year."
- We healthy people cannot possibly imagine the pain
that Kozlowski endures as an AAS sufferer. Tyco
shareholders, however, might have some inkling what the
pain feels like. Tyco shares have collapsed more than
70% in 2002 alone.
- The "Kozlowski Affair" is but one of the most
egregious examples of shareholder abuse. During the late
bubble years, corporate chieftains and Wall Street's
investment bankers would take turns wiping their feet on
the millions of investors they were purporting to serve.
Maybe that's why the reputational race to the bottom of
the sea between corporate America and Wall Street is a
dead heat.
- Maybe that's also why fewer and fewer investors wish
to avail themselves of Wall Street's conflicted
research. "With Wall Street's big research houses
swimming in scandals, investigations and litigation,
investors are hankering for...unbiased stock research,"
Crain's observes. "Independent research houses all over
New York are on a roll...Perceived as paragons of
disciplined, trustworthy research, they are taking
advantage of the myriad messes weighing on their big
rivals' reputations."
- As a contributor to Apogee Research, I have definitely
noticed an uptick in demand for independent research.
And Apogee is not merely independent, it has also been
very right - both on the long side and on the short side
of the market. Call it skill or call it luck - or call
it a little bit of both - all 13 of Apogee's current
recommendations - 6 shorts and 7 longs - are in the
black.
See: Apogee Research
http://www.apogeeresearch.com/dr
- Even when the stock market falls, consumers are
remaining confident. One measure of their steadfast
confidence is their growing contribution to GDP.
Financial commentators often remark that consumer
spending equals about two thirds of GDP. But David Tice
calculates that consumer spending is currently
contributing a spectacular 88% of GDP. Now that's
confidence! In other words, they are spending more and
more, even as corporations are spending less and less.
- Consumers aren't the only ones who are feeling
confidant these days. So are mortgage lenders. Many
lenders seem to be so sure that things are getting
better that they are refusing to foreclose on folks who
don't pay them. "While the number of mortgage
delinquencies has increased in the last five years or
so," the New York Times reports, "the proportion of
homes that end up being sold through foreclosure has
been declining. That's because many lenders are stepping
up their efforts to work out arrangements with
delinquent borrowers that let them avoid foreclosure and
stay in their homes whenever possible."
- Like the tree that falls in the woods, if a mortgage
becomes delinquent and the lender does not foreclose, is
it really delinquent?
******
Slouching back to Paris...
*** Which has done better over the last 30 years - the
Nasdaq or the S&P Utilities Index? Utilities, notes
Richard Bernstein. Why? Because dividends really do add
up...while capital gains have a way of disappearing. Too
bad most U.S. stocks pay so little in dividends.
*** "After long U.S. spree," reports the International
Herald Tribune, "investors broaden portfolios..."
Specifically, investors are buying more European stocks
than U.S. stocks. Foreign purchases of U.S. stocks
totaled $100 billion in the 12 months ending on May 1,
2002. During the same period foreigners purchased $200
billion of European stocks.
*** Bob Bauman of the Sovereign Society sends this note
of warning: "Yesterday came news that leading US
financial services firms and banks have formed a private
database company to compile information about criminals,
terrorists and other 'suspicious' and 'bad people'...
A prime measure of suspicion will be possible 'money
laundering,' that all-purpose, elastic criminal charge
that is stretched to cover anything connected to cash,
money or finance...The new snitch system reportedly has
the government's OK.
"Well, why not? Private enterprise can now make a profit
doing police work and at the same time get rid of
unwanted customers and clients with ease. Himmler's
Gestapo and Castro's block informants are historical
pikers compared to the ability of a complicit US banking
system reporting to the FBI on a real time basis."
Sovereign Society
http://www.agora-inc.com/reports/SVS/website/
*** This is a big day for Jules. The teenager - whose
grades have been marginal - learns today whether or not
he will be booted out of his school. The poor boy
suffers in anticipation...like a guilty man waiting for
a jury verdict.
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The Daily Reckoning PRESENTS: John Myers, of Outstanding
Investments fame, with a rather simple formula for
investment profits in the natural resource sector.
Simple...in our view...should not be ignored.
THE PAPER AGE
by John Myers
In my 17th year I spent the summer working with our
neighbor Mr. Lynch. Our project: to encircle a quarter
section of land with rail fences.
Lionel Lynch had the best stories. He was a World War II
Veteran and a self-made millionaire. He was also an old-
time farmer who drove a beat-up Ford truck. Riding along
in the truck he used to tell me about the landing at
Normandy beach, the push through France and a German
sniper's bullet that missed his heart by inches. I
remember asking and then being allowed to see the scar.
One windless day in August, the sun was grueling. Mr.
Lynch drove the claws of his hammer into a post and
said, "Time for a break." He went to the back of his
pick-up and threw-off the gunny-sack that was covering a
gallon of Mrs. Lynch's homemade iced tea. We sat on the
hood of the truck and old Lionel surveyed the rolling
tide of ripening wheat fields that stretched to the
foothills.
He dug into his greasy coveralls and reached for his
zigzag papers and a pouch of tobacco. Within seconds he
had fashioned a cigarette, snapped a match to life from
his boot and inhaled a big drag.
"This is a wonderful land we live in," said Mr. Lynch.
"And they ain't making anymore of it."
It may not have seemed that way during the 1980s when
the rolling recession plowed a deep gouge into farmland
prices. In Alberta a section of land that would grab
$1,000 in 1980 would fetch only half of that a few years
later. It was the same throughout North America where
not only land, but hard assets across the board fell
into steep retreat.
Metals - base, precious and strategic - dropped
precipitously in the 1980s, as did grains, cotton and
almost everything else from hogs to coffee. The CRB
Index of commodities fell by almost a third between 1980
and 1985.
The age of paper had arrived and it seemed not only
profitless, but downright stupid, to hold anything else.
Beginning with a broad rebound in the Blue Chips in the
1980s and continuing with the NASDAQ in the 1990s, the
stock market was the only game in town. At silver's high
in 1980, nine ounces of the white metal would buy you a
single share of the Dow Industrials. By 1999 you needed
a wheelbarrow to carry 2000 ounces of silver to buy one
share in the Dow.
Yet, something very strange has been happening over the
past couple of years. The stock market has staggered,
while hard assets have been moving up slowly but surely.
So what exactly is happening? I think I have the answer,
and it relates back to that summer's day with Mr. Lynch.
A few years later, economics professors in big
auditoriums using fancy charts and complex names would
teach it to me. But it was the same lesson, one of
supply and demand. As the supply of anything grows, from
apples to atom-busters, the price of it falls. Now this
is where it gets interesting.
The only thing that has been really growing by
gangbusters over the past 10 years is paper...money, US
dollars.
In 1992 M3, a broad-based measure of dollars, stood at
$4.2 trillion. Currently M3 totals about $8.1 trillion
dollars, or almost double what it was a decade ago. If
we take the much smaller measure of currency in
circulation we see that during the same period it has
grown from $267 billion to a shade under $600 billion.
That's correct, there are more than twice as many
greenbacks circulating in the world today as there were
10 years ago.
Now let's compare that to the amount of gold in the
world. Each year miners deliver about 50 million new
ounces of gold from the ground. That adds about one-half
of one percent to the world's total reserve of gold.
Roughly speaking, the amount of above-ground gold has
grown from 9.5 billion ounces to 10 billion ounces over
the last ten years. That means while the number of
dollars has doubled in a decade the amount of gold has
risen by only 5%!
To give you an idea of how much gold is produced each
year: the entire annual harvest could be put into an 18-
square-foot cube. The cold hard truth is that gold
supplies are growing at less than 1/10th the rate of the
U.S. money supply.
It is the same for almost every commodity. Water is in
critically short supply, as is arable land. That means
that repeating the Green Revolution of the 1950s and
'60s is all but impossible. World grain farmland
increased until 1980. It has been on a steady decline
since. The reason? Take your pick - soil erosion,
waterlogging and salting of irrigated land, air
pollution and water shortages.
Less water, less food, and, it seems, fewer mineral
deposits.
Paul van Eeden, a stockbroker at Global Resource
Investments, understands the growing scarcity of hard
assets. "Let's look at an example of depletion and
discovery. Worldwide copper consumption is about 33
billion pounds per year," writes Paul. "To put that in
perspective, the biggest copper mines in the world
contain on the order of 20 to 30 billion pounds of
copper, which means that our annual consumption depletes
the equivalent of one major copper deposit a year."
The drawdown in global mineral reserves has resulted in
mineral companies slashing their exploration budgets.
According to the Metals Economics Group, total worldwide
nonferrous exploration was $5.2 billion in 1997.
But mineral exploration expenditures declined by 29% in
1998, 24% in 1999 and another 7% in 2000. That brings
the total exploration expenditure at the beginning of
the millennium to only $2.6 billion, 50% of what it was
only three years prior. Mineral exploration is not
keeping up with the historical norm.
Demand for hard assets is soaring. The Developing World
is bent on creating its own Industrial Revolution. That
means massive amounts of raw materials are needed.
For example, if China were to pursue "an automotive
economy" similar to the US as they proposed in 1994,
there would be a resource boom like no other we've see
in history. "If the Chinese were to drive as many per
capita passenger miles as Americans currently do each
year," Benjamin R. Barber in the book Jihad vs. McWorld
"it would take only five years to use up all the earth's
known energy reserves."
In my book, a soaring demand for natural resources of
every variety in the face of dwindling supplies coupled
with an avalanche of paper dollars makes up a very
simple equation. And if Mr. Lynch were still around
today, I believe he would come to a similar commonsense
conclusion - the value of hard assets is set to soar
against a sorry U.S. dollar.
Yours for opportunity,
John Myers,
for The Daily Reckoning
P.S. It's a fairly simple formula...a dwindling supply
of resources plus a skyrocketing demand for them coupled
with an ever-increasing volume of dollars equals rising
prices. Simple as it is, it makes for some fairly
impressive investment choices.
For example, in my private trading service, The Resource
Trader Alert, we've already seen 77% profits on silver
in just 3 months...82% profits with gold calls, also in
about 3 months...and 99% on unleaded gas (of all things)
in only 5 weeks.
Not to mention the 276% we pulled down last year on
Range Petroleum... and 668% profits with Ballard Power.
Across the board, natural resources are providing far
superior returns to anything you might find on Wall
Street. If you'd like to learn more, please click on the
following link:
The Resource Trader Alert
http://www.agora-inc.com/reports/RTA/ProfitHere
Editor's Note: John Myers is son of the late great
goldbug C.V. Myers. Accordingly, he's been helping
readers earn lucrative returns in stocks largely ignored
by Wall Street since his early 20s. Our man-on-the-scene
in Calgary, John has his fingers on the pulse of the
natural resource industry - including oil, gas, energy
and gold.
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Want to read more from our regular contributors? This
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