--- Begin Message ---
-Caveat Lector-
The Daily Reckoning
Weekend Edition
June 15-16, 2002
London, England
By Addison Wiggin
MARKET REVIEW: Thus Commences The Vicious Cycle
It's the question of the year, says CBS MarketWatch's,
Tom Calandra (courtesy of Le Metropole Cafe): "When the
investing public, already headed for the exits, runs
screaming from the U.S. stock market, how will gold
mining stocks, and gold, benefit?"
The answer seems obvious... to some. Since September,
mining share indexes have even risen ahead of the spot
gold price... no small feat, as bullion is up 28%. In
the same stretch, the Philadelphia Gold & Silver Index
(XAU) is up 49%... and the AMEX Gold Bugs Index has
reached as high as 139%.
What's more, "gold mining stocks," write Calandra,
"thanks to the weak stock market, nuclear war threats,
and reduced forward-selling by miners, are juiced well
beyond the pricing models of professional analysts. The
Wall Street and Toronto mining analysts almost all use
operating cash flows, profit margins, and the level of
proven bullion reserves a company has in the ground as
their touchstones for value."
These valuations are, of course, a far cry from
measuring 'eye-balls,' potential payoffs from
productivity increases, off-the-book derivative schemes
and share buyback programs we've come to know and love
over the last several years.
With the tepid caution of a 17-year-old entering his
first peep-show, investors again belied their wariness
of Wall Street's shenanigans this week and left the Dow
panting uneasily 171 points lower. The Nasdaq and S&P
fared slightly better... each losing about 30 for the
week.
Even in London, from whence I scribble today, Mr.
Market-Smith-Jones was left feeling a bit edgy. The
'footsie' shed about 300 points over the last two
trading sessions... sliding down to 4630. Uneasiness
with regard the US 'recovery' and widespread lack of
interest by investors were widely cited as reasons for
the drop.
In the humble opinion of your editors here at the Daily
Reckoning, we have entered the initial phase of what
promises to be a uniquely vicious cycle: Foreign
investors pulling the plug on Wall Street... an
increasing desire by the world's central bankers to STOP
using the US dollar as their reserve currency... further
turmoil in the markets... driving investors to seek
alternative investments outside of the world's major
markets... including those, like the FTSE, that
generally hold up well during US market weakness.
In a nutshell: "If foreign investors fail to recycle
funds generated by our trade deficit," writes the
Prudent Bear's David Tice "the dollar could continue to
sink, further limiting interest in our stock and bond
markets. After all, there are bull and bear markets in
the dollar as in any other freely traded commodity.
Prior to its bull run over the last seven years, the
dollar lost half its value against the yen - from late
'84 through '89 - and against the Swiss franc - from
'85-'87."
Should the dollar continue to drop, as we expect, the
price of gold to go higher and higher still, as it is
the safest investment for individuals - and governments
- when markets tumble. "Gold," says the Financial Times
this morning, "long shunned by professional investors,
is back in fashion as a 'safe haven' investment. The
Swiss National Bank, which has one of the biggest gold
reserves of any central bank, says that private
investment demand in Japan, Europe and the US is
'booming'."
"The investment case for gold," writes Tocqueville Funds
John Hathaway, "centers on the notion that the over
valuation and excessive supply of the US currency has
funded a decade's worth of uneconomic investment and
unsustainable consumption." And according to Professor
Robert Mundell, also courtesy of Mr. Hathaway, "There
will come a time when the pileup of international
indebtedness makes reliance on the dollar as the world's
only main currency untenable. It is no longer necessary
or even healthy for the U.S. or the rest of the world to
rely solely upon the dollar."
For more on the sustained rally we're expecting in gold
- including an opportunity to further investigate five
gold juniors we expect to benefit quickly from a rally
this summer - please read the following Daily Reckoning
Investor's Alert, followed by John Hathaway's
groundbreaking report "The Investment Case For Gold: The
Basics" (also available on Tocqeville's excellent
website):
The Untold Secret Behind The Gold Rally
www.agora-inc.com/reports/400KPENY/WealthBuilder/
And in the meantime, hope you're having a good weekend.
It's World Cup fever here in London today, as England
takes on Denmark in the firs match of the sudden death
round. The pubs opened at 7am this morning, and they're
packed...
Addison Wiggin,
The Daily Reckoning
P.S. "Given their unpleasant experience [should
international investors lose money in US markets]," Tice
continues, "it would be no surprise if they thought
twice about putting more money in U.S. stocks. And sure
enough, foreign buying is losing steam. Net foreign
purchases averaged just $5.3 billion a month during
January and February. Other than last September, that's
the least interest foreign investors have shown in our
stock market since April, 2000. February net buying at
$2.1 billion was far below the $9.3 billion average over
the '97 - '01 period." More below, in today's Flotsam &
Jetsam...
P.P.S. By the way, if you haven't heard, Agora Financial
Publishing will be hosting our Annual Agora Wealth
Symposium in San Francisco this year.
It promises to be quite a shindig. We've arranged for
you to stay in a five star hotel for about half what it
usually costs...all while minling with with some of the
sharpest 'contrarian' investment minds in the business
today. Then again, I'll be speaking, too...
For more details, click below... "early bird" discounts
are still available, but not for long:
The Agora Wealth Symposium
August 14-18, 2002
The Palace Hotel,
San Francisco
http://www.awaionline.com/dr
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THIS WEEK in THE DAILY RECKONING
by Bill Bonner
06/14/02 ALMOST TOO GOOD TO BE TRUE
"...What sticks in our craw is the self-righteous
carping and the "I told you so" subtext of the sudden
stock market naysayers. We do not recall the newspapers
complaining about Kozlowski's compensation when his
stock was rising. Nor do we remember anyone in the mass
media who was troubled by the way in which Tyco and
other boom-era whizzes did business..."
http://www.dailyreckoning.com/body_index3.cfm?id=3278
06/13/02 THE CURTAIN RISES
"...Nothing about this recession/recovery has followed
the script. Every line has been flubbed. The leading man
- Alan Greenspan - played the same character he always
plays...Mr. Easy-Money-to-the-Rescue. But the audience
neither booed nor cheered. No one seemed to care..."
http://www.dailyreckoning.com/body_index3.cfm?id=3273
06/12/02 RISING NORTH STAR
Guest Essay by Andrew Kashdan
"...Canada is looking better and better as an investment
destination for those fleeing the declining U.S. dollar.
Economic growth is rebounding, interest rates are rising
and both current account and budget surpluses are
expected this year..."
http://www.dailyreckoning.com/body_index3.cfm?id=3269
06/11/02 QUACKS AND RISK PREMIA
"...As recessions go, the recent downturn was a total
flop. It did none of the things recessions are supposed
to do. Consumers did not slow their borrowing or
spending. They bought new cars instead of making do with
old ones. They bought new houses, and mortgaged more of
existing ones...Stocks did not go down to reasonable
levels. Businesses did not pay down debt..."
http://www.dailyreckoning.com/body_index3.cfm?id=3262
06/10/02 TRADITIONAL VALUES
"...In large groups of people, complex and even elegant
ideas get mushed down to a fermenting syrup of empty
jingles, slogans, and campaign folderol. From time to
time, now and again, but according to no published time-
schedule, Mr. John Q. Public takes up the brew and
quaffs it like a dipsomaniac with an empty stomach. In
practically no time at all - it has gone to his head..."
http://www.dailyreckoning.com/body_index3.cfm?id=3258
* * * * * * * * * * * * * * * * * * * * * * * * * * * *
HEADLINE, NEWS And INSIGHT: Is The Dow Headed For
7300?...Big Problems With The 'Recovery Story'... And A
Stern Warning From The Most Prudent Of Bears...
Half-Empty - And Draining Fast
by Adam Lass
Following a complex and convoluted charting system -
perhaps one, that only he could understand - Q-Wave's
Adam Lass comes to a staggering conclusion: The next
wave in the bear market on the Dow could knock us all
the way back to October '98...
http://www.dailyreckoning.com/body_headline.cfm?id=2165
Not Your Garden-Variety Recession
by Dr. Kurt Richeb„cher
"...So far, policymakers and Wall Street have been very
successful in deluding the public into the belief that
the U.S. economy has no serious problems. In my view,
however, it is grossly misplaced confidence..."
http://www.dailyreckoning.com/body_headline.cfm?id=2140
FLOTSAM AND JETSAM: Foreign Investors Hold The Key To
Dow And Dollar Strength
Watch Out if Foreign Investors Turn Against U.S. Markets
- David Tice
The Prudent Bear
"...Throughout the '90s, non-U.S. investors were
increasingly aggressive buyers of U.S. securities,
helping to drive U.S. stocks higher during the bubble,
and keeping them from falling further since.
This foreign money is nothing to sneeze at. In fact, the
Securities Industry Association calculates that between
1997 and June 2000 foreign investors were the third
largest purchasers of U.S. equities, behind only U.S.
mutual funds and life insurance companies.
But how long will foreign investors keep buying our
stocks? After all, the factors that piqued the interest
of foreign investors are working in reverse. The NASDAQ
has under performed the U.K.'s FTSE 100, Europe's FTSE
300, and even the Japanese Nikkei over the one, two and
three year periods ending in April. The S&P 500 has
fared better against those averages, but it too has
posted negative returns over each of the periods.
And now the dollar has begun to weaken. That makes bad
returns worse when translated into local currencies.
Year-to-date, the dollar has lost ground against the
Euro, the Canadian dollar, the Swiss Franc and even the
Japanese yen.
Given their unpleasant experience, it would be no
surprise if international investors thought twice about
putting more money in U.S. stocks. And sure enough,
foreign buying is losing steam. Net foreign purchases
averaged just $5.3 billion a month during January and
February. Other than last September, that's the least
interest foreign investors have shown in our stock
market since April, 2000. February net buying at $2.1
billion was far below the $9.3 billion average over the
'97 - '01 period.
Foreign investors bought more than stocks over the past
decade. They were also happy to help soak up the supply
of U.S. governments, agencies, and corporate bonds. By
1998, net foreign inflows into U.S. securities had
reached $288 billion, on their way to a record $522
billion last year - a fivefold increase over eight
years. Foreign investors now own some 40% of the
country's marketable Treasury securities, compared to
19% in '92. And, foreigners bought a net $229 billion of
U.S. corporate bonds (including structured products) in
'01. That's triple the $76 billion net inflow into all
U.S. open end bond funds - including government bond
fund funds.
But foreigners have had less enthusiasm for U.S. fixed
income instruments lately. While they were net sellers
of Treasuries in '99 and '00, they were heavy net buyers
of corporates and agencies. Last year foreigners were
net buyers in all four categories of US securities
tracked by the U.S. Treasury. But in January and
February, foreigners were net sellers of Treasuries and
only meager buyers of everything else. Other than last
September, we have to go back to early '99 to find less
foreign interest in U.S. financial markets generally.
If foreign investors fail to recycle funds generated by
our trade deficit, the dollar could continue to sink,
further limiting interest in our stock and bond markets.
After all, there are bull and bear markets in the dollar
as in any other freely traded commodity. Prior to its
bull run over the last seven years, the dollar lost half
its value against the yen (from late '84 through '89),
and against the Swiss franc (from '85-'87).
Either a sharply falling dollar, or a grinding dollar
bear market, would make foreign investors think twice
about loading up on U.S. securities..."
Then what? See: The Untold Secret Behind The Gold Rally
www.agora-inc.com/reports/400KPENY/WealthBuilder/
Editor's Note: David W. Tice is the founder and director
of David W. Tice & Associates, a capital management firm
in Dallas, Texas. Tice manages The Prudent Bear Fund and
is an important component in Strategic Investment.
Tice's work has gained national recognition through
Barron's articles he has authored and from his
appearances on business television. He has appeared on
the Nightly Business Report, Wall Street Week with Louis
Rukeyser and CNBC, warning investors about the dangers
of investing near the end of a bull market.
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