Epileptic Fits

From Japanese sensation to worldwide phenomenon, the story of a small-cap wonder…

It was Dec. 17, 1997 – 6:30 p.m. Anxious school kids all over Japan were huddled around their TV sets to watch the
38th-ever Pokemon episode – "Computer Warrior Polygon." It seemed harmless enough…

The main character, Pikachu, had a mission. He had to go inside a computer and stop a deadly "virus bomb" from being dropped by the evil Polygon.

The anticipated confrontation between good and evil came to a head twenty-one minutes into the show. Pikachu and
Polygon met face to face to battle. Not wasting any time, Pikachu used his electric powers to destroy Polygon and
stop the bomb from being detonated. It was an intense fight. And to heighten that intensity, the directors
rapidly flashed a series of blue and red lights on the screen.

Within minutes of the battle airing on TV, hospitals were flooded with calls. Pokemon viewers were suddenly suffering
from acute nausea, blackouts and epileptic fits. There were even kids who entered into trance-like states, similar to
hypnosis. One little girl described her sudden illness like this: "As I was watching the blue and red lights flashing
on the screen, I felt my body becoming tense. I do not remember what happened after that."

It turns out the combination of the colors, the flashing effect on the screen, and the duration of the fight scene created an optical stimulus that triggered instant attacks in thousands of Japanese viewers – leaving many temporarily helpless.

Within hours the Japanese Ministry of Health, Labor and Welfare was investigating the Pokemon episode. TV Tokyo
issued an apology and took the cartoon off the air. Even Japan’s Prime Minister Ryutaro Hashimoto weighed in with
comments on the unfortunate situation.

Clearly, this marked the end of Pokemon, right? I mean, come on. This cartoon sent a wave of panic over all of Japan. Twelve thousand kids experienced some form of temporary illness. And 618 children were hospitalized –
suffering from bouts of memory loss, stiffening limbs and epileptic-type fits.

Pokemon had its 15 minutes of fame; now it was over.

WRONG!

By April 1998, four months after the infamous fight scene, Japanese kids and parents demanded Pokemon re-air. They
missed the lovable monsters.

Sure enough, Pokemon was brought back. And by year’s end, it was the third-most watched show in Japan!

The obvious question that comes to mind is – how could parents actually allow (let alone demand) Pokemon to re-air? The answer is simple.

Pokemon was an engaging show. It had children sitting at the edge of their seats wondering what would happen next.
Plus, with its long list of characters, animation style and timely topics, Pokemon proved to be a tremendous learning
tool for young kids. Seven-year-olds could rattle off more facts about Pokemon than they could about any other subject
– period.

Pokemon had appeal. And in 1999, it tipped from a Japanese sensation to a worldwide phenomenon – it was introduced to the United States on Nov. 22. The rest is history.

Today there are Pokemon video games, action figures, DVDs, CDs and, of course, the TV show. The company that owns the rights to Pokemon, 4Kids Entertainment, Inc., went from a $739,138 company in 1997 to a $38.8 million company in 2000. Its stock price shot up from $1 to a high of $37.31 (after splitting several times) in that three-year span. Investors who recognized the power of the Pokemon monsters made a killing. And you can, too.

At $28.50 a share, it’s probably too late to invest in 4Kids Entertainment now. But there are hundreds of other
stocks on the market today that are just like 4Kids was in 1998 – on the verge of tipping from a small business to an
internationally recognized corporation. And historically, these are the most lucrative stocks to invest in – far
better than even the biggest blue-chip stocks.

Unknown small-cap companies like 4Kids Entertainment average about 12% returns year in and year out. By
comparison, large blue-chip companies will give you about a 10% return on your investment. Big deal, right? We’re
talking about two points. Who cares?

Before you decide "not to care," consider this…

Over an average five-year holding period, a basket of small-cap stocks will give you a nice 84% return on your
money. A similar basket of large-cap stocks will only give you a 47% return. And the longer you are willing to hold,
the bigger the difference between small-and large-cap returns.

Over a 10-year holding period, small-cap stocks have been good for a 197% return – compared to 119% for its large-cap
counterparts. Hold for 20 years and your unknown, never-talked-about small-cap stocks will average 762% returns –
more than twice as much as the highly touted, often-publicized blue chip stocks.

And if you really have time on your side, you should know this…

Over a 35-year holding period, small-cap stocks have ALWAYS outperformed large-cap stocks. Always.

Of course, investing in small-cap stocks can be a risky business – especially in the short term. Some companies
will go out of business – and their stocks will fall to nothing. But others will go on to make you 3,631% profits
in three years – like 4Kids Entertainment did between 1997 and 2000. The question you need to ask yourself is…

Is short-term volatility worth it for the long-term profits?

Those investors who bailed on 4Kids Entertainment in December 1997 took a 17% loss when Pokemon was pulled off
the air. But more importantly, they missed out on 3,631% profits over the next three years. That’s hard to swallow.
In fact, I wouldn’t be surprised if those people experienced acute nausea, stiffening of the limbs and the occasional epileptic fit every time they happened to flip past the latest Pokemon episode. Only this time I guarantee it wasn’t from the flashing red and blue lights…

Regards,

James Boric
for the Daily Reckoning
February 5, 2004

Editor’s note: James Boric is the editor of the small-cap advisory letter Penny Stock Fortunes, in which he identifies and recommends solid companies going for penny-stock prices. He also follows faster-moving trades in a weekly e-mail called the CXS Alert.

"All we can tell you," we told a lawyer at last night’s dinner party, "is that things in nature seem to have a certain symmetry. For every right hand, there is a left one. For every mood of ebullience, there is one of despair. For every boom there is a slump. America enjoyed a spectacular boom during the 1990s. The slump that followed was not spectacular. It was hardly noticed."

Which makes us think there is more slump coming.

But what intrigues and titillates us is that what is coming will be spectacular. For the last few years, economic trends lined up in such a delightful way, we could hardly believe it.

Deeply in debt already, Americans were able to borrow and spend even more…while their assets rose in price. They spent money they didn’t have on things they didn’t need…and then, the nice people in China and Japan gave
them back the money so they could spend it again. Mortgage payments went down, while housing prices went up.
Meanwhile, the Bush Administration returned some of their tax money…while it too spent more money, also provided
by helpful foreigners.

Coming soon, we expect, is a period in which the major trends are so unfavorable, we will hardly be able to believe they could be so bad.

How so? Here we offer not a prediction…but a possibility.

Everyone now seems to expect a continued decline of the dollar. A few Americans are taking precautions. At
Everbank, for example, deposits in non-U.S. currencies rose from $135 million a year ago to $525 million now.

But we cannot believe that Mr. Market will go along with what everyone expects. Nor can we believe that the dollar,
under the weight of ‘twin deficits’ of half a trillion each – trade and federal – will go up. But while people
expect a decline in the dollar, very few – indeed, none of the economists recently surveyed by the Wall Street
Journal – expect a sharp or disruptive drop. The surprise is likely to come – as George Soros suggests – on the downside…with a panic out of the greenback.

As the dollar falls, prices on imported goods – notably oil – would rise steeply. The falling dollar would also
cause the collapse of the bond market…even central bankers would be forced to sell U.S. bonds in order to
protect their reserves. This would increase the cost of money throughout the U.S. economy….causing asset
prices…houses and stocks…to fall. [Ed note: We are putting the finishing touches on our long-awaited report
on the dollar crisis…watch this space to learn how you can protect yourself in the event of a dollar rout.]

Americans have enjoyed inflation while it has been confined to their assets. They will not enjoy it when it strikes their living costs, especially when their houses begin to go down in price.

Readers may recognize this set of trends as a bad case of "stagflation." But stagflation describes a world of rising
consumer prices without economic growth. Slumpflation will serve as a handle for an economy that is in decline…even
while consumer prices rise.

Slumpflation will be neither a gay nor a carefree time. Mortgage payments will rise with interest rates, but house
prices will fall. Prices for imports – and practically all ‘things’ – will rise, while available income – after debt service – will drop.

If it comes to pass, Americans are likely to experience a mood swing. The economy that seemed almost ‘too good to be true’ of the late ’90s and early ’00s…will become the economy that is ‘too bad to be true.’

Too bad it will be true.

Over to colleague Addison Wiggin, now in London

–:–

Addison Wiggin, fresh back from a building-clearing fire alarm at Centre Point Tower…

– "Instead of blaming Mr. Greenspan," columnist Steven Rattner wrote in the NYTimes on this date in 2001, "we should reflect on the willing suspension of disbelief that allowed us to ignore everything we have been taught about sound investing." Mr. Rattner was, of course, referring to the collective delusion gripping the investing public throughout the bubble years of 1996-2000.

– While we might not go so easy on the Fed chairman, especially given his complicity in the ‘echo bubble’ of 2003, we cannot help but agree with Mr. Rattner’s leveling of charges at the lumps. For, willing "suspension of disbelief" has been all the rage on Wall Street for about 6 months now. Are investors about to get swatted in the face with the wet sock of reality, yet again?

– Market action over the past week suggests it’s possible. The financial media is littered with comparisons of the twin bubbles 1999-2003. Some overt, others unintended: "Glut of Money Chasing Too Many Tech Start Ups [in Silicon
Valley]" reads a headline in this morning’s Financial Times. And we moan…déjà vu all over again.

– We suspect even Johnny 401(k) must be getting nervous…and wondering if this rally is running low on adrenaline. In a very volatile day, the Dow dropped 34 points yesterday to close at 10,470. The S&P 500 and Nasdaq had similarly down days yesterday. The S&P slid 9 points to 1126…the Nas was off 52 to 2014.

– You want to try something eerie? Try opening a 10-day chart of the Dow, Nasdaq and S&P 500 and leave them open
side by side on your computer.

* Since Tuesday (January 27th) of last week, the blue-chip index has lost 278 points and failed repeated attempts to
reclaim the intra-day 52 weak high of 10,748 set that day.

* In the same span of time the S&P 500 has lost 29 points…and the Nasdaq 139.

* During the first bubble, the Dow peaked in mid-January (the 14th to be exact). Will Tuesday January 27th be an equally auspicious day?

– We note, too, curiously, that the next day, January 28th, was the day the Fed removed the phrase "considerable period" from its post-FOMC press release. Hmmmmn…Bubble top 2004?! Is nature really that symmetrical – that cruel
and ironic? We wait, like an expecting father, to find out.

– Meanwhile, the finance ministers of the G7 nations are gathering in Boca Raton, Florida. Following their last meeting in Dubai on September 24, in which tacit agreement to let the dollar fall was reached, the "orderly decline" dollar really got underway. The greenback has fallen 8% against the euro since, trading this morning at $1.25. What would happen if the decline became "disorderly"? We can’t help but wonder.

– The wildcard in tomorrow’s meeting will be Jean-Claude Trichet and his cronies at the European Central Bank. "The
U.S. and Asia have entered a symbiosis, in which Asia is financing the American recovery," opines Thomas Mayer, the
chief European economist for Deutsche Bank, in the NYTimes. "For Asia, that’s fine, and for the U.S., that’s also fine.
The problem is for the bystander." The bystander, of course, being the euro.

– Morgan Stanley published a report yesterday, warning its clients that the "euro zone" could "break up due to the
political discord over the Constitution and the euro rules." "[We] believe markets will have to attach a higher
probability to a break-up of EMU and/or EU at some future date…despite the costs of leaving the euro, a country
might still conclude that the benefits of re-introducing a national currency outweigh the costs."

– Robert Mundell, the Nobel-prize-winning "father" of the euro, responded to Morgan Stanley’s warning by suggesting a dollar rout is more likely than a break-up. "So much hinges on the dollar now," comments our own Dan Denning, watching the greenback burn from Paris. "This isn’t clear to most investors. It’s not perceived as a threat, and probably won’t be until it’s too late. But the twin deficits are grinding the currency into a mush pulp."

– "Sometime this year," Denning predicts, "you’re going to hear the dollar break. It’s going to start costing everyone in ways they can’t imagine. The big risk is that the weak dollar leads to a sell-off in U.S. financial assets AND a
powerful surge in inflation. Which means Americans will wake up to find that their decaf latte just got 40% more expensive."

–:–

And Bill Bonner, back in Paris…

*** There is a time for sages and a time for fools. Lately, it’s been a fool’s market. The worst stocks – those that have the highest prices, lowest profits, and most implausible prospects – are the ones investors have favored.

Only someone who didn’t know any better would buy such stocks at such prices. Which is why it’s been a great time
to be a young lump….with no fear, no history, and no money. With nothing to lose, and nothing to worry about…you could have made a fortune in the Bubble Reloaded of 2002-2003.

*** Take the Cisco Kids, for example. Profits are going down. Sales are going up. Investors sold the stock
yesterday, disappointed by the slow profit growth. The company only made 10 cents a share in the last quarter…which still puts the price at about 65 times earnings. Hmmm…

*** We ridiculed George Gilder in our book. But the Gildered Age is back…and so is Gilder himself…with what is, for now at least, the last laugh.

"Love him or hate him, stock analysts know that George Gilder – in both the short-term and the long run – has made a small fortune for his Gilder Technology Report subscribers," begins an email sales message.

"How? By investing in a tiny group of innovative and (for the most part) little-known companies that are building tomorrow’s key technologies 2 to 5 years ahead of their competitors. In 2003, his portfolio was up 123.5%.

"Despite the tech-stock meltdown of April 2000, and thesubsequent 3-year bear market in high tech, overall Gilder
has continued to earn handsome profits for his readers.

"Since its launch in 1996, the Gilder Technology Report has comfortably doubled the returns of the S&P 500 –through both bull and bear years.

"In 2003, the market began to come out of its 3-year bearslump into a gradual recovery, and Gilder Technology
Report subscribers profited handsomely, with an annual gain of 123.5%.

"Had you invested $100,000 in GTR’s companies in 2003, your portfolio would have grown to $223,500 – in just 12
months. But don’t just take our word for it. Check out the January 2004 issue of the Hulbert Financial Digest. It’s
right there in black and white, Gilder Technology Report up 123.5% in 2003.

"In 2004, George Gilder remains cautiously optimistic…"

And so it is a more amusing world than it was 14 months ago.

*** A thoughtful reader writes: "I read the Daily Reckoning regularly and am very impressed with the ideas you put forth. I know you get lots of questions and comments, but I was reading about Chinese History yesterday and came across a paragraph that caught my attention. It refers to the period directly following the Sino-Japanese war and it is so simple and basic in concept that I was surprised at the similarities between Chiang’s policies then and our government’s monetary policy now:

"’The most virulent cancer attacking the body politic (of the Guomindang) was inflation. While prices rose approximately 40 percent during the war’s first year, from the time of Pearl Harbor in 1941, prices increased more than 100 percent each year. Thus, a trinket that cost 1.04 Yuan at the start of the war would have cost 2,647 Yuan at war’s end. Nothing guts out the political support of a people for its government faster than inflation, even of the slowly rising kind, much less the marauding strain of inflation seen here. It was produced by simply printing more money when there was an insufficient supply. Its results included hoarding commodities, creating scarcities and even higher prices; corruption that spiraled out of control; and ravaged standards of living among officials, soldiers, intellectuals, people on fixed incomes, and students. Some, if not all of these, were groups that were dangerous to offend. For sowing inflation through the
printing of money, Chiang (kai-shek) would reap the whirlwind.’ – ‘Revolution And Its Past’ by R. Keith Schoppa (pg 275)

"I realize that this severe inflation was largely the product of an overstretched military regime fighting a huge war against a foreign power while simultaneously fighting internal rebellion. That’s what makes it all the more shocking to me that, in an age where historical information is readily available, a government that doesn’t need to fight any wars, and that doesn’t need to be overstretched, would seek to create internal rebellion and make enemies abroad by starting wars and by pursuing inflation and the devaluation of their currency through the printing of money. It seems kind of like the same process but in reverse. I guess that’s the beauty of Democracy. Keep up the good work guys.

*** "Democratic Caucus…Feb. 17th…Be there! We must get George W. Bush Out of Office! You must bring your American passport to vote."

Thus begins an email invitation to a political event. Here in Paris and all over the world, Democrats are mobilizing the rank and vile to put their man in the Oval Office.

We could not imagine a worse person to have in the White House than the one we have now. "No absurdity left behind," is George W. Bush’s private motto. Who else would embrace every foolish adventure that comes along – both at
home and abroad? Who else would be stooge enough to approve every sordid piece of pork that crossed his desk? Who else would favor boondoggles for the rich, the poor, democrats, republicans, Rosicrucians, Rotarians, the old, the young…everybody?

Bush is surely the nation’s worst chief executive since Bill Clinton. We couldn’t imagine anyone worse…that is, until we looked at the Democrats running against him. That is the problem with the two party system, we conclude; only one side loses.

*** We are unable to muster the contempt the Bush administration deserves. Our reserves of sarcasm have been depleted; we find them replaced by a peculiar admiration. George W. Bush is a perfect imposter…which makes him
oddly appropriate in relation to today’s fraudulent stock market, economy, currency, and culture. He is also the man
most suited to today’s great challenge…keeping America on the road to ruin.

There is a sublime poetry at work. In his State of the Union address, Mr. Bush said he was rising to ‘the tasks
of history.’ By a kind of lyrical accident, Mr. Bush seems to have spoken the truth.

George W. Bush really is doing the heavy lifting of history: He is helping to destroy the dollar, the economy, the nation’s security, it’s citizens’ liberties and almost everything else we hold dear. Even our souls may be at
risk. All of this is the natural consequence of increasing spending while already being terribly in debt and going to
war when you don’t need to. Looking for trouble…he is sure to find it. But this ‘task of history’…it is work
that needs doing. Why? Because nature abhors monopolies, vacuums and bubbles. When a man sits on the top of the
world, some instinct enters his empty head…and drives him to move…to stretch and bend…until he slips off.

*** Give us your slurs, dear readers, your tired, your poor, your huddled masses of epithets…and we’ll give them right back! A reader comment:

Re: A CYNIC’S GUIDE TO INSENSITIVITY: HOW TO DISCOVER YOUR INNER BIGOT

Hating another human being because of their race, religion, or membership in some other broad demographic group is simply a sign of laziness. After all, with just a little time and effort you can really get to know someone and learn to hate them on a more personal level.

*** And another on the same subject:

Hey! You left out Pommy-bastard, whingeing pom, gwailo (Cantonese for Foreign Devil), sambo, golliwog, gringo, and dag.

And while we’re at it and lest we be less than inclusive…

How many feminists does it take to change a light bulb?

Three actually. One to hold the ladder.The second to screw in the light bulb and the third to make the documentary!

Great for dinner parties that one. My wife just loves it when I drag it out.