The Daily Reckoning
Weekend Edition
May 14-15, 2005
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

[Editor's Note: Congratulations to frequent Daily Reckoning
contributor Dan Denning! His new book, 'The Bull Hunter'
just hit #3 on the Barnes & Noble bestseller list. This
development sets Dan up for a colossal showdown with J.K.
Rowling and her latest Harry Potter entry.

The book is still at the printers, to be released on June
1. We'll be certain to keep you up to date with Dan's
progress in this battle. In the meantime, look out for an
exclusive extract from 'The Bull Hunter' in our section
'Flotsam and Jetsam,' below, and a brief summary of the
book in this week's 'Book of The Week.']   

MARKET REVIEW: THE WALL OF WORRY

Last week, your Baltimore editor was in Manhattan, touring
some of the city's more fashionable locations,
including the gym at Chelsea Pier.

If you want to define quality, this gym is it. It has
everything…beach volleyball, a driving range, bowling
lanes, a putting green, and a boxing gym with a
dozen different varieties of punch bag. Apparently, a
former champion is in charge of the boxing facility there.
And the swimming pool was stunning too, managed by an NCAA
swimming champion. A clever architect had designed the
pool so it looked like it was part of the same
body of water as the Hudson River. This was a place for
beautiful people.   

We'd been invited to come climbing by another newsletter
writer, Paul Mampilly. And even though we'd never seen a
climbing wall before, we knew the wall at Chelsea Piers was
a good one. It was well kitted out…loads of jug handles,
buttons and odd-shaped pieces of rock are screwed to the
walls, colored and labeled to mark out different routes of
varying difficulty. One part of the wall was vertical,
another part was leaning forward for advanced climbers, and
for those who fancied crawling on the gym's ceiling upside
down, there was a large overhang.

They even lent us a harness and a pair of shoes for free.
And the best part, because we got there an hour before
opening time and the guy in charge was amenable - the wall
normally opens at 5 p.m. on Thursdays - there was no one
else using the wall. 

"It was all financed with tax-exempt bonds," said our host
as we strolled around the Pier 60. "There was nothing here
before. Just old docks. So a well-known developer bought
the whole thing, using money borrowed from the state, and
renovated the place. Now look at all this. It's worth
millions. And the taxpayers were the only ones who took any
risk."
    
This was the first time your weekend editor had ever been
climbing. Fortunately, a colleague back in Baltimore had
given us three key pieces of advice before we left… "Keep
your hips close to the rock face, use your legs for power
and arms for balance, and if you want to take a rest, just
extend your arms and hang, still keeping hips to the wall. 

"Trust your feet," shouted our climbing partner from below,
during the third and final ascent. "Lift your right foot up
to the next green foothold and then push yourself up."

In order to lift our right foot, we'd have to rest our
entire body weight on a tiny blue-painted pebble sticking
out of the wall, forty feet above the ground…

Paul Mampilly is a former Wall Street analyst and portfolio
manager. He's got an MBA and a CFA. He's worked for several
large investment banks and he's covered nearly every market
sector. We chatted with him about finance…first on a
shady bench in Battery Park and then at the base of the
cliff face in between climbs.

"I couldn't stand the working environment in the large Wall
Street firms," he said. "There was always so much conflict.
And they tried to control us all…they wanted everyone to
be the same and think the same. So I had to leave. It just
wasn't for me."  

"We're all different, and we express our ideas
differently," he continues. "The mainstream approach to
market analysis is just as bad. That people will always
seek to maximize wealth is simply not true. Efficient
market theory is what they taught me in my undergraduate
and graduate studies, yet there's just so much it can't
answer for."

So Paul struck out on his own and set up a website, where
he publishes his analysis. Capuchinomics, says his website,
uses "human emotion as the primary factor in analyzing the
fluctuations of markets and securities."

"I began to wonder why a company in the biotech industry
with 25% earnings growth and 80% profit margins is more
valuable and/or more volatile than a company with the same
characteristics in the furniture business.  Biotech
companies…are highly valued while a furniture maker with
equivalent characteristics is valued at a fraction of that
price."

"If efficient markets price stocks without distinction,
these two companies accounting for some small non-
arbitrageable differences (nationality, tax rates, etc.)
should have similar values.

"The answers then must lie beyond value and in the human
psyche, in its desire to perceive more value one enterprise
over the other based on experiential, emotional and
subjective qualitative factors."

Hence the capuchin monkeys. Capuchinomics is based on
behavioral finance. Mampilly monitors dozens of different
sources to get an idea of the sentiment in a market…and
if he thinks it's out of whack, he arbitrages sentiment
with reality. He's found it's an excellent way to trade. 

Take Goldman's prediction for an oil 'super-spike,' in
behavioral economics terms, he says, it was the perfect
confirmation for a short-term top in the oil market. These
signals may seem anecdotal, incidental even, but they're
not. They're a powerful expression of market sentiment.

"What about the stock market?" we asked next. "And the
dollar?"

"Frankly, sentiment suggests you should buy the market.
It's very negative at the moment." Mampilly has been
bullish on the dollar too, as it climbs that 'wall of
worry'… "A rising dollar is one of the greatest threats
to the economy…it'll reverse everything that's happened
in the last three years…"

A wall of worry indeed, but the marriage between left big
toe and the small blue pebble held, and we grabbed the top
of the wall.

Now it was time to come back down again. "Just let go of
the wall, and rappel down," Paul shouted. "Just walk down
the wall like a commando."

But we couldn't let go. Like the price of your favorite
stock, we just clung to the top of the wall and ignored the
instructions…  

Regards,

Tom Dyson,
The Daily Reckoning

P.S. Dan Denning's book, 'The Bull Hunter' has just hit #3
on the Barnes & Noble bestseller list and is stirring up a
literary-storm with readers.

Help Dan knock Harry Potter off the top spot!

Here's the link to the offer:
http://btob.barnesandnoble.com/index.asp?sourceID=0041323346&btob=Y

--- Daily Reckoning Book Of The Week ---

The Bull Hunter: Tracking Today's Hottest Investments
By Dan Denning

Investors who limit themselves to U.S.-based stocks and
bonds routinely miss out on global opportunities - because
right now, somewhere on earth, a bull market in a little-
publicized region is providing savvy insiders with double-
and triple-digit returns. In The Bull Hunter, global
investing authority Dan Denning shows ground-floor
investors how to zero in on such regions so they can snag
safe, outsized profit opportunities in countries,
industries, and sectors where huge bull markets are just
taking off.

http://btob.barnesandnoble.com/index.asp?sourceID=0041323346&btob=Y

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THIS WEEK in THE DAILY RECKONING: Want the real scoop on
China? This week's essays were all about China… Two of
them were written by analysts who literally just stepped
off the plane from Beijing, and the third comes courtesy of
our resident commodity expert, Justice Litle, editor of
Outstanding Investments…

PAYING FOR THE PURPLE  05/13/2005
By Bill Bonner
"Did you ever wonder how America came to be the world's
superpower? Bill Bonner explores the self-deception, and
the mad and preposterous ideas that led America to her
first awkward steps as an empire…"
http://www.dailyreckoning.com/Issues/2005/DR051305.html

FINANCIAL MADNESS  05/12/2005
By Justice Litle
"There are two ways to think about China: you can take the
optimistic standpoint, and view it as a rapidly growing
country filled with opportunity…or you can see it as a
ticking time-bomb, just waiting to destroy itself…"
http://www.dailyreckoning.com/Issues/2005/DR051205.html

SHANGHAI SURPRISE   05/11/2005
By Karim Rahemtulla
"After visiting China, Karim is still puzzled by the
Chinese government and economic systems…and can't help
but wonder: is China is pulling off an economic miracle, or
just the wool over the world's collective eyes…"
http://www.dailyreckoning.com/Issues/2005/DR051105.html

THE MYSTERY OF MR. WU  05/10/2005
By Greg Grillot
"Recently, Greg Grillot took a trip to the Far East…and
between exploring terracotta warrior tombs in Xi'an, and
drinking the healing "Sea Horse with Reptiles Liquor," he
pondered the enigma that is the Chinese banking system…"
http://www.dailyreckoning.com/Issues/2005/DR051005.html

THE BUBBLE BLUES  05/09/2005
By The Mogambo Guru
"Bubbles - from debt to real estate - have taken the
country by storm. What will happen when they burst? The
Mogambo Guru predicts that the average American's sense of
blissful ignorance will be replaced by misery and
heartache…"
http://www.dailyreckoning.com/Issues/2005/DR050905.html

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------------------------

HEADLINE, NEWS And INSIGHT: Imagine if you'd been long GM
stock and short GM bonds at the beginning of May. You'd
have lost a fortune! This is exactly what happened to a
London-based hedge fund. Might we see a "liquidity black
hole?" Dan Denning has the story, below…

PREMEDITATED FRAUD
By Karim Rahemtulla
"What if you could raise the rate of return with the stroke
of a pen? Your liability would actually decrease…
Corporate America would be perpetrating a massive fraud on
retirees…doesn't the money have to be paid at some
point?"
http://www.dailyreckoning.com/Featured/Fraud.html

LIQUIDITY BLACK HOLES
By Dan Denning
"Anyone who is long GM bonds after the well-documented
troubles at the automaker of the last year must be, in the
words of Alan Greenspan, 'desirous of losing money.'"
http://www.dailyreckoning.com/Featured/BlackHoles.html

TRANSFORMATIONAL TECHNOLOGY STOCKS
By Jonathan Kolber
"Transformational technology investing is an ideal
diversification from other types of investing. It offers a
kind of diversification that 'is unique.'"
http://www.dailyreckoning.com/Featured/Transformational.html

------------------------
 
FLOTSAM AND JETSAM: Here's an extract from Dan Denning's
brand new book, 'The Bull Hunter.' This is an
exclusive…you won't find this material anywhere else…

A LITTLE SLICE OF PARADISE
By Dan Denning  

In the fall of 2002 I gave a speech that was not well
received by the audience. The speech warned against the
coming fall in the dollar. It also warned about the dangers
of deficit spending. The strongest warnings, however, were
that a long, sustained war on terrorism was a threat to
your financial freedom and, eventually, your liberty.

There were a few people who listened, though, and liked it.
One of them came up to me afterward. She and her husband
were living a comfortable life in northern California. He
was a programmer in Silicon Valley. She sold real estate.
She was worried about the issues I brought up.

Two years later, I wrote to readers of my investment
newsletter, Strategic Investment, that I was about to spend
three months in Asia doing investment research for what
would become the book you're reading right now. Dozens of
them wrote back, inviting me to their homes and businesses
in Japan, China, India, Australia, and Thailand.

I took many of them up on their generous offers. It gave me
valuable insight on each country from people who were
actually living and investing in the places I wanted to
write about. One of the e-mails proved fortuitous:

Dear Dan,

You may not remember me. But several years ago I heard you
speak at the Agora Wealth Symposium in San Francisco. I
just wanted to let you know that since then, my husband and
I have moved to Thailand! We took your dollar warning
seriously and we also wanted a change in our quality of
life. We now run a mountain bike rental bicycle shop on the
island of Koh Samui in the Gulf of Siam. When we're not
running our business, we're managing our investments
reading Strategic Investment and the Daily Reckoning. We'd
love to see you when you're in Thailand and show off our
little slice of paradise and tell you what we think of
investing in this country.

How could I turn down an offer like that? I am an avid
mountain biker. What's more, I'd get a chance to talk with
real readers about how they were personally dealing with
the investment challenges I wrote about every day.

Not everyone will choose to move to Thailand as a hedge
against the falling dollar, though some have. Many others
have set up bank accounts or established second homes
outside the United States.

These are large, quality-of-life decisions that I think
it's healthy to at least consider.

You already have at your disposal a broad arsenal of
remarkably diverse investment weapons to deal with the
world's many threats and its many more opportunities. The
risk of a crashing dollar merits the consideration of what
others would call radical alternatives. But there are many
less radical choices you can make to achieve similar
results.

It's possible, of course, that I'm wrong about many of my
big picture predictions. Although my track record over the
last four years has been pretty good, you are either wrong
or right about the collapse of a currency. There is not a
lot of middle ground. But as a bull hunter, you must
remember that your goal is to find the big trends and then
find the best tools for investing in them.

The trend may be up or it may be down. It may be in
commodities or currencies. It may be in U.S. tech stocks or
Australian mining stocks. But the unique advantage of using
ETFs is that you can invest in all these trends quickly and
easily, wherever they might be and whichever direction they
might be going. There is no trick to it. But you have to
think as a bull hunter, not as a "buy and hold" investor.

It's a small change in thinking. But it's the kind of
change that allows you to do more. It allows you to invest
in different sectors, different asset classes, and even
different countries all over the globe. As Robert Heinlein
says, "Specialization is for insects."

You do not want to invest like an insect these days, as a
specialist. It will doom you to certain poor performance,
if not outright extinction. And with the existence of so
many new ways to make money from so many different markets,
there's no good reason not to at least consider some ETF
strategies in action.

[Ed. Note: Denning goes on to outline specific strategies
for trading the macro trends he sees dominating markets
over the next few years. Until recently, this type of macro
strategy was only open to hedge fund managers and guys like
George Soros, but with the release of 'The Bull Hunter,'
it's now available to everyone.

Bull Hunter:
http://btob.barnesandnoble.com/index.asp?sourceID=0041323346&btob=Y

---------------------------

And The Markets…

	Friday	Thursday	This week	Year-to-Date
DOW	10,140	10,189	-205	-6.0%
S&P	1,154	1,159	-17	-4.8%
NASDAQ	1,977	1,964	10	-9.1%
10-year Treasury	4.12%	4.17%	-0.15	-0.10
30-year Treasury	4.48%	4.52%	-0.15	-0.34
Russell 2000	582	587	-15	-10.7%
Gold	$420.40	$422.40	-$5.80	-3.9%
Silver	$6.92	$6.93	-$0.01	1.5%
CRB	293.85	296.02	-6.61	3.5%
WTI NYMEX CRUDE	$48.67	$48.54	-$2.23	12.0%
Yen (YEN/USD)	JPY 107.32	JPY 106.76	-2.29	-4.6%
Dollar (USD/EUR)	$1.2633	$1.2705	182	6.8%
Dollar (USD/GBP)	$1.8506	$1.8658	394	3.5%

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