-->A Perfect Marriage

The Daily Reckoning

London, England

Tuesday, 3 February 2004

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*** Beneath the 60-year credit cycle surge - MOOD...

*** Gold down again... buy, buy, buy... You don't have to be
a weatherman to own a winter coat... and other confusing
advice...

*** Cheapest stocks in America... useful frauds... and more!

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"We live with fraud and pretense everywhere... our lives are
wrapped up in them. Best not to try to deconstruct them too
much; you will have nothing left."

Merryn Somerset Webb is the editor of the U.K. magazine
MoneyWeek and a Daily Reckoning aficionada. She offered
your editor this sage advice over lunch yesterday.

We are thinking about it, dear reader. Everywhere we look,
we see fraud, vanity, deceit, and charlatanism. And yet, we
dare not scratch the surface too hard, for we fear to
scrape away what lies beneath... something real... real
blood... real tears... genuine, honest, feelings.

That is what is really behind the big patterns we see in
markets and economies, said Ian Gordon over drinks last
night."Mood" drives the credit cycle. Take away all the
numbers and the economists' jargon, and it is the public's
emotions that cause the massive swings in prices.

Ian is a professional Canadian mining capitalist and
amateur historian. He writes his own newsletter, The Long
Wave Analyst, in which he applies Kondratieff theory to
today's market conditions.

In a recent issue, he quotes W.D. Gann's letter to clients
from 1928:

"When the time cycle is up, neither Republican, Democrat,
nor our good President Hoover can stem the tide. It is
natural law. Action equals reaction in the opposite
direction."

"The time cycle has now moved from the Kondratieff autumn
to winter," Ian continues, bringing us up to date,"and
there is nothing that Alan Greenspan, President Bush, or
other 'powers that be' can do to bring back autumn. Nor can
they reverse the inevitability of the Kondratieff winter,
which is now upon us. Like his Republican predecessor,
Herbert Hoover, President Bush will probably be a one-term
president..."

Back to 1928 and W.D. Gann:

"The present bull campaign has lasted longer than any
previous campaign in the history of this country. The fact
that it has run longer and prices have advanced to such
abnormal heights means that when the decline sets in, it
must be in proportion to the advance.

"In making my calculations on the stock market, or any
future event, I get the past history and find out what
cycle we are in and then predict the curve for the future,
which is a repetition of past market movements. The great
law of vibration is based on like producing like."

"It's really very simple," Ian explained after he'd had a
few."People go deeper and deeper into debt during the
expansion stage of the long cycle. Then, they have to pay
it back."

In the epoch described by Gann, Americans' debt rose to
more than 250% of GDP. Then, in the 'winter' of the cycle,
Americans saved like the Chinese. Savings rates hit nearly
20% during the '40s. By 1950, debt had dropped to less than
150% of GDP. It took nearly another half century before the
public's mood returned to the exuberant levels of the late
'20s.

"The most important thing is to know where you are in the
cycle," says Ian. By his reckoning, it is later than most
people think: early winter. The decline has begun, but the
average investor has not yet realized it. Debt to GDP has
reached over 300%. We have seen estimates as high as 360%.

Advice to readers: You don't have to be a weather
forecaster to own a winter coat.

And now, while we're waiting for bad weather, here's
Addison with the financial news:

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Addison Wiggin, writing in Paris...

-"The market can remain irrational," we remind readers of
the insufferable Keynes quote again,"longer than you can
remain solvent."

- Past events require us to suspend our disbelief while
examining today's irrational stock prices."History
suggests," said a study published by a firm called
CyberTrader featured in today's USAToday Money section,
"that stocks might still have room to run before suffering
a 5% pullback."

The past four times the S&P 500 has gone 217 trading days
without a 5% correction, the market has kept chugging
higher. Performance history:

Year Next 3 mos. Next 12 mos.
1954 8.5% 38.3%
1958 8.9% 11.2%
1993 4.1% 1.5%
1995 7.6% 14.2%
Avg. 7.3% 16.3%

-"Through the end of January," William Livesey, the
CyberTrader report's author, told McPaper,"the S&P 500 had
gone 217 trading days without losing 5%. There have been
four other occasions since 1954 when the benchmark index
enjoyed a correction-free period of 217 sessions. In every
case, stocks were higher three, six and 12 months later,
the study found. The average gain a year later: 16.3%. More
encouraging is the fact that, on average, the market went
an additional 76 days before sinking 5% or more."

- Livesey, of course, interprets the data as being bullish.
"I'd say we will probably not see a correction until after
May," he said. Then again, the fact that this study graces
the front page of the USAToday Money section is dubious
news to any self-respecting contrarian. For when the herd
all thinks the same thing, he knows... they're about to get
another think comin.'

- Not so yesterday, however. The S&P 500 fought off selling
pressure following a lower-than-expected Institute of
Supply Management index number. The ISMN index came in at
63.6 - a 20-year high for the third straight month, but
missing analysts' projections by nearly half a point. The
S&P immediately began selling off... but fought back in late
trading to close 4 points higher for the day at 1,135.
Yesterday's gain of 4 points to 1135 stretched that to 218
days. Likewise, the Dow tacked on 11 to 10,499. The Nasdaq
was off 3 at 2063.

- We've been ogling the fact that the stock market circa
2003 resembles the bubble year 1999 in disturbing ways. And
disturbing it is... at least, for 'investors.'
'Speculators,' on the other hand, are stripping off their
clothes and leaping headlong back into the pool... skinny
dipping in broad daylight... fearless of getting caught with
their pants down.

- A chart in this morning's Wall Street Journal shows just
how brazen these lumpen-hussies have gotten. Since the
beginning of what the editorial staff at the WSJ has now
begun to call the new Bull Market, guess which sector is
heading the pack? Why, tech stocks, of course! Since
October 9, 2002, the Dow Jones tech stock sector has raced
ahead 105%, followed distantly by the Financials at 60% and
our old pal Telecom, up about 45%. Ohhh... will the
shameless never learn?

-"... Of some concern to investors," the WSJ grants,"is
the fact that the technology surge seems to be powered by
the same fuel that powered in 1999: monetary stimulus. As
was the case in 1999, when the Federal Reserve was worried
about possible computer glitches in the year 2000, low
interest rates and easy money have provided more cash than
companies can invest in their businesses, and a lot of that
money has found its way into stocks." Really...

- Of course, despite the fact that the S&P 500 is trading
at 24 times trailing earnings... and the Nasdaq 100 at 54
trailing earnings... the WSJ mollifies its readership by
suggesting things aren't quite as heady as the bubble top
in 1999. Back then, you'll sigh with relief, the S&P 500
traded as high as 36 times trailing earnings. The Nasdaq
100 was getting lightheaded at 165 earnings. So... never
fear, trade on!

- But please do be careful. As recently reformed tech bull
Porter Stansberry points out, pitfalls abound."Red Hat,"
writes Mr. Stansberry in The Blast, a daily e-mail for
subscribers to his Pirate Investor group of investment
advisories,"a company that packages the free Linux
computer operating system and sells it to corporate users,
is now valued by the stock market for $3.6 billion. That's
almost 30 times its sales estimate for 2004. Not 30 times
future earnings... 30 times future sales.

-"That's about the richest valuation I've ever seen for a
company with over $1 billion in market capitalization,"
Porter continues."It must be a super-profitable company,
right? Wrong. Over the last three years the company lost
$232 million... before giving away $181 million in stock
options. How ridiculous is Red Hat's share price? Barron's
recently pointed out that Red Hat is trading for a larger
value than the entire likely future revenues of its
industry.

-"By 2007, software analysts estimate the total size of
the paid-Linux market will reach $600 million... that's
about 1/6th of Red Hat's current market capitalization. How
much would a knowledgeable investor pay for a company like
Red Hat? Novell, a long-established corporate software
maker, paid $210 million for German Linux
reseller, SuSe Linux last year. What do individual
investors know about Linux that Novell doesn't? Nothing.
The drunks are paying 14 times too much.

-"Careful," warns Stansberry,"the drunks will wake up
soon." And then we'll be in 2000 all over again... with
fuzzy-headed investors rubbing their eyes in
disbelief... trying to make out the numbers printed in their
retirement account statements.

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

Bill Bonner, back in London...

*** Gold is down... great! The yellow metal dropped as low
as $395 yesterday, comfortably below our buying target.
Buy! Gold is like a winter coat, we remind readers; we may
not need it, but we ought to have one anyway. The seasons
have a way of changing whether we want them to do so or
not.

*** The yen is up! Despite spending nearly a quarter of a
trillion dollars over the last 13 months to put some spine
in the greenback, the dollar slumped like a teenager
yesterday... dropping to its lowest level against yen in 3
years. What would happen if the Bank of Japan just let
nature take its course, we wonder?

*** Meanwhile, Americans are acting as though they had
nothing to fear but fear itself. Bloomberg reports that
they are spending money twice as fast as they earn it.

*** Here is something that looks like good news: Factory
growth is at a 20-year high. But... what's this... factory
jobs are still declining! Oh, well... the laid-off factory
hands can get jobs parking cars at Starbucks... (try to get
some guy in Mumbai to do that!)... while other laid-off
workers hang around, sipping coffee, checking the want-
ads...

*** Oh là là... lies, lies, lies...

Bush and Blair went to war over weapons of mass
destruction...

Of course, it was a lie - there never were any WMD, they
now admit. Both Bush and Blair say it was an honest
'mistake'; they blame the spies... each has called for an
'investigation'...

Which is another lie, of course. As former Treasury
Secretary O'Neill reports, the administration planned to go
war with Iraq even before the WMD charge was invented...

So, the Bush team now attempts to shift the whole war aim
to"building democracy"... which is yet another lie. Neither
you, nor we, nor any sensible American really cares who
governs Iraq... provided he minds his own business.

Besides, democracy is itself a fraud. People can vote all
they want... it won't make them any richer, happier, or
thinner.

"Of course, democracy is a fraud," said Merryn."Everybody
knows it. But it may be a useful fraud, like patriotism...
or plastic surgery."

*** This from our colleague, Dan Ferris:

The Last Cheap Stocks In America

I went to the stock screener at www.msn.com today. Looking
for cheap stocks, I used the following criteria to find
some great values:

1) under 10 times earnings
2) under 1 times book value, and
3) under 1.5 times sales

These are the basic benchmarks of what I call"deep value
opportunities." If I also insist on a decent measure of
liquidity, say 100,000 shares a day, I get a mere 9 stocks.

There are over 7,000 companies whose shares are traded on
U.S. exchanges. And there are only 9 that qualify as
potentially undervalued according to my established
benchmarks.

Here they are, the cheapest stocks in America, by earnings,
book value and sales.

Korea Electric Power Corporation (KEP)
This is the company that provides South Korea with 99% of
its electricity. It's got a nuke-happy dictator as its
neighbor, so people are afraid of it.

Orthodontic Centers of America (OCA)
This company provides simple services like bill paying,
payroll and basic supplies for orthodontic practices. It's
having a huge problem digesting a dirt-cheap acquisition it
made a couple of years ago, which appears to be blowing up
in its face.

Webzen (WZEN)
This company is a developer of online games in Korea. About
370,000 people in Korea and China use this company's only
product, a role-playing game called Mu.

Friedman's Inc. (FRM)
Friedman's is the national jewelry chain, with about 600
stores, that sold a bunch of bad receivables to a finance
company. Over 50% of its sales are on credit. It sells
cheap jewelry to low- and middle-income customers, who
default at a high enough rate to get it into trouble.

Videsh Sanchar Nigam Ltd. (VSL)
This is an ADR for an Indian phone company.

Sea Containers, Ltd. (SCRA)
This company ships people across the English Channel, Irish
Sea and Baltic Sea. It's also in hotels, railroads and
publishing.

Applica Inc. (APN)
Applica bought Black & Decker's household appliances
division a few years ago. It sells toasters, blenders,
fans, hair dryers, pest control devices, food
processors... you name it. It has about six other brand
names, besides Black & Decker.

Nortel Inversora S.A. (NTL)
This is a holding company whose sole asset is 55% of
Telecom Argentina STET-France Telecom S.A., the Argentine
phone company.

PXRe Group Ltd (PXT)
PXRe sells catastrophe reinsurance. Reinsurance is
insurance for insurance companies. This company survived
Hurricane Andrew and 9/11, the two largest insured losses
in history. Like Sea Containers, it is domiciled in
Bermuda.

.. My little screening exercise suggests that there's
almost nothing left to buy in the U.S. markets. Or any
other markets, for that matter. My search included all the
U.S. traded shares of foreign companies, too. And only 6 of
them made the list. Four of these companies do all their
business outside the United States.

Think about that for a minute. Of the last 9 cheap stocks
in America, 6 are foreign and four don't make a dime from
U.S. customers. I'm not the least bit xenophobic. But it
looks like investing in U.S. companies right now is a
really bad idea.

*** An Indian reader of the Daily Reckoning:

"... It could be that something different is happening as
many Indians who have been great skeptics in the past now
tell me that despite all the well-known problems in the
country (500mn living on less than a dollar a day) there is
a feeling that the mindset has changed - Indians are no
longer afraid of the outside world and believe, for the
first time, that India can compete in the world and its
people and companies can compete against the best in the
world."

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The Daily Reckoning PRESENTS: A new bull market... not only
in the"fastest-growing primary energy source in the
world," but in an increasingly widespread method of
transporting it.


A PERFECT MARRIAGE
by John Myers

It's no secret - the world is draining dry its oil
inheritance. Outside of the Middle East, a new giant oil
field hasn't been discovered in 30 years. America has only
21 billion barrels of oil reserves left, enough to meet
demand for just two years.

Even in the Middle East, new oil fields are becoming harder
to find. Meanwhile, China and India hunger for vast amounts
of energy to satisfy a population of 2.3 billion people
demanding the comforts of an industrial economy.

Alternative energy sources are no elixir. Giant windmills
spin, but only when wind blows. In North America, the last
nuclear power plant was built in 1978, and scientists are
still vexed with what to do with the radioactive waste.
Hydrogen can power vehicles, but only if the vehicle is as
big as a bus.

Yet there are two energy sources that can indeed meet the
world's demands for the next half-century - oil sands and
natural gas. The latter just happens to be the fastest-
growing primary energy source in the world.

The Department of Energy projects that 900 of the next
1,000 U.S. power plants built will burn natural gas.
Worldwide, consumption of natural gas is projected to more
than double between now and 2025. But the most robust
growth in natural gas demand will occur in the developing
world, where demand is expected to rise by 4% per year.

According to the Department of Energy,"Much of the growth
in [the developing world] is expected to fuel electricity
generation, but infrastructure projects are also underway
for natural gas to displace polluting home heating and
cooking fuels in major urban areas, such as Beijing and
Shanghai."

It would seem like a perfect marriage: The nations with the
largest amounts of natural gas - like Russia and of course,
the Middle East - are eager to sell, while the nations with
the greatest need for natural gas are eager to buy. And
since natural gas is a clean fuel, even the
environmentalists are happy.

However, there is one problem: How do you get that gas from
the countries that hold major gas reserves - distant
countries like Iran, Saudi Arabia or Venezuela - to the
United States?

Unlike oil, which is liquid at room temperature, methane is
gaseous. In its natural form, the only viable way to
transport natural gas is via pipeline. But to move massive
amounts of natural gas through pipelines from, say, Saudi
Arabia to China is not only economically unfeasible, but
politically foolhardy. Fortunately, there is a solution:
Liquid Natural Gas, or LNG.

Liquid Natural Gas is methane cooled to less than -161°C.
At that extreme temperature, it becomes a boiling liquid
that can be stored in heavily insulated tanks. Every
chemistry student knows that such extreme temperatures are
difficult to achieve, even in a test tube. Yet great
technical advances over the past half-century have made the
conversion and transportation of liquid gas economically
feasible.

The first experiments with turning methane to liquid were
carried out in the United States in the 1950s. In 1959 LNG
was delivered to England. Commercial deliveries of LNG from
Algeria to Europe began in 1964, and five years later the
industry grew greatly when steady deliveries of LNG were
made from Alaska to Japan.

The Arab oil embargo in 1973 spurred growth in the
industry, and the first LNG supply contracts were signed.
During the 1970s, four LNG terminals were built in the
United States. However, the development of gas pipelines
from Alaska and Canada to U.S. markets resulted in the
collapse of LNG sales to the United States.

Yet the LNG market bounced back and grew steadily in the
1980s and '90s, principally with imports moving to Asia and
Europe. The necessity of LNG, coupled with cost-cutting
technologies and economies to scale, have made LNG an
increasingly competitive fuel source.

Since 1999, the high cost of crude oil and a sharp increase
in demand for natural gas have resulted in the rapid growth
of the market for LNG. Today's major LNG market is Asia,
where 71% of the world's LNG cargo is delivered. But other
markets are already opening up: Europe, for instance, where
LNG terminals in Spain, Portugal, Turkey and Greece will
probably soon be joined by terminals currently under
consideration in France, Italy and Spain.

The interest in LNG has also spread to our portion of the
globe. An LNG terminal was completed in Puerto Rico in
2000, while another is under construction in the Dominican
Republic. There is even a proposal to build a terminal in
Mexico, a country with considerable oil reserves.

But the interest in LNG doesn't stop there. In the past
three years, new production and port facilities have also
been built in Oman, Qatar, Nigeria and Trinidad.

Clearly, any past prejudices against LNG and concerns
surrounding producing and delivering it are dissipating.
"What is [now] being challenged is the mystique about LNG
technology - that in order to be viable, LNG plants must be
large, with increasing sophistication and complexity," says
Martin Houston, a senior LNG administrator."In addition
there was the view that only a few companies had the
necessary technical expertise to undertake LNG projects."

With production and delivery concerns subsiding, interest
in LNG is growing. Currently, LNG makes up only 6% of the
world's natural gas trade. But as demand for natural gas
grows - especially in the developing world - the LNG
industry will see a surge in growth.

Between 1995 and 2001, pipeline exports grew by 39%. The
LNG trade grew by 55%. And think about this: World LNG
trade totaled 120 million tons in 2002. It is expected to
surpass 160 million tons by 2006, a growth of another 34%.

That kind of growth is extraordinary, especially for an
energy thirsting world... and it's phenomenal for real asset
investors. Look for exciting opportunities ahead in this
sector, as the market for LNG really gets off the ground.


Regards,

John Myers
for The Daily Reckoning

P.S. LNG is clearly a subject of increasing
attention... especially since last summer, when Energy
Secretary Spencer Abraham proposed holding a LNG summit,
which took place in December of 2003. Fed Chairman Alan
Greenspan is also singing the praises of LNG, noting that
LNG is an important industry that can act as a"safety
valve" for the energy needs of the United States.

That's a lot of attention to pay to a relatively new
industry. Yes, LNG has been around since the 1960's, but
only recently have energy leaders stressed its importance
in meeting the world's future energy needs. That's an
important factor to remember. Since these developments are
so new, now is the time to get in on this sector.