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8:30 AM Friday, April 22, 2005: Dumb. Dumb. Dumb. Nasdaq buys Instinet. It's obvious someone is going to buy Archipelego. And it had to be somebody desperate like the New York Stock Exchange. Dumb. Look at all the gains we could have made:

SBC buys AT&T. Q.E.D. Somebody will want MCI. Turns out to be Verizon and Qwest. Even better. Two morons bidding against each other.

It doesn't matter if there's any logic to these mergers. (There isn't.) What matters is there's frenzy. It's easier to buy, than to run your business better. Better to buy the disaster you don't know than fix the disaster you do know. Remember Verizon still provides voice mail to its dead employees.

Whom am I to criticize? I'm just as dumb, letting these obvious money-making opportunities slip through my fingers. From now on, here are the rules:

+ When a company announces a bid for another company, we find all the other companies in the field that could be bought.
+ Then we find all the companies that could do the buying.

That's it. End of story. By the way, Qwest yesterday raised its bid for MCI to $30 a share. I bet Verizon will raise theirs too.

Time Warner and Comcast are buying Adelphia, beating out a last minute bid by CableVision. Now who will CableVision buy? Another cable company, I bet.

Bear market rallies are ALWAYS more violent than bull market rallies.
Yesterday, the Dow rose 206 points, or 2.06%, its biggest point gain since April 2003.

There were four reasons: Greenspan spoke positively, jobless numbers fell, there were some good corporate earnings, and the fact that the markets were tremendously oversold. Markets don't go down in straight lines.

As you know, I'm not bullish. BUT, there are those who are. And it behooves me to give them equal time. From today's Wall Street Journal Online by Steve Liesman:

"What We Can Learn About Gap Between Earnings, Stock Prices

You'd think the stock market was convinced we were about to start a new war, or that some other calamity was imminent.

Not since the eve of war with Iraq has there been such a wide gap between earnings and stock prices. With the recent market selloff -- even counting Thursday's stock market rally (i.e. yesterday's) -- the forward price-earnings ratio of the S&P has shrunk to 15.21, just a bit above the 14.72 hit on Oct. 20, 2002, according to Thomson Financial.

I'm no raging bull, and I enjoy a big fat bear story just like any financial journalist. (Both good news and bad news are good for my business.) But this is getting a little whacky. "There's a huge disconnect between the marketplace and the value of the companies and the earnings that are coming out," David Dropsey, research analyst at Thomson Financial, told me this week.

Let's take a look at the running total of profits and forecasts that Mr. Dropsey puts together every day during earnings season.

We went into the quarter with the consensus estimate calling for S&P 500 earnings growth of 7%. (Please see my article from Feb. 184). By April 1, that number had sheepishly risen to 8.2%.

Where are we now? Try 11.9% with about 40% of the S&P reporting.

(Be forewarned: Thomson and most other Wall Street firms talk about operating earnings, a non-standard, non-official accounting method that excludes certain write-offs, or other expenses or gains that companies claim are not central to their operations. This is a debatable proposition and it's generally far better for investors to look at earnings reported under Generally Accepted Accounted Principles and compare them with operating earnings to see if the exclusions make sense. However, there are, as far as I know, no running analyst estimates of GAAP earnings. So, the extent to which profits beat or miss expectations -- that is, the extent to which markets may be correctly or incorrectly priced relative to earnings -- can only be measured by using the consensus operating-earnings estimates.)

With that said, there's every chance that the 11.9% first-quarter earnings gains could go higher. The reason: financials. They represent half of the S&P 500 market capitalization, and so far their earnings are up 7% compared with a year ago. The estimate had been for a 1% gain. But only half the financials have reported. If the rest of the financials do as well, first-quarter results will "continue to ramp up at an accelerated rate," Mr. Dropsey says.

Among the reasons for the gains: Banks are lending more and the mergers-and-acquisitions and IPO activity flow nicely to their bottom lines.

There's more potentially good news on earnings, including forecasts for the third and fourth quarters, but we need to pause now to look at what has spooked the markets so severely.

The Fed's Beige Book this week gave investors an overload of contradictory information. Sure, the overall economy was said to be expanding, but growth was characterized in a more cautious tone than a month earlier.

The Beige Book said, "…[A]ll twelve Federal Reserve Districts indicate that business activity continued to expand … Kansas City and San Francisco noted solid growth, Chicago and Dallas characterized growth as moderate, and Atlanta reported a robust pace. By contrast, while citing positive growth, New York and Cleveland mentioned uneven progress across sectors."

While more than half of the districts said that retail activity was up, the remainder used words like subdued, deteriorated or disappointing.

The market could process slower growth if it hadn't been forced to download depressing details on inflation: "Price pressures have intensified in a number of Districts, and most report that high or rising energy prices are a concern across sectors."

This, of course, causes a brain short-circuit. How can we have rising inflation and slowing or uneven growth? The brain grasps for something to hold onto and settles on the only word that comes to mind: stagflation.

Mind you, we are miles from what I would call real stagflation, which is flat or negative growth and rising prices. As Janet Yellen, president of the San Francisco Federal Reserve Bank told me this week, stagflation is on her radar screen, but "I would not overblow the parallels between the 70s and now. What we are seeing is something far more limited. Inflation expectations remain longer-term very well contained. Wage and salary growth and compensation overall is well contained. Productivity growth remains extremely solid. I think the fundamentals on inflation going forward are excellent."

What most economists see right now is slower growth that still remains in a range of 3.25% to 3.75%, which is above long-term trend. Even with higher inflation, that would hardly fit the description of stagflation.

Ms. Yellen acknowledged the soft-patch of growth we hit in March (see last week's column), but suggested higher oil prices had a similar impact last summer and the economy waved it off. She added that while higher oil prices could damp growth, they were as much a sign of solid global activity, suggesting that she favored further hikes in the Federal Reserve's overnight lending rate in the face of higher energy prices.

That brings us back to our earnings forecasts. One of the more remarkable aspects of first-quarter earnings is that companies are making money despite high oil prices. Take out energy, and the 11.9% S&P gain so far in the first quarter shrinks only to 8.9%, or just a little less than the twice what the estimate was in April.

What's more, estimates for the third and fourth quarters are solidly in the double-digits whether you include energy or not. The consensus calls for 16% earnings growth for the S&P 500 in the third quarter, up from 14.3% on April 1, and for 12.2% growth in the fourth quarter. Those are solid numbers and don't suggest either an overall economic or profits slowdown.

The big caveat to this is that the economy doesn't end up responding evenly to high oil prices. That is, it rolls along for a while amid these higher prices, going through these ups and downs, and finally reaches a tipping point that causes a recession.

That's one possibility and the likelihood can't be known. But here's another possibility: The last time the P/E ratio on the S&P was this low, (remember, back in October 2002) the S&P 500 Index a year later was 30% higher.

Take that past-performance data for exactly what you think it's worth."

A heady statistic: The chances of you dying on the way to get your lottery tickets is greater than your chances of winning.

I used to tell my reporters that they should quote statistics when:
1. They seem plausible.
2. No one has better statistics (i.e. ones that contradict them).
3. They say the statistics with authority.

Yes, I have no idea if this statistic is accurate. But it fulfills my three criteria.

Debtors Prisons were not pleasant. But they served as a deterrent of sorts.

Newgate Prison was a dismal, unhealthy place. About 30 people died there every year. Physicians often refused to enter the prison and people passing by held their noses. Newgate was notorious for its overcrowding, unhealthy environment (lack of air and water, and epidemics). Newgate did not supply its prisoners with bedding and clothing. These things had to be purchased from the keepers.

"After the commitment of a prisoner is made out," wrote Thomas Fowell Buxton, in Prison Discipline, "he is handcuffed to a file of perhaps a dozen wretched persons in a similar situation, and marched through the streets, sometimes a considerable distance, followed by a crowd of impudent and insulting gazers; exposed to the stare of every passenger: the moment he enters prison, irons are hammered on to him; then he is cast into the midst of a compound of all that is disgusting and depraved. At night, he is locked up in a narrow cell, with, perhaps, half a dozen of the worst thieves in London, or as many vagrants, whose rags are alive, and in actual motion with filth; he may find himself in bed, and in bodily contact, between a robber and a murderer; or between a man with a foul disease on one side, and one with an infectious disorder on the other. He may spend his days deprived of free air and wholesome exercise. He may be prohibited from following the handicraft on which the subsistence of his family depends. He may be half starved for want of food and clothing and fuel. He may be compelled to mingle with the vilest of mankind, and, in self-defense, to adopt their habits, their language, and their sentiments; he may become a villain by actual compulsion. ...

Your guess: Why is Harry writing about debtors prisons? He clearly has someone in mind. Don't lend money to your friends. They closed Newgate in 1827, sadly.

Bedbugs in hotel rooms: From today's Wall Street Journal: "Bedbugs nest on or near mattresses and feed at night by biting and sucking the blood of people as they sleep. They can cause itchy red welts and considerable, lingering anxiety. They're nearly impossible to get rid of without treating bedding and furniture with powerful pesticides. (Throwing everything away works, too.) The good news is that bedbugs are not known to transmit diseases."

...Their resurgence today startles even bug experts. Gary Bennett, a professor of urban entomology at Purdue University, has studied insects for 50 years and says he hadn't seen a case of bedbugs until recently. He didn't think they existed in significant numbers but became a believer last year when one of his students was bitten in a hotel in Salt Lake City. "You know infestations are on the rise when someone in the entomology department gets bedbugs," Dr. Bennett says.

Econonomists were created in order to make weather forecasters look good. But it wasn't always so. Once upon a time, life was simple:

This week's columns were among the best I've written. I hope you learned something reading them. I certainly learned something writing them. I hope you enjoy this weekend as much as I plan to. Hug the kids. Kiss the spouse. Get some exercise.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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