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generated illusory profits (but very real taxes on those profits), it was still better than having to go out and buy more at inflated prices. I hate to make near-term predictions on macro events, but it seems to me that we're most likely to see a replay of the 70s environment over this decade: Rapidly rising commodity prices, combined with retail prices that are relatively stagnant, will result in lower corporate profits, ugly stock and bond markets, and high unemployment. All in an environment of economic turbulence. If I'm right, commodities will be a good thing to own. Producers will be forced to inventory them out of self defense.

The third, and biggest, macroeconomic influence I see, however, is the value of the dollar. I've made many arguments in the recent past (XXI/11) for this unit topping out, and when the descent starts in earnest, commodities priced in dollars should rise proportionately. The main risk at this point is that bad economic times will cut back consumption of commodities, taking prices even lower; that's certainly what happened during the 30s. But my guess is that this recession/depression will be closer to the experience of the 70s. In any event, with commodities already at historic lows, a lot of the risk is wrung out, even if I'm wrong.

Specifics....

Even though platinum is down significantly (from its Jan 01 high of $639 to the current $474), and palladium even more (from its Feb 2, 01 high of $1,090 to the current $433) I can't get overly enthusiastic. For one thing, these metals are getting a lot of action from explorers at these prices (well, at least relative to anything else in the bombed out mining sector), and some are making strikes. The supply will come in. And despite their uses, demand can only drop at these prices.

Copper is certainly cheap enough at $.68, but it still sells for twice the best producers' costs. And it really can get hurt in a real downturn. Those are the basics. Bears can (correctly) point out that if and when the mines in the Congo's Katanga get back into production the price of copper could fall in half. Of course, that may not happen for another generation. Meanwhile, current producers, like Phelps Dodge (PD, US$32.25), the world's second largest copper producer, recently cut output by 175 million pounds per year at high cost operations in New Mexico and Arizona.

Oil, now that it's come down to $20 from its recent spike again gets my attention. Usage will drop further as the recession goes on, but the points I made in XXII/5 remain valid. And it is the most political of commodities. Don't forget that 2/3 of US oil is now imported, and 17.5% of total US energy imports come from Saudi alone. Natural gas, down from a July 25 all time high of $10.10, is again in an interesting range.

All of the grains, but especially soybeans (at $437.20 basis Jan 02) are real bargains. I presume American farmers continue to grow them simply out of habit

The best bargains among all of the soft commodi

ties? Coffee ($.42) down from a recent high of $.83 and a decade high of $2.76 in 1997, and cotton ($.35) down from a recent high of $.64, and a decade high of $1.11 in 1995.

Of course, gold and silver are certainly the best bargains of all, for reasons past issues detail.

With the exception of gold and silver you may want to use this data as no more than cocktail party information because of the risks inherent to getting involved in futures. But you should be aware we're in a bottoming area.

Funds as a Snare and a Delusion

I've pointed out the fantastic rate of creation of new mutual funds (typically 750-1,000 new funds each year for most of the 90s). I haven't given adequate emphasis to the winding up of existing funds, usually by merger with a larger, more successful fund. This happens for two reasons: One, bad performers inevitably drop in size, and that hurts their profitability to the management company, which is working on a percentage of assets under management. Two, when a fund merges or is wound up, its bad track record, and accompanying embarrassment, disappears with it.

For example, if you'd invested $1,000 in the (now-defunct) "Investment Indicators Fund" in 1968, which was merged into the (now-defunct) "Industry Fund of America," which was merged into the (still-extant) American Heritage Fund you'd have about $50 left. Not very impressive for the greatest bull market in history.

This type of thing is just as likely as the 1,000% returns early buyers of funds like Magellan have gotten but not nearly as well known. Who's going to advertise results like that? There are three main reasons I can see for this poor performance:

1) Expense ratios Management fees, 12b1 costs, legal, regulatory and administration nick the average fund for about 2% or better per year. Compound that over a decade and it's 22% of your capital.

2) Turnover Funds differ greatly in turnover, ranging from a frenetic 200% to almost nothing. Maybe 50% is typical. But every purchase and sale takes a commission, and a bid-ask spread. Over time this can also amount to big money.

3) Management A smart manager can overcome the expenses and still make gobs of money. But are there 20,000 geniuses managing funds today? With their average age being about 30 (it was 28, I'm told, at the peak of the Internet bubble), I think not.

Of course this is why 90+% of funds necessarily under perform the S&P.

In any event the increase in the absolute number of funds is a bull market phenomenon, making it easy for the average guy to get into the market. But as sentiments change, and people liquidate their funds to pay off debt, keep their heads above water after they lose their jobs, or just get out of the market because of fear, the funds will

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have to sell stock to redeem shares. Unfortunately, it's generally only other funds that are in a position to buy the size positions funds sell. That puts real pressure on the market.

One reason why, despite their expenses, funds can look good during a bull market is that managers use new influxes of cash to buy their favorite stocks, driving them higher, and creating, in effect, a self-fulfilling prophecy. During the 1993 to 2000 bull market funds that got a net inflow of cash performed, as a group, twice as well as those who had outflows for just that reason. But the reverse happens when fund shareholders cash in.

In any event, my guess is that we'll see literally thousands of funds merged or liquidated over the next few years, since the fact is that, even with fat fees, a fund with less than $50 million loses money for its management company.

My advice remains to forget about the cheerleaders telling you to hold on to funds for the long term. Sell them, or replace them with those specializing in gold stocks.

Of course, that advice is exactly the opposite of what the mainstream believes, if the inflow of $14 billion into funds in the past month is any indication.

The Value of Human Life

The recent hunt to kill Osama bin Laden at almost any cost turned my thoughts to the value of a human life.

We hear a lot of public agonizing from Washington and the chattering classes about the "infinite" value of a "priceless" human life. Unless it's a Muslim accused of terrorism, in which case they should be dispatched post haste. It's a highly charged subject, where anyone questioning the proposition risks being considered both unpatriotic and morally depraved; for that reason it's not analyzed closely. But that is, perhaps, one of the best reasons why we should dissect it. I think it's important to use words like "infinite" and "priceless" with care and precision. Because if a word can't be defined accurately, then an idea is expressed inaccurately. Thinking becomes fuzzy, and logic breaks down when people don't know what they're talking about.

When people say something at variance with reality they create a lie, and the reason lies persist is because no one confronts and analyzes them. Lies, no matter how pretty or elegant they may seem at the time, are always destructive.

What is a human life worth to you? Let's take the emaciated Ethiopian (strike that dated image: the child is now Afghani, and will probably soon mutate into an Iraqi, then a Sudanese) whose photo graces the Foster Parent ads in many magazines. A dollar a month? You'd probably say "Of course" even if you neglected the chance to send in your check the last time you saw her. How about $10? Sure. $100? Maybe. $1,000? Almost certainly not. So that child's life actually has a real dollar

value to the person who's going to write the check. Forget the generalities about infinite value. That only washes if you're spending other people's money, which effectively has no value.

What if the kids you save later decide that they have to wipe out the rest of their country's rhinos and rain forest in order to survive? Maybe, quite candidly, you'd rather have the rain forest around than the kids. The concept of infinite value of a human life leads to a sense of cognitive dissonance in the light of the real world. The fact is that a life has a finite value, just like anything else. Some lives are worth a dollar. Others (like your own, or those of your friends and family) are worth perhaps millions. Others are worth nothing. Still others are worth negative amounts, which is why the mafia, or the government, or some individuals, put prices on the heads of certain people. It's all completely arbitrary. It's arguable that if there's only one human life in the world, then that life really does have infinite value, since "value" doesn't exist independent of humans who assign it. The only thing for sure is that the sanctimonious concept of the pricelessness of human life is ridiculous.

As for the ethics of it, I feel perfectly justified in spending several thousand dollars for medical treatment of a dog or a horse I own, even though I wouldn't consider doing so for any of the millions of people who "need" it more. Money, after all, represents the distilled life of the person who earned it. And if life has any value, then people should be at ethical liberty to spend it as they wish. But not everybody believes that.

You've probably heard of the newly minted profession of "bioethicist" in that context. A bioethicist is someone who's supposed to determine the right and wrong of these things. I consider them noisome busybodies and self-appointed censors pandering to dimwits apparently incapable of thinking out psychological/ethical/economic dilemmas on their own.

There are lots of issues around to give newly minted bioeticists head time on TV. Is cloning humans moral? How about stem cell research, which offers the near term prospect of practically eternal life? How about selling body parts? Online bidding at eBay pushed the price of a kidney to $5.7 million before the web auctioneer stopped the bidding because it violated Federal laws. The offering, posted by a Floridian named 'Hchero', read as follows: "Fully functional kidney for sale. You can choose either kidney. Buyer pays all transplant and medical costs. Of course only one for sale, as I need the other one to live. Serious bids only." I am, of course, 100% in favor of all these things.

As well as online auctions of human eggs, which has also been made illegal. A California entrepreneur launched a new website allowing infertile couples (among others) to bid on the ova of beautiful models and actresses. Estimates were that bids could go as high as $150,000 at www.ronsangels.com, which attracted

Continued on page 7

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In the April 2001 IS I commented that since everyone, including myself, was getting pretty bearish, we were likely due for a nice strong rally which we got. Then the events of 911 occurred. After the initial plunge when the market reopened, stocks have been up strongly. In fact, the majority of commentators are calling for a resumption of the late, great bull market. It's not an entirely irrational sentiment, if you trace the history of America's wars relative to its stock market; what stands out is that betting against America has always been a losing proposition. Since at least WWI, the market usually gets quite weak at the start of a conflict, due to a natural uncertainty about both the government's response and the eventual outcome. It's historically been smart to buy stocks after the initial sell off.

For example, the Dow Jones Industrial Average fell 2.9% on the first trading day after the Pearl Harbor attack, and another 11% over the next four months. That's surprisingly little, in view of the beating that not only the Americans, but all the allies, were taking on virtually every front. But, despite a bad start, the Dow not only went on to return 20% in 1942, but doubled over the next three years as the war drew to an close.

War, at least in the past, has always seemed good for the economy and the market for at least three reasons: First, America has not only always triumphed, but it has done so without taking serious damage. "Winning" is pyhrric if you're left in the state of Britain or France after either World War. Second, war has helped America to spread its culture around the globe, and aided its businesses in gaining market share. I have real reservations on how wise that methodology will prove to be in the long run but that's another subject. Three, since the creation of the Fed in 1913, wars have been financed largely through inflation. And, notwithstanding all the damage it does, that new purchasing media does find its way into shares, driving them higher. So it's understandable that people are used to thinking that not only is war the health of the State (correct), but that it's the health of the economy and the market as well (incorrect).

Another factor behind the post 911 strength lies in the fact that we've had the biggest bull market in history since the bottom in 1982. If there's one thing people have learned over at least the last decade, it's to buy on dips. And, although the stealth bear market of the last three years (prominently including the wipeout of high tech issues) has shaken that faith, the true believers haven't yet been turned into agnostics, much less apostates. It's going to take years before the psychological expectations built up in all that time wash away. We're not likely to get the final bottom until everyone is so utterly fed-up with the stock market that nobody is looking for a bottom and nobody will care when it arrives.

The big difference between the market now and that of 1941, however, is simply

value. After Pearl Harbor it dropped so little because it was still at depression-era levels. That's totally the opposite of today's situation. And, after a while, it was fairly clear how and when the Axis would be defeated. Whereas now it's completely unclear not only how and when the enemy will be defeated (notwithstanding the surprisingly quick collapse of al Qaida in Afghanistan), but even exactly who the enemy really is. I believe, therefore, that we're still early on in what is likely to prove one of the worst bear markets of all time.

How long and deep will this bear market be? Nobody has a crystal ball. But the stock market fluctuates around a mean established by fundamental values, alternately going above and below the trend line. Based on how high it's run in recent years, I suspect we'll see something a lot more ugly and traumatic than just a bear market in stocks before it's over. Stocks, bonds, the dollar, and the economy itself are likely to get whacked in a way you see only once in a lifetime. If you're lucky. There's every chance we're looking at the Greater Depression, and I suspect it's going to be worse than even I think.

It occurs to me that the next few years may present a true test of the Austrian school of economic thought, of which I'm a proponent. One of its tenets is that a credit driven boom must, inevitably, be followed by a roughly proportionate downturn. And we've certainly had a gigantic, credit-driven boom.

One other thought that's occurred to me recently is the utter intangibility of stocks. Unless you're getting dividends (which are sparse today), all you've really got is a piece of paper, for which there may not even be a market. That thought will cross the minds of millions over the next few years.

Now Yr ago %chg

S&P 500 1144 1305 -12

DJIA 10035 10635 -5

CRB 191 228 -16

30yr T Bond 5.40% 5.49% -1

90day T Bill 1.76% 5.77% -69

TED Spread 23 71 -67

Gold 277 273 +1

Silver 4.51 4.63 -2

M-1 $1,158 bil $1,073 bil +8

M-3 $8,058 bil $6,995 bil +15

US Treas Debt $5,881 bil $5,677 bil +3

Con.Install Debt $1,628 bil $1,534 +6

Margin Debt $1,486 bil $2,191 -32

The TED (the interest differential between T-Bills, the most secure way to hold dollars, and Eurodollar deposits, among the riskiest) has collapsed over the last six months; its all-time high was a 600 point spread in the early 80s; it's now reached its low point. The TED is an indicator few watch today, reflecting perceptions of systemic risk today's gigantic levels of debt, the possibility of a meltdown in the stock market, a panic in the $100 trillion derivatives market, or a run on the dollar. For the

moment the TED says the system is fairly liquid and stable.

T-Bonds continue to be perceived as a haven, and they've certainly been a great speculation in recent months, although the tide may have changed. I think of long term bonds as more of a roach motel, despite the fact the amount of official US government debt not counting contingent liabilities and off-balance sheet obligations has only just begun growing again, up over $200 billion. The spate of new Federal spending post 911 virtually assured that. As does the rapid decline of economic activity and the rise in unemployment over the last year. Does it really make sense to lend dollars for 30 years at 5.4% to an essentially bankrupt entity? I think not. Bonds are a speculation. If you want paper, hold T-Bills, or two year notes. The yield is lower (3.1% for two-year notes, vs 5.4% for 30 year bonds), but there's much less risk from an interest rate spike.

The government is reporting a $127 billion surplus for 2001, after a $237 billion surplus for 00, after a $124 billion surplus for fiscal 99, after a $70 billion surplus for 98. These numbers are, of course, pure hogwash. The way to measure the deficit, at least on a cash basis, is by subtracting what was owed by the government last year from what's presently owed, and the number you see above is a $214 billion deficit. And that's when the economy is booming, tax dollars are rolling in (mostly from realized capital gains in the market), and interest rates are very low. If you used accrual accounting, which would be far more accurate, the deficit would already be off the scale. The difference is made up by cash theoretically allocated for the world's biggest and longest-running Ponzi scheme, Social Security. My guess is that even the cash deficit numbers will be in the $500-750 billion range in a few years. I sincerely hope I'm wrong.

Gold and silver remain excellent values; in fact, silver hit what I believe was an all-time inflation-adjusted low of $4.07 a few weeks ago. There's every indication there are hundreds of millions more ounces that are still short in the gold market, so when the tide turns the resultant bull market may be as spectacular as that of the 70s. The bottom line is that it's been a long bear market since January 1980, but it's come to an end. It is, therefore, the best of all times to be accumulating, at least if you're a contrarian. I am. Anything can happen, as shown by the fact oil was going for $10 three years ago. I'm rat holing gold coins more enthusiastically than ever. I think both metals aren't just going through the roof, they're going to the moon, this cycle.

You'll notice both M-1 and M-3, a much broader measure of the money supply, exploded about a 12%-15% increase. Of course, one of the problems of the "New Economy" is that nobody knows what the money supply really is anymore. For all anybody knows, maybe options on dot-com stocks were once part of it, since they were being used as money until very recently. I

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think gold will again be used as currency within a generation, solving the problem. But that's only likely to happen after the present monetary system collapses.

There's well over $1.6 trillion of consumer debt out there, a 3% increase from last year. Most of it is financed at around 18%. It will be tough to service if (when) things get ugly.

Margin debt fell last year by about $705 billion, but it's still sky-high. Figuring interest at 10%, it's hard to see how those people are going to make enough money to cover it. At the beginning of this market, I recall debit balances were only about $20 billion a fraction of today's numbers.

It's funny how the worm turns. Not even counting things like Tulip Mania, and the South Sea and Mississippi Bubbles, financial history is replete with times such as we've just finished. Turnpikes were the subject of a mania in the late 1600s in England; canals were hot there in the 1790s (and later in the US); in 1824-25, 624 prospectuses were issued for railroads in England. Telegraph issues were hot in the 1860s; radio and auto issues in the 1920s. Stocks ending in the suffixes "onics" and "ex" in the 1960s. And the biggest bubble in world history, the dot-coms, has only recently burst. We have yet to see the real fallout, in my opinion.

The $64 question, of course, is what happens next. As the numbers in this issue show, just because some air has come out of the bubble, and there is the odd comment in the popular press about how this may be a bear market, doesn't mean it's over and you should look for things to buy. People are still just feeling uncertainty. Before it's over they'll run a much richer gamut of emotions, including fear, panic, resignation, and total capitulation. As a bear market eats away at stock prices like a cancer, shareholders will go through the emotional stages of those who have been diagnosed with terminal forms of that disease.

The recent mania focused mainly on the NASDAQ where, for years, the average P/E lingered in the 20-1 area. Then, starting in 1991, it moved up to the 40-1 area. Then starting in 1997 it went parabolic, topping out at something like 150 in 2001. The pendulum, in process of reverting to the mean, will go far beyond it in the other direction.

I, of course, have long been quite conflicted about the market. On the one hand, the longest trend in history is the Ascent of Man, and that trend is not only going to continue, but accelerate. On the other hand, it seems clear that the US is devolving almost daily into a far less free and far more oppressive country, with the US government inducing most other governments to follow its lead. That trend has gone hyperbolic since 911; that's plenty of reason to be quite negative on the market. On the other hand, unless the US really goes over the edge, entrepreneurs will continue to be driven to create wealth by founding companies and

developing technologies, bringing their investors along with them. Back on the other hand, we've gone through a bull market of epic proportions, and bull markets are followed by bear markets as surely as night follows day. Companies can grow and grow, even while their stocks can go down.

They say that one's take on the market tells you more about them than it does about the market, and it's usually true. Which of the above factors (and I could make the list vastly longer) strikes you as the most important?

As for myself, I haven't trusted this market for most of its long duration. When Strategic Investing came out in November 1982, I spent about a quarter of the book explaining why I thought the market was going to 3000 by the end of that decade. It seemed like an outrageous, even absurd, prediction at the time. Now, not so much later, it would be considered a catastrophe if the market declined to 3000.

Although the average investor doesn't seem to have a clue about it, the fact is that markets go from being very underpriced to very overpriced, and back again, in cycle, regularly exceeding even the wildest projections on both extremes. Let's look at the fundamentals for the S&P 400 Industrials (at 1334), and you guess which extreme we might be looking at, even though they're down from 1517 this time last year. In fact, the numbers are still so out of whack, that it now seems really only worth recounting them as a curiosity:

1. Price to book value At 6.52 to1 the number is so disconnected from historical reality that it's widely viewed as an anachronism but it is down from it's all-time high of 9.5 last year. At market bottoms, P/BV ratios are normally around 1-1. Could the market melt down 90%? It wouldn't be the first time (it dropped 93% from 1929-1933) although it would be the first time in living memory. Which is one more reason it might.

2. Price to earnings At 24-1, it's in a truly rarified atmosphere, albeit down from 36-1 last year and an all-time high over 40. The $64 Question is which way they're headed from here; it's hard to envision a big rise at this point. Earnings are weakening (and how many more Enrons are out there?), but a great deal of the increase in earnings over the last decade hasn't been due to more revenue, but streamlining. And stock buyback programs. Earnings can't rise faster than revenue forever. A P/E of 8-1 is typical of a market bottom. Can earnings collapse? They can unless recessions have been banished, spare the thought of the Greater Depression. I think we'll see some real earnings cuts over the next year or so. We're not even looking at the NASDAQ, with a PE of better than 150-1.

3. Dividend yield At 1.09% it's seems headed up, from the lowest levels in history (about .90%). Yields are still about 1/6 of what is typical at market bottoms. At the 1974 bottom the Value Line Index including lots of stocks with no yields at all, yielded

around 7.8%. Even the DJIA is only yielding 1.8%, not far off its all time low of 1.3%.

We're past the peak of a major, extended "blow off" top, similar to what happened in 1973, 1968 or 1929. Or Japan in 1989. It's the type of thing that happens only a couple times a century; by the time it ends it's a nightmare for most people. Personally, I wish the bull market would go on another decade and another 10,000 points. And there are popular books out there (although no longer quite so popular) saying the market is going to quadruple or even go 10-1 from here, (an excellent indicator the top has already been put in). Good times are a lot more fun than bad times, and everybody gets hurt in a bear market. But you have to look at the bright side, namely that the function of a bear market is to return capital to its rightful owners. Of course, that's just the capital that's left, since most of it will have disappeared in the high living and foolish investments typical of a market top. Since anything can happen, some diversification makes sense. Hence the "long" positions mentioned here periodically. They've been a good idea so far, but there will be less and less listed here as time goes by at least for quite a while.

Any long positions should, ideally, be offset by equal size short positions, which can be accomplished through the prudent use of futures or options in the case of major stocks. See below.

I suspect that many subscribers take that as an academic word of caution. But this is a time when preservation of capital is more important than augmentation. In other words, investors will soon be more concerned with the return of their capital than the return on their capital.

One set of numbers I plan on watching closely is the flow of money into equity mutual funds. The public was sending in $40-50 billion a month in January, February, and March 2000, but since the sell-off, it's declined to $15-20 billion, and, after dipping to a $20 billion withdrawal rate at the intermediate bottom in April 2001, is now at $14.9 billion. Before the great bull market started in 1982 there were less than 1,000 funds, and they were struggling with no net cash influx. At some point, fairly soon, I'll be surprised if the public doesn't withdraw billions each month (see page 2).

Senior Golds The XAU Index, at 54, is really cheap. Its tremendous volatility, at the bottom of the gold share market, means huge option premiums; the strategy I like remains the sale of puts. You can buy ABX, NEM or FCX (and FN in Canada) and sell a combination of out-of-the-money puts and calls for a 20% return on invested capital per quarter at the moment. Although I'd stick to the puts alone you don't want these stocks called away from you for many months. At these prices, I think you might even consider buying the calls something I rarely recommend. These stocks are now

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both decreasing risk and increasing potential. Oddly, however, that's not the way it's worked in this market, and the reasons why not are unclear. Perhaps Joe Sixpack, today's typical investor, just doesn't understand closed-ends. Perhaps he's distracted by their vastly more numerous open-end cousins. I'll monitor the small universe of closed-ends, and alert you when opportunity seems to be knocking. All types munis, corporates bonds, world equities, you name it are selling at discounts of from 5-39%. That's generally an excellent time to bargain hunt. Should you bargain hunt? If you're a bull, the answer is yes, but I'm not.

This year has been a tough one for country funds, between the strength of the US dollar, and the weakness of a lot of foreign markets. Examples? First Philippine (FPF, US$2.63, down 19%YTD), India Fund (IFN, US$9.65, 18% disc, down 14%YTD), Japan OTC Equity (JOF, US$5.40, 11% disc, down 7.7%YTD), Korea Equity (KEF, US$3.14, +25%YTD), Malaysia (MF, US$3.84, 21% disc., down 5.5% YTD, 1.16% yield), Thai (TTF, US$3.15, 1.9%disc., +17%YTD) and the Indonesia Fund (IF $1.22, 18% disc., down 32% YTD). But this group is actually up about 15% from the original rec. These are worth watching from the buy side, but cheap as they are, I have trouble getting excited when I think of what will happen when the US trade deficit which is benefiting these countries greatly turns around.

Mutual funds currently have 5.6% of their assets in cash, up from 4% in January 2001, which was about a historic low. The cash in funds is a good indicator of the tenor of the market. When managers are bullish, they have little cash. When they're bearish they have a lot, and during the 70s to as late as the early 90s 8-12% was more the norm. What's likely to happen from this point forward is the public is going to go from adding money to the funds to withdrawing it, at the same time managers are trying to build cash positions. So they'll be selling a lot of stock. The problem is: To Whom?, since mutual funds are (along with pension funds) the only entities large enough to buy blocks from the sellers. Pension funds will continue to get new contributions, but in a market like this, their managers will be increasing cash, not buying stock.

The average mutual fund is down bout 18% this year. Except the few remaining gold stock funds, which have hit bottom, and are rebounding.

Short Sales Almost everything is overpriced, but the most obvious offenders are stocks in the DJ and S&P indices, since they've been subjected to huge buying by index funds simply because they are part of an index.

The surviving Internet stocks have come off from their highs. I've been selling naked calls on them (at-the-money, with

near term expiry) all the way down. Rather than try shorting individual stocks, you too may want to sell naked calls, or buy puts. The longest of these options are called LEAPS, and go out about two years which should be plenty. Talk to a broker who specializes in options. Although it can show great returns in a market like this, it's a risky practice. Careful.

My prime candidates remain Cisco (CSCO, $18), Amazon (AMZN, $10), IBM (IBM, $123), GE (GE, $40), and Merrill Lynch (MER, $53).

I must admit being specially partial to Amazon. It's a cinch for Chapter 11 as a best case, but has so many true believers that they can be counted on to "pop" the stock whenever real weakness sets in. And Cisco which, apart from any other problems, still has a $134 billion market cap, giving it the liquidity institutions need when they're "hitting the bid." IBM has held up amazingly well for a company which, from 1996 to 2000 increased revenues by only 5%, and total earnings by only 1.5%, but hyped per share earnings by 10.5% through share buy backs. In doing so, they spent $34 billion, while their reported net income was only $31.3 billion. Debt has gone from 31% to 54% of capitalization. It's got to be an accident waiting to happen. Merrill is a proxy for the stock market. And GE, which is already off 24% from its $53 high, is a proxy for the corporate economy as a whole.

Convertibles As long-time subscribers know, I'm a big fan of convertible bonds and preferred stocks. They share several major advantages over the common:

1) They're senior securities. In the event of a bankruptcy you may unlike common shareholders get some, or all, of your money back. Since convertibles are usually issued by risky companies, that's a major benefit

2) They offer a current yield. It's nice to get paid while you wait.

3) Depending on the conversion premium, they may advance as much as the underlying stock. But they never decline as much as the common because they're defended by their senior status and high yields.

4) Most often, desirable convertibles sell for a discount from par. This gives you a built in capital gain as maturity approaches, assuming the issuer can meet its obligations.

I've listed convertibles here for years, but my guess is that not enough subscribers have paid attention to them because they're buried in the text of the Open Positions section.

Name Price Cur Yield Newmont Pr. 43.28 7.4%

Kinross 5.5% Deb. C$58.00

FrptMcCG pr. A 15.70 11.1%

FrptMcCG pr. D 8.40 5.3%

Placer pr. A 23.65 9.1%

Bonds As I've said before, and certainly at these prices, I'm no fan of bonds. Bonds are no more than a speculation on interest rates, the value of the dollar, and the creditworthiness of issuers. And at this point,

about 50% off the bottom, which doesn't bother me in that even these majors are likely, in my opinion, to go 500% in this cycle.

I've modified the list of stocks below to include just those that I own, or am looking to own. After all, since this letter is really just a running commentary on what I'm doing, it doesn't make sense to add things that I don't watch. So I'm putting my money where my mouth is with these stocks, as has long been the case with the smaller ones. But, regarding the majors, I don't follow them at all closely. I prefer the juniors, which offer vastly greater upside. Don't forget, however, that the juniors are mostly exploration driven; they're only indirectly affected by gold prices, since most don't have any gold. The shares of major gold mines, on the other hand, are largely a play on the gold price. Big mining companies, like all big companies, tend to be slow and dumb, run by bureaucrats who usually have little direct share ownership. Franco and FCX are still run by their founding entrepreneurs, however, and are certainly the best managed of the majors. Franco Nevada is as close to a "set-and-forget" play as you can find in precious metals stocks; and it's my first choice in this area. Indeed, it's one of the best assets of any type you can own. We'll see what happens with the takeover battle involving Anglo and Goldfields. Among the South Africans the best holding is Harmony (followed by Goldfields); the most leveraged is Durban Deep. Mining companies are almost all running losses at these gold prices, certainly after amortization of capital.

As I've said before, in caps, NOW IS THE TIME TO BACK UP THE TRUCK. Sure, there will be severe sell-offs. But these are buying opportunities, unlike the sell-offs in the industrial market. I'm deleting Placer for reasons I'll clarify with an article you'll see in the next issue. Barrick remains on the list not because I like the company, or its hedging policies, but because it's a sure recipient of institutional buying when the tide turns. Anglo (the world's largest gold miner) and Goldfields are new additions. Their yields alone are reason enough to own them.

Name Sym Price Yield

AngloGold AU 17.80 3.00

Barrick Gold ABX 15.94 1.39

Durban Deep DROOY 1.34

FrancoNevada FN.T C$23.60 1.27

FrptMcMGd FCX 13.00

Goldfields GLD A$2.43 2.0

Harmony HGMCY 6.54 2.54

Newmont NEM 19.30 0.62

Closed End Funds If you want the diversification and management a mutual fund offers, you should almost always buy a closed-end, not the much more common open-end variety. When its portfolio is out of favor, it's usually possible to buy a closed-end at a substantial discount to assets. Then later, when its holdings are in favor, sell it at a substantial premium, thereby

Volume XXII, No. 12 www.dougcasey.com - Page 7

that means they're a triple threat to your capital. They're excellent speculative vehicles from time to time, but now isn't one of those times.

The best alternative to bonds (in addition to some of the high yield propositions recommended in this section) is a Swiss annuity. The government has severely compromised its tax advantages, but they still offer privacy advantages, liquidity, safety, and the advantage of holding a depressed currency that should do very well in the next few years. Everyone should have one for a meaningful amount, if only for diversification, as per the old saying "It's good to have money. But it must also be in Switzerland!"

Contact JML Swiss Investment Counsellors Ltd. Baarerstrasse 53, 6304 Zug, Switzerland (tel. 011-41-41-726-55-00, fax 011- 41-41-726-55-90). JML is a brokerage firm that works with all the major Swiss insurers.

Money Market Funds I continue to recommend only the Permanent Portfolio T-Bill Trust (800-531-5142), which holds only US T-Bills, and is unique in allowing you to defer taxes on your income indefinitely. This fund is where you should hold the majority of your liquid cash; there's no product that can compare to it, in my opinion. I am a consultant to the group.

Speculative Hedges For the last several years, I've suggested speculations be made within the context of what I call my "10 for 1 Hedge Portfolio," which is intended as a balance against bad times. There are few conventional ways you can hedge against true economic calamities such as a collapse in the value of your home, the failure of your business, the evaporation of your pension fund, or the like. This portfolio, however, comes pretty close.

The portfolio divides your risk capital (ideally) into ten equal (important point) and unrelated (also important) segments, each of which has the potential to increase tenfold over the course of a business cycle. The rationale is that if you're only right on one segment, you'll preserve capital, even if the rest go to zero. At some point over the next few years, everything in this portfolio will be replaced by items to hedge against the return of good times; everything is cyclical. Obviously, the lists don't cover everything, nor should they; 90% of the time 90% of all markets are valued in a "reasonable" range. Speculative opportunity arises at extremes of valuation, but you should wait for the extremes. To use the analogy Warren Buffet is fond of, investing is like a baseball game with no called strikes; you can just wait for the perfect pitch.

There are now six items on the dance card.

1) Silver For years, every time it's poked its head up, it looks like the start of a new bull market and then it fails. The key has been to buy on weakness. Whether you sell on strength depends on whether you consider yourself a short-term trader, or a long-term investor. The metal has been in a major supply deficit for seven years; perhaps that's why Warren Buffet took a major position in it. I suggest continuing to accumulate $1,000 face value bags of pre-1965 silver coins. Use the COMEX for larger positions of bullion. The nearly 20 year bear market is history; it's just a question of when the bull market begins. My guess is that we could be ready for a run. A strong buy. Consider the Freeport silver indexed "D" preferred, as well. Seriously consider buying silver calls, or just going long some contracts. The risk/reward hasn't been this good in a generation.

2) Junior Mining Stocks After turning bearish on this market in May 96, I'm again a bull. These stocks have now been whacked an average of 95%, their worst bear market in history. Gold now looks so attractive, and these stocks are so depressed (some still sell for less than cash), that you've got to take the plunge. As I've said for over a year, THIS IS THE BOTTOM. Break open the piggy bank for these stocks, as well as gold and silver themselves. Don't miss the first 300% move; it's the safest as well as the fastest.

3) Junior Oil Stocks It's likely we could be looking at another energy crisis in the near future, perhaps fueled by a collapse of the terminally corrupt Saudi regime; or perhaps the US military in the Gulf will provoke something untoward. Consider the geological realities I covered in last months letter. Oil has regained a price that looks like an equilibrium level, but if war breaks out the sky is the limit. I'm not

listing specific oils; refer to a specialist broker, like Jeff Howard of Global Securities (800-477-7853) for details.

4) US Short Sales A good solution might be one of the two bear-oriented mutual funds. Prudent Bear (888-778-2327) and Rydex Ursa (800-820-0888)

5) Agricultural Commodities Simply holding commodities the way you would prime real estate can be highly rewarding. Commodities have fairly collapsed, and this may be the best buying opportunity since 1970

Practically everything is selling at, or below, production costs. Start looking to go long in earnest.

Commodity Contract Price $Value

Cocoa Jul 02 1280/tne 12,800

Coffee Jul 02 50.40/lb 18,900

Copper Jul 02 69.85/lb 17,460

Cotton Jul 02 39.18/lb 19,590

Crude Oil Jun 02 21.40/bbl 21,400

Gold Jun 02 278/oz 27,800

Oats Jul 02 1.56/bu 7,800

Orange Juice May 02 94.35/lb 14,150

Silver Jul 02 4.47/oz 22,350

Soybeans Jul 02 4.37/bu 21,850

Sugar Jul 02 6.35/lb 7,110

Wheat Jul 02 2.85/bu 14,250

Equal dollar amounts of each (e.g., 3 sugar for each crude oil contract).

6) Uranium Stocks Cameco first appeared here at C$18; it about tripled before retreating to current levels. It remains the premier play on higher uranium prices, with a substantial gold kicker. Strathmore, International Uranium, and Paladin Resources are the juniors in this group. I trust you read the issue on uranium; it says it all. Call Rick Rule (800-477-7853) about them and to get the supplement I did on nuclear power.

I've always had some reservations about recommending money managers. I have no desire to manage others money myself, and think everyone is better off taking responsibility for this task personally. On the other hand, there can be some big advantages to specialization and division of labor. I currently am a paid consultant for Adrian Day, who I've known for 20 years, on this. Inquire with Adrian Day, Global Strategic Mgt., Box 6643, Annapolis, MD 21401, 410-224-8037, fax 410-224-8229.

Over the years, I've become cautious about recommending brokers. Sad to say, greed, laziness, dishonesty, stupidity, and incompetence, combined with a glib manner, are not strangers to the industry. All I can say is that I've known the following for years, and do business with them personally. They're knowledgeable about their areas, and their commissions are competitive, if you negotiate. An alternative is to use a deep discounter, but you'd better know what you want. It's usually a penny-wise, pound-foolish practice.

Resource-oriented securities Rick Rule, Jeff Howard and Paul van Eeden (800) 477-7853 or (760) 943-3939; Ben Johnson (800) 547-4898 or (503) 224-1234. Bruce Greene (800) 819-3114; Gold coins R.W. Bradford & Co. (888) 792-2646; David Hall (714) 261-0509; Jefferson Coin & Bullion (800) 593-2585 or (504) 837-3033, and MONEX (800) 949-4653 or (949) 752-1400. n

Continued from page 3

nearly 5 million hits in the first 24 hours of operation last year. Bioethicists think it promotes shallow values. I think it promotes genetically sound children.

It all comes back to assigning a dollar value to human life. I think it's an excellent and ethical idea. Comments are welcome on the website discussion forum.

Volume XXII, No. 12 www.dougcasey.com - Page 8

My Madrassa

I was thinking about the long term problem posed by possibly millions of Muslim boys being educated each year in madrassas (religious schools) in Pakistan, Egypt, Palestine and numerous other countries. We in the West consider these kids benighted, programmed almost like robots into a narrow system of dogma. And I think that's a pretty accurate assessment. How much sense does it make to commit to memory a book written by a 7^th century bandit who claimed to hear voices from on high, and the ability to commute nightly from Mecca to Jerusalem? Well, probably about as much sense as reading other books of divine revelation. Better they should memorize a translation of Harry Potter.

Then it occurred to me that I, and many millions of others, had suffered through something quite similar, if somewhat less extreme.

I remember attending St Barnabas grade school in Chicago, where the nuns (sporting the outlandish penguin outfits of the era) drilled us mercilessly in memorizing the Baltimore Catechism, parroting rote on all manner of preposterous abstractions like the Immaculate Conception, Original Sin, the Ascension and the Trinity. We logged hundreds of hours attending Holy Mass, spoken in a language we didn't understand (although, today, I consider the exposure to Latin gained thereby a redeeming aspect of the experience). We were often sent home with a graven image of the Virgin Mother, before whom we were supposed to pray the Rosary, roping our families into joining us (Remember Kids: The Family that Prays Together, Stays Together). We spent valuable classroom hours in church making the Stations of the Cross. In 8^th grade, in May (which we were informed was the Month of Mary) I recall singing interminable hymns to the latter day re-incarnation of Isis. It was time which, by then, I realized would have been much more enjoyably and profitably spent dancing around a maypole in a meadow with maidens, after the manner of my ancestors, before St. Patrick somehow convinced them to join a puritanical cannibalistic death cult.

We were taught that anyone who didn't adhere to the True Faith would, regrettably but entirely justifiably, burn in hell for eternity. Our consciences, and senses of horror, were assuaged with the thought there may be a limbo for the unconverted righteous but only those who, through no fault of their own, had never been exposed to The Message. We were regaled with innumerable tales of saints who, after a lifetime of severe asceticism (often involving self-mutilation), were granted the most gruesome martyrdom as a reward. Much the way, I would later discover, the Church often treated troublesome non-believers as a punishment. The Crusades were promoted to us as a glorious endeavor to regain the Holy Land from the Infidels who'd stolen it, rather than a cynical adventure encouraging shiftless thugs to do to Muslims what they'd be executed for doing to fellow Christians at home.

The shocking thing is that, although I was always

one to question authority, whisper in class, and make jokes about anything (evidenced today by a hearty appreciation of Bart Simpson and South Park), still I was subverted by all this for much longer than I care to admit. If called upon to engage in a jihader, crusade, I would almost certainly have joined my generally much less introspective classmates in doing what I believed was in defense of faith and fatherland.

Fortunately, however, it was still America, a secular society, rife with a myriad of influences from which a thoughtful or independent person may choose. And so I became an apostate.

As socially liberal as it is, however, America presents the paradox of also being the most traditionally religious country in the West. I say traditionally religious, because there are numerous religions out there that don't worship any God you find in a church, synagogue, or mosque. Communism, for instance, which at its zenith claimed close to two billion believers, was never more than a secular religion manufactured from a hodgepodge of nitwitted opinion, irrationality, and psuedo-science. The most popular religion in today's Europe, and probably the most rapidly growing one in America, centers not on a successful tribal war god from the MidEast, or a Messiah, but trinity composed of The Earth, The Environment and The Ecology. Greenism, with dogmas and rituals as goofy as any, is well on its way to replacing Communism, and is making serious inroads on the older monotheistic religions from the Mid-east.

That brings us back to the madrassas and Islam. I'm confident these things will eventually wind up on the scrap heap of history, although perhaps not for the reasons I'd prefer. But you've got to take what you can get. In the meantime, most Muslim societies are far, far poorer and far, far less open to outside influence (even with the Internet and today's travel and entertainment industries) than America ever was when I was growing up in the 50s and 60s. I'm forced to conclude, therefore, based on my own experience, that the Forever War with the Muslims, terrorism, or whatever, now that it's started, has a long way to run. I just have to imagine myself and my friends back at St. Barnabas, and multiply the fervor by ten. A scary thought.

Douglas R. Casey's International Speculator is published monthly by Douglas Casey. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. Publisher, editors and officers, including Douglas Casey may from time to time have positions, either long or short, in securities or commodities recommended by or referred to in this newsletter. No more than 250 words of this newsletter may be extracted or reproduced in context without permission of the publisher. ©2001 by Douglas Casey.

EDITOR/PUBLISHER: Douglas R. Casey; GROUP PUBLISHER: Laura Davis; PRODUCTION: Marketing Solutions Unlimited; LIST SALES MANAGER: Beth Ketzner

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