| POOR JEFF…I'LL BUY YOU DINNER PARIS, FRANCE
WEDNESDAY, 27 OCTOBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** The $1 million head
*** A big drop in gold
*** A flat tax in Switzerland
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** "$1 million for the head of Shamil Basayev." That was
the offer made by Russia's top general in the campaign
against Chechnya, who, incidentally, grew up in the Chechen
capital of Grozny. A flack for the general eagerly pointed
out that the offer was not meant to be taken literally.
They would be almost as happy to see Basayev taken
prisoner. *** The Dow fell slightly. The S&P, too. And Nasdaq. News
of a change in the starting lineup of the Dow -- adding
Microsoft, for example -- lifted spirits and prices on Wall
Street in the morning…but by afternoon, it was back to
business. And the business of a bear market is making
investors poorer. *** Consumer confidence fell for the fourth straight month.
And Morgan Stanley's Consumer Index was down to 514.
This…and the price of gold…may be telling us that the
bear market will be accompanied by a recession. Perhaps a
very severe one. *** Gold fell $10 yesterday…to $290. Gold was caught in a
short squeeze last month, which quickly added 25% to the
price. Lease rates rose to 10% as the risk-free carry trade
proved not as risk-free as sellers had hoped. But the Bank
of Kuwait put 75 tons of gold up for lease…and the lease
rate dropped back to 1%. Gold has adjusted to its extremely
oversold position. *** The key to the gold market, says Dan Ferris, is to
recognize that it's "like stocks in 1982. The little guys
either sold at the bottom or took profits in the initial
rally. But the insiders loaded up when they saw a bargain.
This is a major reversal from the massive short positions
in gold futures that were the norm until the recent
breakout. With the dollar at 104 yen and the 30-year bond
yielding 6.3%, gold is a bargain, and the large speculators
know it." http://www.realasset.com *** The dollar is keeping step with stocks. It fell against
yen…but it rose against the euro. *** An interesting article in a newsletter from "The
Sovereign Society" explains how you can negotiate your own
tax rate with Swiss officials. You pay a flat fee each
year…from $13,000 to $162,000. You also have to live in
Switzerland six months of the year…which is expensive,
but pretty. Of course, you still have to settle up with the
IRS if you are a U.S. citizen. The United States takes the
position that no matter where citizens live…they have to
file a U.S. tax return. Typically, the IRS allows you to
deduct the amount you pay in taxes to the foreign country.
So you end up paying whichever rate is the higher. *** However, it is very hard for the IRS to collect from
citizens living abroad. Many never bother to file --
especially those who live permanently overseas. Many aren't
even aware that they are subject to U.S. taxes. You can
contact the Sovereign Society at
sovereignsociety@compuserve.com *** Wall Street analysts are overwhelmingly bullish. Which
is hardly surprising considering that they work for
companies that sell investments. A Stanford study showed
that analysts gave a buy recommendation 72% of the time to
stocks underwritten by the analyst's employer. Outside
analysts did so only 56% of the time. Whose recommendations
worked best? The outside analysts outperformed the market
by 42 percentage points over two years. The inside
analysts' recommendations lagged the market by 15 points. *** Not content with record high poll ratings, the British
prime minister, Tony Blair, now finds a new survey that
goes beyond even his wildest dreams. A BBC documentary, to
be screened tomorrow night, shows that British children
have difficulty distinguishing him from the
Almighty. Asked about Mr. Blair, Natasha, 7, said, "He's
got gray long hair, curly, with a gray beard…and he does
miracles and that." She added: "I'm afraid I can't tell the
difference between God and the prime minister." *** I had lunch yesterday at a tiny restaurant near the
office (near Place St. Michel) called La Tourelle. Nothing
fancy. And not expensive. But very good. My companions were
an earnest Dutch couple who are trying to stimulate an
interest in personal freedom in Europe. Everyone draws the
line somewhere, I guess. For Hubert, it was when the local
government required him to get a permit to cut down the
very trees he had planted…and forbade him from living in
his own house.
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BEZOS
"Sour grapes…Envy…" I could almost hear the calumnious accusations. Surely
Porter Stansberry would not let me get away with
criticizing Amazon's chief, Jeff Bezos. Like a movie critic or college lecturer, I would have to
brace myself. For now even we humble scribblers of the
financial persuasion are forced to deconstruct our own
motives. It's all personal now. Every attack is ad hominen.
And I don't even get invitations to opening night…or the
attentions of tender, adoring coeds…who need a little
after-hours help with Joyce or Nabokov. Well…okay…I will get in the confessional spirit of
popular journalism…and admit it. I'm jealous. Bezos'
business in Boston is more than 10 times the size of our
modest business in Baltimore. His photo is on magazine
covers. He's young…he's hip…and he has more hair than I
do. But he also has one other thing I don't -- $300 million in
losses last year. Our business, for all its faults, is
infinitely more profitable. It is in the black.
Touch wood. Nevertheless…I still have to look at the right side of
the menu. Bezos does not. I thought about that the other night. There is a nice
bourgeois restaurant near our apartment called La Petite
Tour, just up from the Place Costa Rica. The food is very
good. Maybe too good for me…I have felt a little sick
after both occasions when I ate there. But the restaurant
still perseveres in the quaint old custom of giving the
menu with the prices to the man. His female companion gets
a menu with no prices indicated. This encourages me to make
suggestions to Elizabeth…such as, "hmmm…the confit de
canard looks good." Elizabeth is suspicious…since I
otherwise have no opinion on culinary matters. Bezos is worth $8 billion. He doesn't have to offer
suggestions. He can eat at any restaurant in town. He can
order everything on the menu. Champagne, too. Money, to
him, has reached an extreme point of diminishing marginal
utility. A $100 bill is almost worthless to him.
You can see why that is so by imagining the revenue that $8
billion can produce. Invested in T-bonds…at 6%…it would
yield an annual income of half a billion dollars, or $1.3
million per day. That includes Sundays and holidays. But the trouble is, Bezos doesn't own T-bonds. He owns one
of the worst stocks on Wall Street -- his own. Part of
being a cheerleader for Amazon means that Bezos can't sell
his stock. Oh, he can sell a share or two when he needs cab
fare. But his motives are deconstructed, too. If he were to
lose faith in Amazon, it would be bad PR…and bad for
Bezos' image as a business genius. Amazon stock doesn't yield the same as T-bonds. It doesn't
even yield as much as stock in my company. It yields
nothing. And yet…investors think the company is worth $29 billion.
What is it really worth? Look at it as a business. Stable businesses, with stable
profits, are worth about 8 to 15 times annual profits. You
can get nearly that much from a bond…so why pay more for
a stock? You would pay more only if the profits were growing…so
you could anticipate a rise in the capital value as well as
the yield. That is why, say the Internet apologists, Amazon
is so expensive. But the numbers don't add up. According to
"Upside Magazine," Amazon is projected to grow at 70% this
year. Let us be generous and say it will grow at 100%. This
would double sales to $2 billion. That is IF # 1. Now let us say that, somehow, Amazon is able to turn a
profit. To do so, it first has to erase $300 billion in
losses. Then, if it could eke out a 10% margin on current
sales…that would give it a profit of $100 million. That
is IF #2. Even better, if it could grow…plus produce a 10% profit
margin…that would give it a profit of $200 million. That
is IF # 3. If it achieved all three IFs…what would the company be
worth? That is, if AMZN doubled its sales and achieved a
stable profit margin of 10%…what would a reasonable
person pay for it? Well…let's say 12 times the $200
million in profit, or about $2.4 billion -- not even one-
tenth of the current price. And those IFs are so fantastic that not even Bezos himself
thinks he can pull it off. The company doesn't dream of
making a 10% margin. In fact, it doesn't seem to dream
about operating in the black. In other words, the scenario
is so rosy that even the Amazons cannot imagine it. And
yet, as fantastic as my scenario is, it still results in a
reasonable price for the stock that is only about 10% of
the current quote. Ned Ludd doesn't have to worry about Amazon. It will
destroy itself. Now that I think of it, I'm not jealous of Bezos after all.
The poor guy has the hopes and dreams of thousands of
investors resting on his weak, narrow shoulders. And he
hasn't a clue how to make good on the promises he's made.
He is a genius today…but soon he will wake up a moron. Then I will defend him. And invite him to dinner. Bill Bonner P.S. I found an interesting book "Silicon Snake Oil," by
Clifford Stoll, a scientist who has used the Net since it
was first created. Like the lawyer I mentioned yesterday,
Mr. Stoll wonders whether the Internet is just a waste of
time. Or worse. More tomorrow.
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