Freedom Lawyers of America

SAFE MONEY REPORT
Cover Story - January 2004
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Two defining events of 2004 ...
1: Tech Wreck II!

2: New bull market in
gold and natural resources!


If you bought the average Nasdaq stock right now, you'd have to wait a full
140 years - until the year 2144 - before the companies could produce net
profits that add up to the amount you invested.

I don't know about you, but I can't wait that long. Nor can my son, or the
next generation of children.

In contrast, the price of gold, commodities, and other natural resources
were driven down - or largely held down - for more than TWO DECADES. And
despite a nice rally, they remain greatly undervalued today.

Here's how to profit from BOTH megatrends!


Part 1
Tech Wreck II

SCO Group, which sells UNIX operating systems, finally began making some
money for the first time in early 2003 after losing $1.93 a share in 2002
and $10.92 a share in 2001. So, Wall Street apparently thinks it's hot
stuff. But it's still selling for 145 times earnings - far too rich even
for aggressive investors.

Quest Software, a $1.4 billion database software company, is selling for 60
times earnings.

Red Hat Inc. is trading at 391 times earnings; Juniper Networks, 185 times
earnings; and Novell Inc., 211 times earnings.

At the very least, aren't the 1990s bubble stocks now good values? Hah!
Amazon is still selling for 106 times earnings and Yahoo, 139. Hundreds
more are in the same boat.

Sound familiar? It should ... because it's remarkably similar to the late
1990s.


What happened? How are investors getting sucked into this same trap AGAIN?

First, Wall Street's big sales machine went back into action. Once the 10
major brokerage firms signed the global settlement agreement with
regulators, it was assumed that the scandalous past was largely behind us.

Sure enough, research analysts began upgrading companies left and right,
almost exclusively based on more future promises.

Second, many investors fell for the new Wall Street sales pitch. They
wanted to catch the big fish that got away in the first tech boom. They saw
another chance to restore that glorious moment. And so they cast their luck
again.

Third, Wall Street was able to grab onto one aspect that was indeed
improving in the tech sector - sales. What they did not tell you is that ...


Profit margins at many tech companies are way, way down!

To get those sales increases, most companies have had to slash prices to
the bone. Result: Profit margins have plunged.

*A 60-inch HDTV sold for $7,000 in 1999; today you can buy a 65-inch Sony
HDTV for $3,299, and a 55-inch for $1,800.

* A Sony 2-megapixel digital camera sold for $900 in 1999; today a
comparable camera sells for $289.

* The cheapest DVD player in 1999 cost just under $200; now you can pick
one up at Costco for less than $79.

Not surprisingly, one of the world's largest makers of these electronics -
Sony - has suffered steadily falling profits and a near nonstop plunge in
its share prices.

From 1999 through 2003, Sony's revenues actually went up 15% to $61.3
billion. BUT, the company's expenses went up at a faster clip:
Manufacturing costs - up 13%; selling and other administrative costs - up
33%. Result: Sony's net income before taxes fell by a third - to just $947
million.

Dell Computers is in a similar bind: Gross sales are up 83% in 2003
compared to 1999. But to achieve those results, Dell had to slash prices
mercilessly. Right now, for example, you could order a brand-new Dell
Pentium4 PC with a breakneck speed of 2.5 gigahertz, disk storage of 40
gigabytes, and software that used to sell for hundreds of dollars - all for
a grand total of $399!

Back in 1999, the cheapest Dell computer available - the Dimension L400 PC
- was one-sixth as fast, had less than one-ninth the storage, and only a
fraction of the software. But its cost was more than double - $899 - and
that was already considered "dirt cheap" back then.

Not surprisingly, Dell's gross profit margins are 17% less than they were
during the 1999 tech bubble - and its return on assets is 32% less. Again,
the same pattern: Sales are up, but profit margins are down. And here is
what is truly frightening: Dell's profit margins are actually pretty good
compared to those of many Nasdaq companies:

* Ericsson has suffered a 62% decline in gross profit margin - from 45% in
1999 to 17.8% today.

* Citrix Systems, which provides access infrastructure software and
services, suffered a drop in gross profit margin of 31% - from 50% in 1999
to 35% in 2003.

The big problem in 2004: With the cost of raw materials and manufacturing
rising, further price cutting to stimulate sales will be extremely
difficult.

If anything, in an attempt to restore profitability, many companies may be
forced to jack up prices. Result: The sales spurt will come to an abrupt
end.


Many Nasdaq 100 companies that have rallied 50%, 100%, even 300% STILL have
no earnings whatsoever!

No matter how impressive a rally may be, when it's based on weak growth in
earnings, it makes me nervous. And a rally in stocks with no earnings
whatsoever makes me want to call 911. Examples:

# Amazon.com: Despite all the hoopla about the "new Amazon," the online
retailer is STILL not making money.

No doubt, Amazon has been busy: The company set a new record of 2.1 million
items ordered on a single day in December. But what it isn't talking about
is the same, old inescapable phenomenon that prompted us to coin the phrase
"Amazon.bomb" back in 1999: Red ink - $37.8 million in the first three
quarters of 2003.

Call me old-fashioned, but I think a company needs to turn a profit ... at
least a little profit ... before you should risk your hard-earned savings.

# Sun Microsystems went from a net profit of $1.8 billion in 2000 to a net
LOSS of $3.4 billion in 2003.

# Broadcom, the broadband giant, had a small profit in 1999. Then the
losses hit big time: $687 million in 2000 .... $2.7 billion in 2001 ...
$2.2 billion in 2002, and ANOTHER $959 million in the first half of 2003.

# Then there's Verisign, a company that seems to have transformed the art
of losing money into a science. It lost $3.1 billion in 2000, $13.3 billion
in 2001, and $4.9 billion in 2002. What about 2003?

It lost "only" a few hundred million!

Maybe some people think that's "progress." But you'll never get me to fork
over my money for a company that hasn't made a single DIME in the last four
years.


No new "killer app" technologies

This is vital: The overwhelming majority of companies listed on the Nasdaq
are offering little more than refinements and enhancements of existing
technologies - rarely anything substantially new.

I see no equivalent to the cell phone which spread across the globe like
wildfire ... local area networks which took over the business world ...
digital cameras that suddenly became affordable ... or the World Wide Web
itself.

Sure, technologies have been improved incrementally. But they have not been
replaced or surpassed. Nor have there been any new breakthroughs that come
close to matching those of the 1990s. Examples:

* Cell phones in 2003 now have color screens and come with digital cameras.
But their primary function - talk - has not changed.

* Laptops are thinner and faster ... and wireless Internet access is
convenient. But a portable computer is still a portable computer.

* Everyone sings the praises of TiVo and its competitors - video digital
recording devices that allow you to record TV shows and watch them at a
later date. Nice technology, but not a revolutionary advance over the
old-fashioned programmable VCR.

In the stock market as a whole, what we have, in essence, is a video-tape
replay of the 1990s tech bubble - and without the sexy new inventions. My
view: It will inevitably end in a replay of the great tech wreck of
2000-2002.

On the flip side ...


Part 2
The dollar decline will accelerate, driving gold and natural resources
dramatically higher

While front-page headlines proclaim the glories of the stock market rally,
the truly BIG story of our time is buried in the back pages, submerged in
Wall Street's subconscious:

The dollar fell steadily throughout most of 2003. It fell again on the last
trading days of the year and still further as the New Year opened. At the
same time, in lock-step with the dollar plunge, we're witnessing a parallel
surge in gold, energy, and other commodities. It makes absolute sense: When
paper money loses value, hard assets gain.

Just this week, on January 6, the dollar plunged to an all-time low against
the euro ... a seven-year low against the Swiss franc ...a six-year low
against the Australian and New Zealand dollars ... a 10-year low against
Canadian dollar ... and an 11-year low against the British pound.

The biggest drama, though, is the dollar's fall against the Japanese yen.
Last year, Japanese authorities dumped a whopping 21.1 TRILLION yen (over
$200 billion) onto the foreign exchange market in an attempt to stop the
dollar from falling.

But despite the huge interventions, the dollar fell against the yen anyway.
And this week, the decline has accelerated, again despite massive
intervention by the Japanese authorities.

Why? There are three dead weights dragging the dollar lower:

#1. The U.S. trade deficit is the worst in all history - $358 billion in
2001, $435 billion in 2002 and an estimated $491 billion in 2003.

It's about seven times larger than a decade ago. It's bigger than the
official tally of the entire federal budget deficit. It's more entrenched
than any trade deficit in history. And it's worsening at a faster pace.

You ask: "But since the overall U.S. economy is larger, isn't it OK to have
a larger deficit?" Sorry. That argument doesn't work here. Even in
proportion to the growing U.S. economy, the trade deficit is still the
largest in history. Consider the chart:

The worst previous trade deficit crisis came in 1987,
http://www.safemoneyreport.com/img/issues/357_tradedeficit.gif when it hit
3.2% of GDP. That helped precipitate the sharpest dollar decline of that
era, which then led to the worst stock market crash of all time. But now
look! The hole in our trade balance is far deeper than it was back in 1987
- a whopping 4.42% of GDP.

This means that foreigners are earning far more in dollars from their
exports to the U.S. than we're earning in their currencies from our exports
to them. Result: They're getting stuck with hundreds of billions of extra
dollars every year.

Until a couple of years ago, they were willing to simply reinvest nearly
all of those dollars in America - mostly into U.S. bonds and stocks. No
more! Now they're starting to sell a bigger chunk of the new dollars they
earn, driving the value of the dollar down.

#2. A huge backlog of potential selling from abroad. An even bigger threat
stems from the danger that foreign investors will start selling from the
huge hoard of U.S. investments they've been accumulating over the years:

Based on the latest data available from the U.S. Treasury Department,
foreigners hold $1.46 trillion in U.S. Treasury securities, $1.69 trillion
in U.S. corporate and other bonds, plus another $1.17 trillion in U.S.
stocks. Grand total: A whopping $4.32 TRILLION!

How much longer can they hold on before they rush for the exits? No one
knows for sure. But we do know this: In 1987, foreign investors held on for
about six months. Then, they unleashed a great selling barrage that helped
precipitate the greatest stock market crash of all time.

#3. Benign neglect. The president of the United States - the most powerful
man in the world - has been convinced by his advisers that he actually
wants a cheaper dollar.

They figure a lower dollar will make U.S. products cheaper and more
competitive overseas. They hope a cheaper dollar will help save U.S. jobs
which are now fleeing, in torrents, to low-wage countries. They're telling
the president that a weaker dollar is vital to saving his own job.

For a while, the president tried to protect U.S. jobs another way - with
tariffs on imports like steel. But late last year, he was forced to end
those tariffs! That left only one tactic - a much cheaper dollar.

Conclusion: Our currency is sinking ... and yet no one in Washington or on
Wall Street seems to care.


When the dollar falls, gold rises

It's a see-saw relationship that is rarely broken ... and that is
especially strong right now.

This week is a case in point. As the dollar plunged to new lows, gold
blasted through the $425 level. And along with gold, other commodities are
also taking off. Natural gas is up 59% in just the past three months.
Copper has risen by 42% since July. Heating oil has risen a whopping 40%
since September, while cotton and platinum are up 34% and 28%, respectively
since June. Crude oil has jumped 25% since September.

The worldwide flight from the dollar to gold and other commodities is the
most powerful and consistent powerhouse behind these new bull markets.

But it's certainly not the only one. There's also surging demand from China
and elsewhere. Short supplies. Neglected production facilities.

Most stock analysts, however, don't seem to understand com-modities. They
look at the commodity-based stocks - like gold, energy, and natural
resource companies - strictly in terms of their earnings. Earnings are
important, but these companies must also be viewed as asset plays.

The logic is simple: The stocks may be fairly valued based on earnings. But
if the commodities that drive these stock prices are still severely
undervalued, it implies that the shares can go a lot higher simply by
riding on the wave of rising commodity prices.

That's what we see happening, and that's why we feel these shares should be
good investments whether the market averages continue rising ... or turn
sharply lower.

No investment is risk-free, and this certainly applies to gold, energy and
natural resource stocks. So be sure to stick with our instructions in the
next articles to help reduce the risk of loss and maximize your long-term
profit potential.





SAFE MONEY REPORT
Prof. Investor - January 2004
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QUESTIONS FROM OUR READERS


Q: You keep telling us the dollar is tanking, foreigners keep dumping our
Treasuries, and the twin deficits are a disaster in the making. Yet
government officials say inflation is non-existent and unemployment is
falling, while the stock market is rallying like times could never be
better. Could you please tell me what planet they and you are on?

A: The folks in Washington are on Mars, named after the Roman god of war.
Last year, they waged a massive battle against what was about to become one
of the greatest economic disasters of the century. They cut interest rates
to the lowest level in 45 years. And they passed some of the biggest tax
cuts in history. This year, they are waging still another battle - this
time to stay in office. But they're running out of ammo.

We are down here on Earth. We readily admit they won the first battles, and
that the economy has bounced back dramatically. But they're still going to
lose the war. Reason: The trade and federal deficits ARE having a direct
impact, driving our dollar into a tailspin. This is a deeply destabilizing
force that is inescapable. And it's just beginning.

Q: All the fund managers and analysts who are being interviewed on CNBC,
CNN, etc. seem to be claiming that the economic recovery and the new bull
market will continue throughout 2004. Doesn't that make you doubt your
views?

A: Quite to the contrary, the unanimity of their optimism is very similar
to the state of mind we saw before each and every major decline in the
market in recent years. It merely reinforces my conviction that this is a
great bubble that could burst when you least expect it.