Market Review: Cisco Head Fake And The Price Of Gold

“Want an interesting exercise?” asks the untiring John Mauldin, fresh back from Mexico. “Go to www.bloomberg.com. Get a quote on Cisco. At this moment the consensus estimated forward earnings are projected to be $.35 with a Price to Earnings (P/E) ratio of 59.”

“But if you go to Bigcharts.com and retrieve the same information, you find they suggest earnings at $.15 with a P/E of 102. If you look at the 2001 year fiscal year- end for Cisco, you find losses of over $1 billion dollars.

“Who is right? Looking at the actual quarterly tax filings, Bigchart.com apparently uses past or trailing actual earnings. Bloomberg uses projected pro forma earnings, and of course don’t refer to those inconvenient write-offs that will happen later this year, which will possibly once again have the company showing a loss.”

The same “company which said this week,” Mauldin continues, “‘Sales are flat, we are not sure when we will see some real growth, but we fired a lot of people and cut costs so we made more money than you guys projected,'” goosed the Dow up 300 points Wednesday.

But Enron-weary investors these days tire more quickly of such bull market shenanigans. The Dow gave most of the rally back by the close on Friday, leaving it just shy of 10,000… down 66 for the week. The Nasdaq and S&P also fell… each for the third week in a row.

Meanwhile gold has been attracting attention as if it were the late ’70s rather than the early ’00s. “A month from now, a year from now, five years from now undefined you choose the timing because I won’t,” wrote CBSMarketWatch’s Tom Calandra yesterday, “gold is going to be trading three to six times what it is now.”

Citing the oft-mentioned Morgan Stanley study authored by the inimitable Stephen Roach, Calandra suggests that “when the red in the U.S. current account surpasses 5% of GDP, all heck will break loose in the financial markets.” (As I mentioned in this space a few weeks back, GDP is currently running at about 4%…)

“By then,” continues Calandra, “the euro will be worth a ton more than 91 cents. So will the Canadian dollar and the Australian dollar. The world’s battered economies, the ones that rely on metals and other natural resources for their livelihoods, like Ghana, Australia, South Africa, Chile, Canada, even Russia, will be less battered.

“By then, the paper wealth that is the industrialized world’s stock and trade will be more paper and less wealth.”

And by then, the gold – by Uncle Harry’s estimate – could be worth upwards of $529 an ounce.

Happy Mothers Day,

Addison Wiggin,
The Daily Reckoning
May 11-12, 2002 — Paris, France

P.S. Compliments of Le Metropole Cafe, Harry schultz provides a compelling “case example substantiating a gold price of between $354 minimum and $529 maximum.” If the latter is true “gold bugs” will reap upwards of 100% on the bullion this year alone.

…see Flotsam $ Jetsam, below…

THIS WEEK in THE DAILY RECKONING
by Bill Bonner

05/10/02 AT THE FEE CONVENTION

“…Libertarian thinking was very much the fashion at the FEE convention….and like so much libertarian thinking, it was logical, intelligent…andabsurd…”

05/09/02 DEMOCRACY IN AMERICA

“…’The fact is, democracy refuses to be bound in a simple, unequivocal formula. It’s a moving target, with multiple and contradictory personalities. It is not a ‘thing,’ nor even an ‘idea’; it is amythology’…”

05/08/02 CONFESSIONS OF A SHORT SELLER
Guest Essay by C.A. Green

“…Most investors fall into one of two broad camps. The first are optimists. They think the market will go ceaselessly higher…The second group of investors are more skeptical… They sit comfortably in cash and short-term Treasuries, waiting for the storm to hit…But there is still another group of investors, with both a nasty contrarian streak and a predisposition to fly the Jolly Roger. And they enjoy sellingshort…”

05/07/02 LIBERTY IN LAS VEGAS

“…’Liberty’ can be a slippery concept. It can have a very simple meaning and simple application…or it can get stretched into a grotesque shape and used to justify things that make people lessfree…”

05/06/02 LUNCH WITH THE MAYOR

“…The U.S. economy has suffered a wipe out in the tech sector, a recession, a collapse of profits, a breakdown in business investment, a crash in telecom, and the worst terrorist incident in history. Still, so little blood trickles down the gutters of Main Street, USA, that people think the American economy must be bulletproof. Nothing can stopit…”

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

FLOTSAM AND JETSAM: Uncle Harry serves up a delicacy at the Dos Passos table at Le Metropole Cafe. Could gold could go as high as $529 an ounce?

The Dollar And Gold
– Harry Schultz

“…The dollar in modern economies and modern psychology plays three distinct roles.

1. It is in a practical sense an income earning vehicle held both as a reserve currency externally by individuals and governments.
2. It is the common share of The United States Inc.
3. It is the largest world medium of exchange in facilitating the transfers in world trade.

The Dollar therefore is the world’s largest trading market in itself. Historically, during periods of US dollar strength the demand for gold has weakened. It may be said that the there are only three markets that need to be fundamentally understood, and the knowledge of all other markets are then in your grasp. Those markets are the US 10- year bonds, the US dollar and Gold.

The 21 year disdain for gold and relative attraction of the US dollar has not declared Gold dead. Gold is quite alive as it has efficiently played its role in the three part relationship between the key markets that reflect all else tradable in the world.

Budget Surpluses in the US and healthy Current Account Balances due to ebullient stock and bond markets on balance during the past 21 years has cast a long shadow over gold. Gold is and will remain a currency investment vehicle which runs counter to the concept that government are running the financial household prudently, therefore the modern concept that real lasting value lies in paper assets. It does not matter if we are discussing the Roman Republic, the Weimar Republic or Argentina today; the concept is just the same.

Great Britain played, in the early 80s, with every plausible excuse to accept growing Current Account Deficit Balances as acceptable. The Bush financial administrators are doing the same today. It is not surprising that the USDX (US Dollar Index) which had risen from 65 to 121 has formed a Head & Shoulders top technical price formation with deteriorating momentum indicators. This formation is looking every day more like a confirmed top on the long bull market for the dollar.

Where can the US Dollar go?

For two generations our money managers and business school students have experienced a declining on-balance gold market price. Central Banks have sold their gold reserves, attaching those sales to many reasons from non performing asset to barbarian relic.

It has been politically incorrect to discuss gold in the halls of ivy attached to the word currency. That Jurassic Age concept, as the business students and modern money managers feel, is believed to be a relic of the unenlightened period of gold exchange standards and the discipline of the exterior trade forces upon a nation’s economic condition.

They would ask: How could a major power stand for such nonsense if gold was flowing in or out of the treasury? Was it not more productive to control the printing of paper along with every other economic factor and markets while handling the news media as the spin city tool of economic well being? Well, it has worked, but there may be limitations.

The crack in the armor of any “controlled economy” is that in time, ever more & then too much needs to be controlled. Assuming our technical reading of the USDX and the strength of the US Dollar is correct, then what is that market responding to? It is the growing US budget deficit and growing US current account deficit in an environment of a lower US stock market and potentially lower US bond market later this year. There is no question about the US budget deficit and there is no question about the deficit condition in the current account.

History is a great teacher of how people who are in fact the market, react to economic circumstances. It is also a historical fact that all large current account deficit conditions with concurrent large budget deficits cause a significant fall in the market value of the country’s currency. In fact, what history says is that such a fall would occur at the time that the current account deficit reaches 5% of the GDP or similar past measures. Further the fall in the currency usually amounts to 38% to 42% of its previous bull markets. How high can gold go as a result of a fundamental decline if the US Dollar? In my opinion, based on the 40% mean decline in a currency, considering this historical perspective and relating that to the gold price, a one year fundamental US dollar bear market measured by the USDX that results in the USDX at 111-112 would place gold at but not above $354.

A two year bear market in the US dollar in which at any time the USDX sold to 99 and a gold price of $529 is possible. This will result from the 5% GDP 40% currency market revaluation precedents.

The bullish wild card for the gold price is the extremely large short spread position on gold bullion via gold derivatives represented by the gold producer’s hedge positions of a proportion few even today would consider possible unless they did the research (as we have) and saw the figures for themselves…”

Editor’s Note: Gold is up 16% over the last year. If what Harry says is true we could see 100% gainer before we’re through. John Myers, who recently pocketed 385% on a gold play, says right now “gold is still cheap” and there’s still time to get in.

Also, Uncle Harry Schultz says he’s been doing some groundbreaking work proving the explosive potential of derivatives… with figures that are available “no where else,” but in the Harry Schultz Letter.