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Detoxing the Markets: Bears Still Look Hungry
Source: www.thestreet.com ^ | 07/16/2002 | By Peter Eavis

Posted on 07/16/2002 4:50:49 AM PDT by Lazamataz

Capitulation, my foot.

Monday's trading may have created one of the most gut-wrenching days in stock market history, but it hasn't brought equity values to a bottom. A broad market index like the S&P 500 must slide another 20% or more from here before it is properly valued. Chillingly, even after this year's 30% drubbing, tech stocks must lose half their current value to reach sensible levels.

other words, the S&P and the Nasdaq will both need to drop to around 700 before stocks hit a floor. The one piece of good news is that we're in the last leg of the postbubble correction. But as all action-movie fans know, the last sequence is always the bloodiest. The end is nigh, but it is also in sight. The bad guys in this story are yet to be slain: nosebleed valuations, earnings tampering and a hamstrung macro environment.

(One big caveat: Despite the bleakness of the last few days, stocks almost certainly won't go straight down from here. Recall how long it took for the Nasdaq to hit Detox's target of 1500.)

Despite the selling, a substantial reserve of bullishness still exists on the Street. A clear sign of that is onetime bears like Bank of America's Tom McManus telling people to buy more stocks. Meanwhile, the Fed's monetary policy is extremely loose, and that is keeping the financial system intact -- at least for now. And the selling surely won't be done until we stop hearing the idiotic mantra that equities are cheap because they've fallen so far. On that yardstick, Adelphia, Enron and WorldCom are all screaming buys.

Fundamentals drive markets over the long term, and they still bode ill. Don't be tricked by the argument that because we're trading at close to 15 times expected 2002 earnings for the S&P 500 companies, we must be close to a bottom. Fifteen times is close to the long-term average multiple for the index.

Yes, the index is trading at around 18 times the $51.14 of forecast operating profits. And yes, these may be trough earnings for some sectors. But why are forecast as-reported earnings -- that is, earnings after certain charges and supposedly nonrecurring items -- so much lower at $35.47?

Some of the gap has to do with thedifferent ways that S&P collects as-reported and operating earnings,but it is also because operating earnings generally leaveout goodwill writedowns that have been necessitated by the introduction of a new accounting rule.

Now, there is some argument for keeping a chunk of those writedowns out. But these won't be the last goodwill writedowns we see; as accountants are forced to do their jobs properly, such charges to intangible assets are likely to become a lot more regular. Quite right, these may not be cash charges, but in most cases it took cash to buy or build those assets in the first place.

For those reasons, it makes sense to factor in some of the goodwill charges. Very roughly, that could be done by taking a midpoint between as-reported earnings and operating earnings. That gets us to around $43 in S&P 500 forecast 2002 earnings. Multiplying that by the 15 multiple makes 645 -- close enough to Detox's 700 target for the index.

At the same time, tech stocks have to continue tanking. If we use the S&P 500's information technology sector index as a rough yardstick for tech names, the sector is trading at an absurd 38 times forecast 2002 operating earnings. If we halve that multiple to 20 times, that sector index must also fall by 50%, all else being equal. And 20 times is an aggressive valuation for a sector that is crawling out of one of the biggest busts in history. Apply the halving principle to the Nasdaq and you're at 700 once again.

Of course, any discussion based on earnings assumes we can trust the profits numbers that are reported. As we have seen, that's about as advisable as letting Hannibal Lecter babysit your firstborn. The bulls will retort that once the SEC's deadline passes this fall for CEOs to pledge that their company's numbers are clean, the market will be able to rally.

But who's to say the liars won't keep lying? The wording of the pledge is loose enough to let a top dog weasel his way out if chicanery is exposed later. And even if generally accepted accounting principles are adhered to, the stuff called earnings may bear little relation to what is generally thought to be profits. Actually, it's not even clear that professional money managers know what profits are, given the extent to which postmodern blurriness has infected institutional investors. It's quite mystifying why the head of, say, the Janus Twenty fund hasn't been dragged before Congress for losing billions in mom and pop money. Why the brokers and the accountants and not the people who actually destroyed the wealth?

Completing the nightmare, the Fed can do little more and is looking more and more like the Bank of Japan each day. It has cut rates like crazy and unleashed an unprecedented credit boom -- even in the midst of an economic slowdown, a phenomenon few economists can explain. But this lending bingewon't offer much lasting help, because all it has done is inflate prices in the housing and services sector, shore up demand for autos and make it much easier for the government to suddenly run up a huge deficit. All those uses are consumptive and divert resources from productivity-enhancing investment. What's more, firms are too debt-laden to go back to '90s-level investment spending.

As Alan Greenspan massively raises the supply of dollars, the greenback's price -- surprise, surprise -- is falling against other currencies and gold. It's easy to see why foreigners are heading for the exits: First, in this postbubble, overleveraged environment, the opportunity for good returns has diminished. Moreover, the Fed is deliberately cheapening the dollar that the outsider eventually aims to get paid back in.

But the domestic investor has stayed relatively faithful. Sure, individual flows into the market are way down, but mutual fund flows are still strong, in large part because of the captive 401(k) flows. A reversal of those flows will be the next shoe to drop. And it will trample stocks still further. Capitulation means surrender. And the bears can still safely cry: "No surrender!" Even after a day like Monday.


TOPICS: Business/Economy; Editorial
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[Long term] Market prediction is delivered.
1 posted on 07/16/2002 4:50:49 AM PDT by Lazamataz
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To: ken5050; rohry; Southack
No-bottom-yet bump.
2 posted on 07/16/2002 4:51:54 AM PDT by Lazamataz
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To: Poohbah; Tauzero; #3Fan
Bears still chomping bump.
3 posted on 07/16/2002 4:53:28 AM PDT by Lazamataz
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To: A Navy Vet; headsonpikes; Sir Gawain
Buy-high-Sell-low bump.
4 posted on 07/16/2002 4:54:54 AM PDT by Lazamataz
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To: dighton; Timesink; andy_card
2002-election-blues bump.
5 posted on 07/16/2002 4:55:37 AM PDT by Lazamataz
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To: ironman; Dog Gone; FITZ
penny-cost-averaging bump.
6 posted on 07/16/2002 4:56:41 AM PDT by Lazamataz
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To: glc1173@aol.com; meandog; RightWhale
Tank-MacNamara bump.
7 posted on 07/16/2002 4:57:33 AM PDT by Lazamataz
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To: Willie Green; smith288; A. Pole
Derailing the Market Maglev Train bump.
8 posted on 07/16/2002 4:59:15 AM PDT by Lazamataz
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To: Lazamataz
Let's pretend there is a PPT. The PPT cleaned out a lot of shorts yesterday. Put them on notice that feasting off a subsiding stock market can be painful. Shorts accelerate what would be a gradual/orderly decline.

PPT= plunge protection team run by our federal government through Treasury

9 posted on 07/16/2002 5:05:03 AM PDT by dennisw
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To: Lazamataz
wait a minute!

bill clinton broke the business cycle. . .

islam is a religion of peace . . .

the check's in the mail. . .

it's not you, it's me. . .

10 posted on 07/16/2002 5:06:12 AM PDT by bandlength
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To: dennisw
PPT= plunge protection team run by our federal government through Treasury

I agree. But Alan Greenspuge and the PPT are running out of rope. If you've noticed, the huge increase in the money supply (which then appears to be used to fund the Plunge Protection Team) seems to be causing a precipitious drop in the dollar.

They cannot afford much more Plunge Protection. The markets should equalize at their justifiable levels anyways. All they are doing is making things worse and giving us a weak dollar to boot.

Inflation will occur if they keep this up, as well. I am shocked it hasn't!

11 posted on 07/16/2002 5:10:35 AM PDT by Lazamataz
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To: Lazamataz
Will the Mods change your title at the end of the day to "Bears Out to Lunch"?
12 posted on 07/16/2002 5:10:43 AM PDT by cibco
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To: bandlength
My two favorites have always been:

1) The check's in your mouth.

2) I promise I won't *** in the mail.

13 posted on 07/16/2002 5:11:41 AM PDT by Lazamataz
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To: cibco; Registered
Will the Mods change your title at the end of the day to "Bears Out to Lunch"?

That was something. They just cannot seem to keep their hands off the titles, should the article be one that is negative (if still realistic).

One Admin Mod asked if the title should go back to the way I posted it. Polite fellow. So I said, "Yes, please do". He or she complied.

Not two hours later, there was YET ANOTHER title change. This time there was no Admin Moderator asking if the title change was okay.

I'm feeling like my articles are METRA trains and the Admin Mod's (as well as many posters) cannot help but tag them with graffiti. Satis est potuisse videri.

14 posted on 07/16/2002 5:18:49 AM PDT by Lazamataz
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To: Lazamataz
Oh well... if patterns hold, the DOW will go up 145 today and every one will relax and start buying. Buy on the dips ya know. Or was that buy the Dips?
15 posted on 07/16/2002 5:24:39 AM PDT by cibco
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To: Lazamataz
If there was such a surge in the money supply, then gold would be at $380.Please keep in mind that the dollar lost 50% of its value from 1985-'88, and the world didn't break into lil pieces.

And this idea of a PPT is so ridiculous, that well, it could only come from a piker.This is what bear markets are like.Everyone has a pet theory why things sell off.They sell off because they NEED to be sold.

So, head back to the shower or try the beach....
16 posted on 07/16/2002 5:46:28 AM PDT by habs4ever
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To: habs4ever
Here's an interesting chart. The last remaining supply side economy (Russia) is in blue, the New Hoover economy is in red.


17 posted on 07/16/2002 5:51:31 AM PDT by Moonman62
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To: Lazamataz
2) I promise I won't *** in the mail.

Oh man. I thought that was piegon droppings! You sick ...

18 posted on 07/16/2002 5:51:46 AM PDT by Timesink
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To: Moonman62
A 500% rise doesn't mean much when you're starting from ten bucks.
19 posted on 07/16/2002 5:53:09 AM PDT by Timesink
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To: habs4ever
If there was such a surge in the money supply, then gold would be at $380.

Are you denying that there has been an extreme surge in the money supply?

And on what do you base the theory that US money supplies are the primary driver of gold price?

And this idea of a PPT is so ridiculous, that well, it could only come from a piker.

Hey, I'm with you! And that whole TWA800 thing? It really was the center fuel tank spontaneously exploding! I also think the pristine bullet really did go through JFK, Wallace, and that third fellow and emerge perfect and undamaged! And President Clinton never had sex in the Oval Office! It's all true!

After all, the government has NO MOTIVATION to tamper with the markets. None. Nope. Not a whit.

This is what bear markets are like.Everyone has a pet theory why things sell off.They sell off because they NEED to be sold.

Nice hat and magnifying glass, Sherlock.

But the fall cannot be too precipitous, and that's where the PPT comes in.

20 posted on 07/16/2002 5:58:13 AM PDT by Lazamataz
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To: Lazamataz
Tues morn 9am, DJIA futures are at -133, looks like we'll have another wild ride today.
21 posted on 07/16/2002 5:59:12 AM PDT by SauronOfMordor
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To: Lazamataz
I will disagree. The PPT has the ability to use small amounts of money used very strategically. Just at the right moment. So not too much money has to be created for them to use. Just my thoughts I have no proof.

These small sums when pumped into the NASDAQ and S&P futures can demolish the shorts. Plus I would speculate that the PPT has the best (fastest) excecution/filling of orders. Another advantage for the shadow team.....
22 posted on 07/16/2002 5:59:56 AM PDT by dennisw
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To: Lazamataz
Yes, call me Sherlock, but this is my business.I run a hedge fund, so have an interest in being right.I put my money where my mouth is, and pay lots of dough to learn about what works and what doesn't.Plus, then there's that old stanby that should never fail if you use it properly: experience.
23 posted on 07/16/2002 6:06:49 AM PDT by habs4ever
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To: dennisw
Wrong.......the markets will swamp anything the Feds can do, if that is what they are going to do.Ever watched an intervention in the forex markets??
24 posted on 07/16/2002 6:08:50 AM PDT by habs4ever
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To: habs4ever
While I take you at face value per your claim, I do wonder about a hedge fund manager who asserts that the money supply has not increased lately.
25 posted on 07/16/2002 6:09:51 AM PDT by Lazamataz
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To: Timesink
A 500% rise doesn't mean much when you're starting from ten bucks.

Actually, their performance is over 3000% from their currency crisis lows. Nevertheless, they have a better economic policy than we do. They learned from the person who defeated them, Reagan. OTOH, President Bush with his Myrmidons in lockstep behind him is undoing everything Reagan did for us economically.

26 posted on 07/16/2002 6:10:42 AM PDT by Moonman62
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To: Lazamataz
A rolling top on the DJIA is indicative that the blue chips have not been sold off, while the OTC has taken a pasting since Sept2000.The DJIA and NYSE have outperformed the OTC, and now is is their turn to get distributed.The forces at work in a bear market eventually catch up to all areas, and the big guys have been the last ones to get knocked, so the longer is takes for them to go where they are going to go, the longer the bear will last.

A purge gets this bear market closer to a conclusion.
27 posted on 07/16/2002 6:12:59 AM PDT by habs4ever
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To: habs4ever
I can agree with everything you wrote, one message directly above.
28 posted on 07/16/2002 6:14:17 AM PDT by Lazamataz
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To: Lazamataz
Money supply increasing is meaningless unless you examine its context.A surge doesn't mean a damn thing if its coming from a base that has been turning over less than the growth of GDP.

Context, Laz, is all.....the monetarists should have learned this back in 1982.

Ask yourself this: "In relation to what"?....
29 posted on 07/16/2002 6:15:39 AM PDT by habs4ever
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To: Lazamataz
In a free market there should be no such thing as a PPT. Protecting certain positions in the market are not a proper use of taxpayers dollars IMO.
30 posted on 07/16/2002 6:15:43 AM PDT by steve50
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To: Lazamataz
This article sets out what I've been trying to convey here for several months, especially regarding the money supply and the weakening dollar.

It's a deliberate strategy by the Feds, and it's having the effect described here. The bozo analysts who claim that it's foreigners showing lack of confidence in the dollar are totally clueless.

It will cause inflation eventually. Commodities will notice the effect first, which is why gold is higher and why oil (another international commodity priced in dollars) remains relatively high in a period where there is an actual glut of oil on the market.

These are not conditions that are favorable to a healthy business expansion. It's a transition zone, where the Fed is trying to let the bubble out of the market without sending us screaming into a deep recession.

But make no mistake about it. The bubble is being popped, because it needs to be in order to set us up for another business expansion. People who think this is over, and yesterday's intraday low represent the bottom, simply don't understand the macroeconomics in play here.

31 posted on 07/16/2002 6:18:52 AM PDT by Dog Gone
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To: habs4ever
Money supply increasing is meaningless unless you examine its context.A surge doesn't mean a damn thing if its coming from a base that has been turning over less than the growth of GDP.

Well, this is progress. At least you are now admitting there has been an increase in the money supply, even if you are challenging its relevance.

Now, you tell me: Why do you not think this increase is relevant?

32 posted on 07/16/2002 6:20:59 AM PDT by Lazamataz
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To: Lazamataz
If you've noticed, the huge increase in the money supply (which then appears to be used to fund the Plunge Protection Team) seems to be causing a precipitious drop in the dollar.\

This is on purpose. They are trying to devalue the dollar and reflate the price level in order to offset the deflationary devestation they themselves created with the "strong-dollar"/tight money policy. We need inflation just to get prices back where they should be.

33 posted on 07/16/2002 6:27:47 AM PDT by Wyatt's Torch
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To: Lazamataz
What is it that you think such an increase portends? YOU are the one that thinks it has great meaning, not I...so..out with it?

I look at the way the markets are acting and take it from there.Money supply has gone up and down in big ways, for 20+ yrs, and what has it meant? Diddly....

Japan has a monetary base that is about 15% of its GDP, yet where is their inflation?? what is the cost of capital there?Yet to a monetarist, this is heresy, it means the inflation express is coming down da track....no, it means the economy sucks and isn't growing enough to make bond yields rise.Money sits in cash accounts doing nothing.
34 posted on 07/16/2002 6:30:50 AM PDT by habs4ever
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To: Lazamataz
Buy-high-Sell-low bump.

Maybe what's happening has to do with the way people are playing the stock market---partly because they aren't sure where it's going and want to make as much as they can ---I almost wish I had the extra money and time to watch it dip, then buy, watch it rise, then sell. Just to see what I could get out of doing that.

35 posted on 07/16/2002 6:41:24 AM PDT by FITZ
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To: habs4ever
What is it that you think such an increase portends? YOU are the one that thinks it has great meaning, not I...so..out with it?

I defer to the hedge fund managers of the world.

From what I gather from your message, you are of the opinion that an increasing money supply is not relevant. Is that a correct statement of your premise?

36 posted on 07/16/2002 6:47:10 AM PDT by Lazamataz
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To: Lazamataz
Yes, in a nutshell....

"It all depends" is a good place to start when examining something like money supply.A growing economy needs money turnover and its liquidity demands satisfied by the Fed.The monetarists back in 1983 screamed about the turnover numbers, saying it meant inflation was still a concern.Friedman, maybe very glibly, thinks the supply should only increase by 4 % per annum.How does he know? The markets will decide.
37 posted on 07/16/2002 6:55:27 AM PDT by habs4ever
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To: habs4ever
Yes, in a nutshell....

I will defer to your judgement but some hunch tells me you are erroneous. I'm sure people who are smarter than I will chime in to challenge your premise. I do not have the education or experience to meaningfully challenge it myself.

38 posted on 07/16/2002 6:57:29 AM PDT by Lazamataz
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To: Lazamataz
Damned-if-I-know bump.
39 posted on 07/16/2002 6:58:31 AM PDT by dighton
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To: dighton; ken5050
DJIA off 122 out of the starting gate.
40 posted on 07/16/2002 6:59:04 AM PDT by Lazamataz
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To: Lazamataz
Just maybe this stock market is Bin Laden's latest terrorist act. It would be really informative to know exactly who has made money in the market after each new announcement of possible terrorist threats. Personally I think that the government should intervene in the process of "going short." The difficulty of borrowing stock should be increased greatly, and much greater reporting of each short transaction should be required. It seems obvious to me that the market could be shorted down from its present levels down to almost nothing in the event of a massive terrorist strike against this country!!
41 posted on 07/16/2002 7:08:15 AM PDT by Securo
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To: Lazamataz

Show this chart to your friends who doubt the increase of our money supply.

42 posted on 07/16/2002 7:09:37 AM PDT by Dog Gone
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To: FITZ
While taking breaks from looking for gaps in resumes?

Doncha think that every other trader is trying to do the same thing, since markets were created?

43 posted on 07/16/2002 7:11:57 AM PDT by bvw
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To: cibco; Lazamataz
How about "Bears still gorging themselves"? Dow down 184, S&P down 10, NASDAQ down 4.
44 posted on 07/16/2002 7:14:05 AM PDT by steveegg
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To: Lazamataz
Are you sure they aren't "L" trains?
45 posted on 07/16/2002 7:15:29 AM PDT by steveegg
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To: cibco
You're better off with French Dip and some chips to go with it.

Dow -170
NASDAQ -5
S&P 500 -11

46 posted on 07/16/2002 7:16:50 AM PDT by steveegg
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To: steveegg
"How about "Bears still gorging themselves"? Dow down 184, S&P down 10, NASDAQ down 4.

To: cibco You're better off with French Dip and some chips to go with it. Dow -170"

I am refering to the afternoon run up just before close. ;0)

47 posted on 07/16/2002 7:29:37 AM PDT by cibco
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To: cibco
The question is will the PPT have it in them two days in a row?

Dow -230
NASDAQ -6
S&P -14
(latest numbers from FoxNews.com, which seems to be much faster than CNBC's website today)

48 posted on 07/16/2002 7:36:21 AM PDT by steveegg
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To: Lazamataz
"Buy-high-Sell-low bump."

I've taken your advice before, and it's never worked for me. ;^)

RE the Money Supply Question....

I think you can never have too much money. Like Huey Long said,'Every man a millionaire and a chicken in every pot'.

And need I remind you, the Huey Long Democrats are making a comeback. ;^)
49 posted on 07/16/2002 7:56:41 AM PDT by headsonpikes
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To: steveegg
Let's watch and see... maybe we can start a daily PPT pool and have a chance to get RICH!

Remember that somedays they stay on the sidelines to make it look honest. We could place side bets on if they did or didn't.

50 posted on 07/16/2002 7:59:22 AM PDT by cibco
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