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The Daily Reckoning

Paris, France

Thursday, 3 April 2003

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

*** Consumers caving in...foreclosures up 36% in the
Rockies...

*** Stock market soars...Nikkei keeps falling...

*** How long will the bear market last? Silent
streets...subway strike...a rat's patootie...and more!



The entire world economy rests on the consumer; if he ever
stops spending money he doesn't have on things he doesn't
need - we're done for.

For many years now, he's gone beyond the call of duty.
Implored by Fed governor Robert McTeer to"buy an SUV...
preferably a Navigator...," and lured by zero percent
financing, he bought one...and one for his wife too! On
credit, of course. Tempted by the Fed's lower rates...he
also bought a new house...and refinanced it twice.

What more can you ask of the guy? And now, says, economist
Allen Sinai, the poor consumer is"caving in."

What the consumer was doing - in economic-speak - was
"dissaving". Instead of saving, he was spending, in other
words. But recently, the spending seems to be trailing off.
It is not that the consumer is willfully shirking his duty
to sacrifice his own finances for the homeland and its
central bankers. He just has no more savings to dis.

Heat, utilities, water, gas, housing, property taxes,
health care, insurance, college tuition and many other
expenses keep going up. Energy expenses rose 22% in the
last 12 months. Medical costs were up 4.5%. Transportation
increased 7.1%.

Last time the Department of Labor Statistics looked, GDP
was still rising. But, as the Mogambo Guru says,"who gives
a rat's patootie about GDP?...And don't give me that crap
that health insurance and mortgage payments and food come
out of discretionary income. Let me miss one damn payment
and then we'll see how 'discretionary' those payments are!"

Mogambo doesn't seem to be in a spending mood. Nor are most
of America's consumers. In fact, more and more consumers
are finding it hard to continue spending at all.

For more Mogambo, click here:
My New Plan To Save America And The Dollar
http://www.dailyreckoning.com/body_headline.cfm?id=3074

From the Rockies comes news that home foreclosures rose 36%
in Denver in the first quarter, compared to 12 months ago.
Bankruptcies rose 26% in the state of Colorado.

And now the war! Only 13 days into it, and consumer sales
have dropped...manufacturing is down...consumer confidence
is falling...and auto sales slumped in the month of March.

But who knows? Maybe a quick victory and another rate cut
will still bring out the spenders again. Maybe they'll wave
refi contracts at the victory parade and then dissave
themselves into an even deeper hole.

Eric? Your news?

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

Eric Fry in New York...

- The stock market is less a market of stocks these days
than an Iraqi War call option. As the coalition forces
advance toward Baghdad klick-by-klick, the stock market
advances uptick-by-uptick. Yesterday, the Dow Jones
Industrial Average soared 215 points to 8,285, while the
Nasdaq Composite added 3.6% to 1,397.

- Now that the sweet smell of near-victory fills the air -
a smell that is quite different from chemical gas -
investors have no more use for safe-haven assets like gold.
Most folks are probably wondering why they bought the stuff
in the first place. In the eyes of many investors, gold
must now seem more like a frivolous yard-sale"bargain"
than a timeless store of value. The yellow metal tumbled
$4.80 yesterday to $330.40 an ounce. Government bonds also
fell from favor. The benchmark 10-year Treasury note
tumbled 30/32, pushing its yield to 3.99% from 3.93% the
day before.

- We assume that the nation's economic difficulties did not
disappear yesterday, but simply receded into the
background, as investors cheered our military successes.
Perhaps denial is the prudent course of action. Maybe, as
the bulls predict, a swift victory in Iraq will bestow a
multitude of blessings upon our struggling economy, and
lift us out of the"soft patch" that Chairman Greenspan has
been bemoaning. Maybe military success will, in fact, prove
to be a sort of elixir that cures whatever ails the economy
and the stock market.

- Alternatively, the Iraqi campaign, even if it succeeds
swiftly, might pluck our economy out of its soft patch,
only to shove it between a rock and a hard place. In which
case, buying expensive stocks would prove to be no more
rewarding in April of 2003 than it has been in earlier
epochs. We suspect that yesterday's stock market rally was
nothing more than the latest temporary respite from our
long-running bear market.

- It would be nice if a costly foreign war could, in fact,
cure most of what ails our economy, while also boosting the
stock market. But wishes are the stuff dreams are made of,
not sustainable stock market rallies.

- Here's some troubling news for all those Wall Street
strategists who stake their bullish outlook on the
statistical improbability of four straight losing years in
the stock market: Japanese land prices declined for the
12th straight year in 2002, sending the average commercial
real estate prices down near late-1970s levels. Likewise,
the Japanese Nikkei is into the 13th year of its bear
market...and has tumbled to a 20-year low.

- The Japanese experience illustrates an immutable law of
financial markets: mean reversion. In other words, what
goes up, valuation-wise, must come down.

- The fact that stock prices would fall in order to correct
a prior excess is not improbable at all...It is a
certainty. Wasn't the bubble itself an improbability of
epic proportion? Ironically, the same folks who point to
the statistical improbability of four straight losing
years, conveniently ignore the statistical improbability of
the massive bubble that preceded the last three losing
years.

-"So blame currently falling stock prices on previously
rising stock prices," says Grant. And if the previously
rising prices had been rising for a long time, the
currently falling prices might continue falling for a long
while.

-"By some standards, the three-year decline in the stock
market is a mere bear cub," says Bloomberg News."How about
13 years, as seen in the Japanese bear market from 1990 to
2003 that is still on the prowl? Or 16 years, as occurred
in the U.S. market from 1966 to 1982? Or 20 years, the span
of the U.S. slump from 1929 to 1949?"

- Is it not true that the higher a rocket soars into the
sky, the farther it must fall when returning to earth? The
return trip to"fair value" takes as long as it takes - no
more, no less. A stock market that falls from a high
altitude must fall for a long time to land on the terra
firma of"fair value".

- How long does it take? As long as it takes. The market
does not follow a predetermined"timetable."

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

Bill Bonner, back in Paris...

***"I was supposed to go to New York next month," Maria
began at dinner last night."But I talked to my agent and
he said the city was quiet. People aren't really doing very
much because of the war. So, I don't think I want to go
over there. What's the point? Besides, with this new Hong
Kong flu, or whatever it is, I don't want to get on a
plane."

Our conversation took place in a restaurant near the Palais
Royal. Normally crowded with American tourists, the place
was half-empty...the only tourists were one couple whose
accent sounded South African and several groups of
Japanese.

War...pestilence...need we mention, dear reader, that the
world economy depends upon globalized trade...which depends
on more than just the American consumer's imprudence?
People have to be willing to get on airplanes. And go into
shops. Hong Kong is described in this morning's press as a
"ghost town"..."dead"..."silent".

***"The antique market is dead, too," said a friend in the
business."For the last several years the Paris market has
depended on Americans. Decorators from New York and LA come
to Paris to buy for their clients. But they're not here
now. I don't know, maybe they're afraid because of the
war....but it's very quiet."

*** Jules, 15, is fed up with the French educational
system. He applied to several boarding schools in America
and was accepted by two of them. But now, the moment of
decision has come. He must tell the schools whether he is
coming.

His parents are worried. They prefer to have him near at
hand, where they can keep an eye on him. And his father
thinks that such schools are a waste of money - a form of
conspicuous consumption, like paying $2,400 for a handbag
on Worth Avenue...or $100 for a bottle of wine at the Tour
d'Argent. Not that the old man is unwilling to waste
money...it's just that he doesn't like feeling like a
schmuck.

"It's not the money, it's the principle of the thing," he
tells his son. But at $30,000 per year, he's not sure.

Neither love nor money may have the final word."With a war
going on...and a plague spreading...do we really want Jules
5,000 miles away from home?" the parents ask themselves.

For little reasons and big ones, the world economy
hesitates...

*** Zut alors! They announced a 'social movement' on the
subway this morning. What they meant was that SNCF workers
had gone on strike, and commuters would have to find a
different way to get to work. So, we took to the streets.
And what a glorious thing it turned out to be. A beautiful
April morning...and an hour's walk to the office. The trees
are setting out leaves. The air is fresh and clear. Birds
sing. Horns honk. Mothers walk their children to school.
The smell of this morning's bread and diesel fumes is in
the air.

Ahhh...may the subway workers go on strike every day!


The Daily Reckoning PRESENTS: While the world's attention
has been focused on war and oil reserves in the sands of
Arabia, a divergence in the price of commodities and
resource company shares, says John Myers, has created quite
a buying opportunity right here at home...


BACKYARD OIL
by John Myers

America is a nation of privilege - most of us don't worry
about where our next glass of water will come from, where
our next meal will come from or where our next gallon of
gasoline will come from. We roll out of bed every morning,
comfortable that sufficient supplies of water, food and
fuel await our personal demand.

More than likely, our complacent comfort is secure with
respect to food and water, both of which are"homegrown".
But our supplies of crude oil are less reliable. Since
homegrown sources of hydrocarbons are satisfying less and
less of our domestic energy needs, we must rely more and
more on foreign sources. All else being equal, domestic is
better.

In a world of increasingly volatile geopolitical tensions,
Outstanding Investments has argued for months that domestic
supplies of oil and gas will become increasingly vital to
the well-being of the U.S. economy. That's why we recommend
stocks like Suncor Energy, a company that literally"mines"
oil from tar sands in Alberta, Canada. Despite the unusual
geological nature of Suncor's reserves, it's"syncrude"
refines into gasoline and jet fuel just as well as Saudi
oil.

The one important difference between these two versions of
crude oil is that Suncor sits right next door in Canada,
not halfway around the world in the middle of the Arabian
geopolitical tinderbox. What's more, Suncor's reserves are
considerable.

The Athabasca Oil Sands, where Suncor runs its operation,
is the largest of these oil sands deposits. It contains
over one trillion barrels of bitumen on its own, although
only about 300 billion barrels of bitumen can be recovered
using current methods of mining. By comparison, Alberta's
conventional oil reserves are currently estimated at about
4.5 billion barrels of oil. Even more significantly, the
Athabasca Oil Sands contain more oil than all the known
reserves in Saudi Arabia.

Suncor is but one example, albeit a very unique one, of a
company possessing large North American oil reserves.
Finding companies with domestic oil reserves isn't too
difficult, but finding companies with considerable and/or
growing reserves is very difficult indeed.

Here's why: North America has been"drilled out", and
substantial finds have become virtually impossible to
discover. By next year, humanity will have consumed about
half the oil that the world holds under its crust. Of the
'yet-to-find oil', pegged at around 150 billion barrels -
half is estimated to rest beneath the sand of just five
Middle East countries: Iran, Iraq, Kuwait, Saudi Arabia and
the United Arab Emirates.

By contrast, much of the"already-found-and-consumed" oil
came out of the ground right here in the US. More
exploratory holes have been drilled in the continental
United States than in the rest of the world combined. The
United States (48 states) oil discovery rate hit its
maximum in 1957 and has since decreased. Proven US (48
states) oil reserves peaked five years later, in 1962, and
have been diminishing ever since. The US oil production
rate reached its peak in 1970 and has also been declining
ever since. For this reason, the United States now relies
on foreign sources for more than half of the oil it
consumes. This is a number that will continue to grow.

America's increasing reliance on foreign supplies is a
certainty, especially since the U.S. Senate recently
rejected proposed oil drilling in the Alaskan National
Wildlife Refuge. But the more we must rely upon foreign
oil, the greater the appeal of a company like Suncor, which
is sitting on vast domestic reserves.

Because high-quality companies in the oil stock sector have
been lagging behind the strong rallies in both oil and gas,
we think the timing has never been better to snap up the
shares of companies with large North American reserves.

As my colleague, and occasional Outstanding Investments
contributor Andrew Kashdan pointed out recently,"Very few
resource stocks have kept pace with their related
commodities. And that bizarre divergence may present a
terrific investment opportunity, even for the most cautious
of commodity bulls".

For example, natural gas prices have soared more than 260%
over the past year and a half. Amazingly, however, the XNG
Index of natural gas stocks - which consists of 15 major
gas producers, including Anadarko - has actually declined
by more than 8% over the same period!

"A temporary pullback in natural gas prices would hardly be
surprising, given the spectacular recent rallies," Kashdan
surmises."But we think that the natural gas bull market is
the 'real deal'. Therefore, we suspect that the shares of
many natural gas companies are too cheap because they are
pricing in a worst-case scenario that is highly unlikely to
occur."

Furthermore, supply and demand trends in the natural gas
sector are extremely bullish for gas prices. On the supply
side, total U.S. gas production volumes were down about 5%
in 2002 and could be down again this year. Natural gas in
storage is nearly 50% lower than it was a year ago. A cold
winter has supported prices, but we think they will remain
firm even after seasonal demand declines. All in all, APC
should be realizing very high prices for its natural gas
this year, and a boost in earnings and cash flow will be
close behind.

Over the last few months, we have tipped off our
Outstanding Investments subscribers to several
opportunities in the North American oil and gas sector. One
example is Petro-Canada, a company that is set to become
Canada's largest petroleum producer.

Petro-Canada is likely to increase output of crude oil by
48% this year to about 364,000 barrels of oil per day on
average. Including natural gas, production should exceed
500,000 boe (barrels-of-oil equivalent) per day. This
increase is double the average growth rate of Canada's top
five oil companies and puts Petro-Canada ahead of its two
main rivals Imperial Oil Ltd. (a unit of Exxon Mobil) and
Shell Canada Ltd. (Royal Dutch/Shell Group).

Talisman Energy is a different sort of play on domestic
oil. The company recently unloaded its problematic oil
properties in the Sudan, looking to re-focus its efforts on
properties back home in North America.

The core truth about Talisman is this: the company is rich
in oil and gas reserves. At the beginning of 2002, Talisman
held proven reserves of 1.5 billion boe, up 26% from the
year before. And the lion's share of it is tucked safely
beneath the Western Canadian foothills and prairies.

When it comes to investing in energy companies, we strongly
believe that there's no place like home.

Regards,


John Myers,
for The Daily Reckoning