Two Degress Of Separation

The Daily Reckoning

Weekend Edition

September 15-16, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Two Degrees Of Separation

As you might expect, there’s a mist of speculation shrouding Monday’s opening. With little more than two degrees of separation between any member of the suddenly very small investment community and someone who worked in Towers One and Two, the mood will be somber.

Logistically, the operation will be a challenge. Nearly 75,000 people will be shuttled into no man’s land. According to Money.com’s Bethany Maclean, ConEd says they’ve laid 100,000 feet of new cable to make communications possible. By conference call Friday, NYSE president Richard Grasso assured listeners the trading floor will open at 9:30 Monday. System testing begins at 10:00 am today.

What might we expect? The world’s markets are themselves less than two degrees removed from the NYSE. If Friday’s action is any indication, we can expect a bumpy ride.

All European markets were down. The Eurotop 300, an index of European blue chips dropped 9% for the week and closed Friday at a 3-year low. The ‘footsie’ 100 in London dropped 3.8% on Friday… both German and French indexes were down more than 5%.

In Asia, markets in Taiwan, Singapore, India and South Korea followed suit – all slid 3% or moe. Thailand’s index dropped 8.6%. The US dollar fell to a six month low in European trading…oil climbed 5%…gold rose.

There is a lot of pent-up selling pressure going into Monday’s opening. According to Dan Denning, editor of The Daily Reckoning Investment Advisory, we could see declines of 5% or more right out of the gate, triggering circuit breakers… and interrupting trading.

So what should you do? Sit tight. See Flotsam And Jetsam below…

THIS WEEK in THE DAILY RECKONING

By Bill Bonner

09/14/01 A DIFFERENT WORLD

“…It was upon the pad of the “new paradigm” that consumers constructed their hopes for the future. The U.S. was the only world superpower – and thus faced no serious threat. But earlier this week, a gang of men armed only with knives and carton cutters inflicted more casualties than Japan’s entire Pacific Fleet at Pearl Harbor…and Americans are gradually coming to realize that their confidence was misplaced…”

09/13/01 GETTING AND SPENDING

“…For the first time, the fragility and vulnerability of the U.S. has been exposed to the entire world. People will say all sorts of mad things…that stocks will go up because it is their patriotic duty…or that they’ll go up because wars always make stocks go up…or that the economy was ready to turnaround anyway. And who knows…maybe they will be right. But is it not likely. For the economic picture remains nearly the same as it was before, with one important exception: consumers have suddenly grown cautious…”

09/12/01 THE DARK YEARS

“…We have been waiting for a defining event to conclude the 20th century…what ‘tipping point’ event would close the book on the long period of peace and prosperity that America has so recently enjoyed, we wondered…Nature was preparing some surprises. Something big was coming, we guessed. But not even in our gloomiest moments did we imagine such a bizarre and bloody trigger event…”

09/11/01 SOMETHING’S COMING…SOMETHING BIG

“…Fed governor Robert McTeer tells consumers that it would be unpatriotic to cut spending now. The health of the entire economy, he points out, depends on the willingness of consumers to continue doing the “irrational” – spending money they don’t have…thus adding weight to their packs even as their food runs low. Have the gods gone crazy, dear reader? Would they really allow a world in which a man, doing what is sensible and right for himself and his family, makes things worse for his friend, neighbors, and fellow countrymen?…”

09/10/01 THE LIVING UNIVERSE

“…The Bible is full of challenges and paradoxes…just like the financial markets… Jesus says that those who would follow him must ‘give up all their possessions.’ The idea here is that a person must be willing to forego the here-and-now pleasures…that is, current consumption…in order to realize a greater reward somewhere down the line. This squares perfectly well with our understanding of how economies really work…”

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HEADLINES, NEWS AND INSIGHT: The “D” Word – Still A Threat…Athabasca Oil Sands, 7,000 Miles Away… Safety and Privacy, A Rare Privelege…

Who’s The Enemy?

by The Fleet Street Letter

The risk has shifted from accelerating inflation to disinflation, to deflation. During the 1960s and 1970s, the industrial economies experienced rising inflation – widespread increases in prices. During the 1980s and 1990s, disinflation – declining levels of inflation – was the trend. In the 2000s it will be deflation – widespread decreases in prices.

A Matter Of National Security

by John Myers

Alberta’s conventional oil reserves are currently estimated at about 4.5 billion barrels of oil. Put another way, the Athabasca Oil Sands contain more oil than the combined reserves of Russia and the United States. And the best part about all this is that Athabasca is about seven thousand miles from the Middle East.

Panama: Privacy and Profits Offshore

by Robert E. Bauman

Today, Panama is ideal for offshore investors who want to enjoy the increasingly rare privilege of strong, legally guaranteed financial privacy and no taxes, corporate or personal. Unlike Bermuda and the Cayman Islands, Panama refused to sign the OECD memorandum of understanding that would have committed it to ending what the OECD calls “harmful tax competition.”

FLOTSAM AND JETSAM: A Mean New World Ahead

– from A New Era Of Uncertainty,

by Dan Denning

“…war or no war, America’s economy will still be left to work out the imbalances built up during the Great Bull Market of the 1990s.

In short, no amount of military action can repair the decade-long damage done to America’s balance sheets. Your best strategy right now is to secure and protect your assets. There are steps you can take.

No Short-term Trading:

In the short term, avoid trying to “trade” the market next week. It will be too volatile to do so. If the Dow moves between 5% and 8% like foreign markets, it could close anywhere between 8,836 and 9,124. The market will be trying to reestablish a fair price for securities. And to do that, it will move up and down rapidly between panic sellers and buyers. It is tempting to try and trade these rallies and sell-offs. But it’s also costly. Avoid the temptation.

Buy Gold Stocks and Treasuries:

In the longer term, gold, bonds, select natural resource, and foreign stocks should outperform battered U.S. stocks. Already the flight to quality and safety has begun. The yield on the 2-year treasury note fell five basis points on Friday to 2.93%, the lowest level since 1958. The yield moves inversely to the price, which means bonds are moving up as investors look for a safe haven until the market sorts itself out. Look for gold, big oil stocks, and some foreign blue chips to match the gain in bonds.

Hedge Against The Dollar:

Readers of The Daily Reckoning Blue Service should stay alert next week for e-mail updates on our Dollar and Euro trades. The dollar has fallen 1.3% against the euro since Friday. That brings it to a 6-month low againstit’s main currency rival. We’ll be looking to take profits as the dollar reacts to the stock market’s opening next week. We may also add to our two gold positions as gold moves about $280. A higher bullion price should directly benefit our two main holdings.

In the meantime, there is quiet reflection.”

Regards,

Addison Wiggin,

The Daily Reckoning