THE DAILY RECKONING

PARIS, FRANCE

THURSDAY, 28 OCTOBER 1999
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Hello again. This e-letter is my way of staying in touch with you and other Agora
Financial customers. It is free. In Today's Daily Reckoning:

*** Amazon just keeps rollin'…
*** Gold is up
*** Buffett moves into energy

But please let me know what you think. (Of course, you can "opt out" at any
time…see below.) Also, feel free to share this with friends. The way to get a
FREE subscription for yourself or a friend is at www.dailyreckoning.com
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*** Amazon announced its third quarter results yesterday. The company lost $86
million. Jeff Bezos saw his net worth decline by half a billion dollars…as the
stock went down 6%. Schadenfreude, anyone?

*** Most of the techs and Nets were hit…as money moved to the financial stocks.
Overall, the Nasdaq fell. But the Dow rose 92 points.

*** As usual, there were 34 new highs…but 245 new lows. A bear rally could take
the Dow up a couple hundred more points. We could even see a reversal in the
high/low ratio. Readers are advised to be skeptical.

*** The French say that British beef is unsafe. The Brits say the same about
French beef. The euro, that symbol of European integration and commercial
harmony…the Esperanto currency of central planners' dreams…sinks.

*** Gold rose $3.80. By my reckoning, gold is cheap. But not ridiculously cheap.
Yet. It was $20 an ounce in 1900. The dollar has lost 95% of its value during the
century. So gold could be at $400…almost enough to buy a suit. Maybe $500.

*** What's really out of whack is the stock market…and the electronic measures
of wealth -- in dollars -- that it implies. Less than 30% of the spectacular rise
in stocks since 1995 can be linked to a rise in earnings. The rest was caused by
credit expansion -- in other words, inflation. A rising price of gold suggests
worldwide growth and continued inflation. That's what the central planners are
hoping for, in my humble opinion. It would allow a gentle deflation of U.S. stock
prices…while the economy is buoyed by worldwide growth. Besides, the central
bankers figure they know how to deal with inflation.

*** If the inflation, now in stocks, finds its way into consumer prices…and
commodities…the price of gold will skyrocket. But that doesn't have to happen.
Most of the credit expansion of the past decade is not in paper currency form. It
can be obliterated at the speed of light…simply by falling prices of stocks and
bonds. There need not be wheelbarrows of currency roaming the streets looking for
something to buy. All the "money" creation of the past 10 years need not cause
consumer price inflation, in other words -- nor a dramatic increase in the price
of gold.

*** While most stocks have been headed down for the past 18 months, Lynn
Carpenter reports that "The Fleet Street Letter's" conservative stock picks are
doing quite well. Its very selective portfolio included a 120% gain on a Japanese
tea company, a 130% gain on Korean steel, a slight gain on Singapore real estate,
gains 30-40% on three transportation stocks and 7% on the fourth. For more
information on the Fleet Street Letter, call 1-800-433-1528 and ask for code
3472.

*** Not only that…transportation stocks are down 19% since May. Oil traded at
nearly $10 a barrel at the end of 1998…now it is over $22 -- which hurt the
transports. But Lynn tells me that her three freight shipping picks actually went
up…41%, 39% and 32%.

*** Warren Buffett, on the other hand, is coming to the oil party fashionably
late. This Monday it was revealed that he had bought into oil for the first time
in his life -- paying $9 billion for MidAmerican Energy.

*** More on the Internet…and an excellent reply from a DR reader…who knows a
lot more about the Internet that I do. I'm reprinting his comment, below, and
asking him to join our company

*** I suggested some weeks ago that it was only a matter of time before the yen
hit 100 to the dollar. That time seems to be at hand. Japan's growth rate has
been higher than expected. The stock market is one of the world's top
performers…up more than 30% in dollar terms. And Art Laffer recently wrote in
the WSJ that Japan is making fundamental economic reforms that will turn the
country around -- in the right direction.

*** Who's Sam Berry? I decided to look for an unknown presidential candidate
after reading the reports on the debate between two of the known
candidates…Gore and Bradley. They reminded me of Kissingers' remark about the
war between Iraq and Iran: "My only regret is that they both can't lose." Hoping
that they both might lose to Mr. Berry, I checked his website. Hmmm…he believes
in a "family wage." Hiring more teachers. And protecting entitlement programs.
I'll keep looking.

*** Two penny stock promoters were gunned down in New Jersey yesterday. Gangster-
style. I guess they ticked off the wrong investor.

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FAULKNER AND THE INTERNET

"I reckon I'll be at the beck and call of people with money all my life," said
Oxford, Mississippi's most famous drunk, "but thank God I won't be at the beck
and call of every son of a bitch with 2 cents to buy a postage stamp."

William Faulkner worked for the post office in the days when communications still
were put on paper, stuffed into envelopes and carried to your door. And the days
when postmen could still be fired for failing to deliver the mail. That is, in
the days before e-mail. The comment above was his remark after he was fired for
failing in his duty. But it was not necessarily rain, nor sleet, nor dark of
night that kept him from his appointed rounds.

Today, I get more than 100 electronic messages every day. One Hundred is a key
number, because if more than 100 pile up in my online mailbox, Compuserve sends
them back…undeliverable. E-mail is a lot faster and more convenient. It is
better. E-mail is so widely used that I rarely get a real letter anymore. And
when I do…it is usually a disappointment…a form letter…or sometimes just a
written confirmation of something that I had already received electronically.

There are those who say that the Internet will revolutionize life on earth and
anyone who fails to invest in Internet companies is a fool. There are others,
fewer in number, lesser in social standing and poorer, who say that it is just a
lot of hoopla about nothing. It's just a fad, like CB radio, they say. Except by
a few cranky dinner companions, I had not seen this latter view expressed until I
read "Silicon Snake Oil," by Clifford Stoll. Stoll is a user…but a non-
believer.

I will not hedge or wiggle…but will state my own prediction without so much as
a soupcon of equivocation: Both views will turn out to be correct.

From an investment point of view, the Internet is now a bubble waiting to pop. My
faith in this view was confirmed yesterday in a very curious phone call. Someone
called to ask me to take out a big contract to place advertising on his website.
Would the ads work? Would they be cost-effective? The discussion never reached
this point. Like almost every other entrepreneur in Christendom, this fellow was
preparing to take his website public. He was getting in line for an IPO. And what
he needed was traffic…eyeballs…faces…and ad contracts. And if I would enter
an ad contract, it didn't matter if the ads worked or not…because he'd give me
stock options. Investors would see the ad sales contract and believe that it was
a business deal rather than a stock speculation. And we'd all make a killing. I
declined.

Investors have much better odds in Las Vegas than in Internet shares. And they
get free drinks. And a show. Even Barbara Streisand performs. If you have lost
all your money…and are feeling suicidal…what better way to finish off an
evening?

The Internet is an innovation that has captured the fancy of millions of people.
But that doesn't mean that it will have a direct, profound or beneficial effect.
Maybe it really is similar to the invention of the printing press. Or maybe it is
more like the invention of television. Probably it is a little of both.

The printing press did not change people's lives quickly nor in a predictable
way. Presses were first used for printing Bibles. The Bibles put the word of God
into the hands of clergy and laymen who came up with their own interpretations of
what it meant. It was not long before Europe was fighting religious wars…which
lasted for three centuries.

Much later, moveable type, cheap paper and industrial processes made it possible
to sell newspapers to the masses -- at a profit. For the first time, people came
to share a common language…a common view of events and trends…and a common
narrative that defined them as a nation. The printing press thus enabled the
creation of the nation state.

Also, it was the printing press that allowed explorers to share the information
and excitement of their discoveries in the post-Columbus era. Other expeditions
were mounted to the New World -- which might have otherwise been ignored --
resulting in the settlement of two new continents…as well as the importation of
vast quantities of gold into Europe. The price of gold plummeted.

The Internet definitely speeds up communications. E-mail is always urgent. But it
is not necessarily important. And that which is done urgently is not necessarily
worth doing. Or done well.

An interesting new study shows the effects of online investing. A pair of
California-Davis economists watched a group of 1,607 investors. They found they
outperformed the market by 2.4% per year, which is quite good, before they went
online. Then when they went online to do their investing, they underperformed by
3.5% annually. A little bit of reflection might be a good idea.

TV was a big improvement. It proved so popular that the habits of the entire
world have been altered. People now watch several hours of TV, on average, per
day all over the globe.

Formerly, they spent that time in a number of ways. Who knows what they were
doing. But they now prefer to watch television. The world has changed. But so
what? You'd be hard pressed to show how it had changed for the better.

At its debut, it was claimed that TV would revolutionize education…and that it
would raise the level of popular culture. Analysts in `49 imagined viewers glued
to their sets as the Royal Shakespeare Company presented "Coriolanus." They
thought the TV would replace teachers, too…and make learning fun.

Actually, in 1922 Thomas Edison predicted that movies would make teachers
obsolete. And now Al Gore predicts that connecting kids to the information
highway will enable them to delve into the mysteries of the Library of Congress.

Of course, in the classroom, TVs became a minor distraction. At home they became
a major one. Kids learned about new toys…and became current with popular gags
and prejudices. But there were no literacy improvements attributed to TV or
movies. And the number of teachers increased.

And the effect of TV and movies on popular culture may have been best described
in the movie "Barton Fink," in which a character who is meant to represent
William Faulkner during his Hollywood years is shown kneeling on a hankerchief in
a seersucker suit, throwing up in a toilet. He rises, cleans himself up a bit and
offers Barton a drink:

"No thanks," says Barton, "I never drink before noon."

"I do require a a bit of the social lubricant from time to time," says the
Faulkner character…taking a drink.

Barton recognizes him as [Faulkner] and asks what he is working on in Hollywood.

"I'm writing a screenplay of the wrasslin' genre," replies the great writer.

Bill Bonner

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WHAT THE INTERNET REALLY MEANS

Hi Bill,

I've read every one of your "Daily Reckoning" newsletters and I find myself in
agreement with much of what you say; however, your views on the Internet and
capitalism seem to be confused. Here is a quote from yesterday's issue:

"It [the Internet] is a threat to the capitalists…not to the workers. It does
not reduce costs…it raises them. In does not necessarily increase productivity.
Nor does it eliminate jobs."

You are in error on all counts. You said it later in the letter: "the Internet
may be merely a new form of communications." That's exactly what the Internet is
and that's all that it is. What we are talking about is communication in the
broadest sense. That means anything that can be digitized and sent
electronically, including music and video. Any business that is connected to
communication will be dramatically affected by the Internet. It will have the
same impact that the printing press had on the publishing industry. Karl Marx had
it wrong when he said that "capitalism is an engine of growth." It's the free
market that is the engine of growth and capitalism is a natural outgrowth of the
free market. All capitalism really is, is one or more people investing capital in
a business for the purpose of earning a profit. The real benefit of it is that it
makes large projects -- ones that individuals couldn't or wouldn't fund --
possible. The Internet doesn't threaten that or really affect it much. It makes
it more efficient because of better communication and it lowers the capital
required to enter certain businesses.

The Internet is really a threat to workers. Here's an example from your own
business. You can eliminate your printing and mailing workers by delivering your
publications by e-mail instead of snail mail. You benefit with lower costs and
your customers benefit by getting the information sooner(which is a tremendous
selling point for financial info). Another example is buying stuff online. You no
longer need to talk to a salesperson to buy. You no longer need to talk to a
customer service person to follow up on an order. There are two workers out of a
job right there. Off-the-shelf shopping cart software (many web-hosting services
include some "free"), while it's not tremendously user friendly yet, can
automatically validate your credit card, assign inventory to you, price and total
your order, assign you an order number for tracking purposes and print out a
shipping ticket. To check on an order all you need to do is enter the order
number and you are told when it was/will be shipped and how it was shipped (say
by UPS). You are given the UPS routing number, and by clicking on it you are
transported to the UPS tracking site where delivery info is given (when it is
expected to be delivered or who signed for it and when it was delivered.)

The Internet does reduce costs and increase productivity, as illustrated above,
by eliminating jobs, printing and mailing costs. And don't forget the free
"advertising' offered by search engines. You mistakenly think the Internet raises
costs, but it doesn't. There has to be an initial investment of at least time to
get started, but it needn't be large and the returns FAR outweigh the costs.
Think of how much money you can save by not printing or mailing your
publications! You can hire programmers and buy expensive equipment if you chose
to, but I would advise against it. Your first Internet presence should be with a
hosting service for the following reasons.

1. You don't know anything yet (and consultants won't be helpful here because the
Internet is too new for any real experts to exist) and it's always better to
make your early mistakes with somebody else's equipment.

2. Hardware changes very fast in this business. Three years is enough to make
most equipment obsolete.

3. You do not yet know how active or profitable your site/sites will be, so you
(or anybody else) can only take a wild guess as to what hardware you might
need.

4. You in particular really don't need programmers to design a fancy website.
What makes a website effective is the copy that is on it. You don't need any
multimedia stuff -- it only detracts from the copy. I get just about all your
sales letters. You know how to produce good sales letters (you got me to shell
out $500 for a copywriting course -- no easy task being the cheapskate that I
am). The same skills are needed to make an effective website. Any reasonably
literate computer user can learn enough Hyper Text Markup Language in a couple
of hours to create a decent website. (All you need to do is download one of
the free HTML tutorials available on the Internet and study it.)

(Note: HTML is not a programming language. What it does it tell your browser
(like Internet Explorer) how to display the copy. For example Hello
Bill will display Hello Bill in BOLD print. For the most part, all you
need is a list of the tags (like ) and what they mean and you are ready to
"program" in HTML.)

5. You can have a website hosted for $8.50/month to $500+/month. Once you get
past $50/month I can see no functional difference between them (as the price
goes up you get access to more "free" software which you may or may not want).
Many web hosts offer website design for $50 per hr or less.)

The Internet is in its early stages. Bandwidth has nowhere to go but up, and
costs have nowhere to go but down. Lucent Technology (the old Bell Labs) recently
announced they have developed a single fiber optics cable that is capable of
carrying one-fourth of the world's current communication needs. I predict that
soon after phone/cable deregulation, homes will have unlimited worldwide
telephone service, unlimited Internet access at 800mbps or better and basic cable
TV all for $30 per month or less.

You mention Amazon.com frequently. In my opinion they don't have a prayer for
long-term survival. Not only are they losing money on the books that they sell,
but they are also trying to sell computer products at the highest prices I have
seen anywhere. You cannot give your customers a good deal on one product and
gouge them on another to make up for it. I'll explain below why this is a
particularly bad idea for computer products on the Internet. To survive, Amazon
needs to mark their products up enough to cover their overhead. How can they do
that?

1. Buy at lower prices (not likely; they have probably rung every concession out
of the book publishers that they can).
2. Sell at higher prices (not likely, since they got the business on price, they
can only keep it on price).
3. Reduce their overhead (possible, but management has shown no inclination to
reduce staff/pay or pinch pennies).
4. Deliver the books via e-mail or FTP download(This would work, but I don't
think the publishers would go for it because they could do the same thing
themselves and cut out the retailers).

Also, you can only take so much business from a competitor before they retaliate
(Marketing 101). Barnes & Noble now has its own website to sell books and it's
growing faster that Amazon. Internet computer product sales are leading the way
for all retail sales. Competition in a free market always drives prices down to
their lowest possible level. Because of the speed of information exchange and a
lower cost of doing business, to be successful, Internet companies must have the
lowest prices. There are now product search engines like PriceGrabber.com and
CNet.com where you can search for the lowest prices for computer products. I
recently bought a printer below wholesale using PriceGrabber. PriceGrabber is
particularly nice because it lists by price (with the lowest price at the top),
gives the wholesale price, tells whether the vendor has the product in stock, and
what they charge to ship it. This started with only computer products, but now
you can search for consumer electronics, books, music CDs, apparel, sporting
goods, etc. It's only a matter of time before all products will be searchable and
listed by price. Amazon.com (or anybody else) cannot sell computer products
without discounting them because people will buy elsewhere.

Bill Dandreta

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