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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 19 JANUARY 2001 

 

Today:  First Annual Financial Darwin Awards

*** Dow and Nasdaq - both up. What gives? 

*** Intel on a suicide mission...find stocks whose earnings 
are NOT expected to grow...

*** How to solve the power crisis in California: gratuitous 
advice from the Daily Reckoning...and more!

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*** Both the Dow and the Nasdaq rose yesterday. The former 
climbed 93 points, the latter 86.

*** The day was book-ended by two announcements from two 
very big techs - IBM and Microsoft. Early in the day, 
investors reacted to IBM's news. The company beat 
expectations by 2 cents. Investors gratefully drove the 
stock up 12%. IBM is such a big part of the Dow that the 
effect was to add 76 points to the index.

*** At the close of the day, MSFT, announced that it had 
hit the lowered earnings forecasts that analysts expected. 
While not exciting news, it was nevertheless enough to send 
the stock up more than 6% in after hours trading.

*** GE also rose 2% in a gesture of solidarity and 
insanity.

*** But outside of the tech world, that is, in the economy 
of real things, Caterpillar said its profits would burrow 
down between 5% and 10% in the year ahead. The stock 
dropped 6.4%.

*** Oil rose 85 cents. And the HUI index of gold mining 
stocks rose a healthy 5%. Silver has been up each day over 
the last five trading sessions.

*** The euro was up a bit...bonds are doing well...

*** The Fed reports that industrial output fell 0.6% in 
December...the 3rd drop in a row. Output for the 4th 
quarter declined at a 1.1% annual rate, the first quarterly 
fall-off since the recession of 1991.

*** But inflation seems to be no threat. The CPI core rate 
rose only 2.6% over the last 12 months. 

*** "This relatively low amount of inflationary pressure... 
has left the door open for the Fed to cut rates in response 
to the sharp slowdown in economic growth," says a 
Washington Post article.

*** Most economists and observers continue to misapprehend 
the nature of a bursting bubble. No inflation? No 
problem...all the Fed has to do is to lower interest rates 
to get the economy hot and bothered again. 

*** The trouble is, low inflation is what you get when 
asset prices collapse. And in a major collapse, neither 
lower interest rates nor tax cuts nor government spending 
can offset the effects of deflation. 

*** Asset prices fall when investors run out of money, find 
themselves too deeply in debt, and realize that the 
expectations they have for their investments cannot be met. 
At the corporate level, overcapacity and bad investments 
squeeze profit margins. The only possible outcome - asset 
prices have to fall to more realistic levels. 

*** Nor can an individual company buck a major cyclical 
downturn by spending more money. "Intel is on a suicide 
mission," opined one analyst following the company's 
announced intention to increase capital spending by $1 
billion this year. "This is pushing the field of dreams 
concepts to a new level," said Ashok Kumar, another analyst 
who follows Intel. Intel can add all the capacity it wants, 
he said, but that doesn't mean the customers will come.

*** A Financial Times article mentions research by James 
Montier showing that stock returns are negatively 
correlated with expected growth of profits. "In other 
words," explains the FT, "companies whose profits are 
expected to grow by the smallest amount, perform far better 
than those where expectations are high. The differential 
between the worst and the best amounts to more than 20 per 
cent a year. This suggests an obvious strategy - avoid 
those stocks where expectations are excessively high, and 
where disappointment is highly likely. Just by cutting out 
the losers, you can improve your portfolio performance."

*** According to an MSNBC newswire report Pets.com 
announced on Tuesday it will change its name to IPET 
Holdings, Inc. Holding what exactly, I'm not sure... except 
for the sock puppet the firm used in its advertising 
campaign. You'll recall, dear reader, the fledgling 
Pets.com made itself famous by spending $2 million on a 
single Super Bowl ad featuring the sock puppet...and in the 
process earned itself a spot on the list of potential 
recipients of this year's First Annual Darwin Awards. 
Yes... more below...

*** Margin accounts fell to $198.7 billion in December, a 
28.7% drop from their record high of $278.5 billion in 
March.

*** PG&E defaulted on some of its commercial paper 
yesterday, and according to the International Herald 
Tribune, Californians began experiencing some blackouts. 
The whole problem would go away instantly, of course, 
simply by allowing the market to work. Power prices would 
shoot up, allocating existing power efficiently to those 
who wanted it most...and suppliers would rush to sell 
California utilities more power to take advantage of the 
higher prices. Soon, there would be a glut of power...and 
prices would fall.

*** Alas, in Washington as in Sacramento, an opportunity 
for demagoguery and chicanery is rarely missed. Having made 
a mess of things by decree and regulation, politicians and 
the chattering class supporting them will now find ways to 
make it worse. And so it goes, dear reader, even at the 
very dawn of this great new digital age, human beings still 
shiver in front of open fires...hoping for mercy from the 
morons who rule them. 

*** "CA Dairy Farmers Brace for Chaos" says an AP headline 
on a news website. Had the cows gone on strike? Were they 
getting mixed up...backing into their stalls...knocking 
over the milkmaids? I began to imagine the kind of bedlam 
angry cows, utterly out of control, might cause. It might 
be something out of a Far Side cartoon. So, I rushed to 
read the article. Alas, the article was not posted. I'll 
have to wait for further news.

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FIRST ANNUAL FINANCIAL DARWIN AWARDS

A fool and his money are soon parted, goes the expression. 
Sometimes not soon enough.

Billions of dollars worth of good money are invested in 
projects with no hope of success. And some of them, even if 
they could be made to work financially, would merely blight 
the commercial landscape like trailer parks and strip malls 
along U.S. Route 1. 

We tend to look down our noses at the fool who loses his 
money. But what is often forgotten is that he performs a 
valuable public service. 

He is like the human landmine detectors used by the Soviets 
in WWII. It was a low-tech approach to finding a safe path 
through a minefield. But it worked. "Punishment battalions" 
were simply marched forward. Those who didn't blow up 
showed the way forward. Those who did, well, they cleared 
away the mines.

How grateful the troops following must have been! Their 
comrades had cleared the way - and marked it with little 
scraps of uniform, blood and bootlace.

This is our opportunity to show some gratitude.

But it is hard to do them justice...or even begin to 
recognize them. There are so many...so many investment 
landmines that needed to be cleared away...and such little 
pieces left to identify them.

Yet, with no gun to their backs...no threats against their 
families ...these selfless heroes marched forward on their 
own - with only the cheers of the mob and media to spur 
them on.

Investors in Bikini.com, for example, thought they were 
going to have a party. According to Dotcom.Failure - a 
website that tracks the progress of these ill-fated 
investments - the site "celebrates the perennially popular 
beach lifestyle." 

Addison volunteered to check it out...

"What do they do," I asked. "How do they make any money?"

"I'm looking... 'the most popular team of super-models in 
cyberspace'...hmmm..." Addison replied, absorbed...

Okay...well, I'll return to that...

Here's one worthy of an award: Millionare.com. Alert 
readers may think they have caught me in yet another 
spelling error. But let me assure you, this error is not 
mine. This is the way they spell it on the website. 

The site promises to reveal the secret of making millions 
of "Internet dollors" - again, not my error. How? Well, 
send $10 dollors to an P.O. box in England and the secret 
will be yours.

There is no further information. Nothing else to do at the 
site. That's it. And yet, investors actually paid as much 
as $4 for the shares in this company. Now, the shares can 
be purchased, in bulk I would bet, for just 13 cents.

Thirteen cents seems to have some kind of magnetic 
attraction for these exploded companies. As recently as 
Tuesday, Pets.com was available at 13 cents, too, after 
once trading as high as $14. 

"Pets.com should certainly receive a Darwin Award," writes 
Daily Reckoning researcher Rick Barnard. "In the first 
quarter of 2000, they spent $21 million on advertising 
(including $2 million on a Super Bowl ad) and only had $20 
million in sales." 

Hmmm...that has to be a winning formula. 

Pets.com blew up this week. The company announced it was 
going to put itself to sleep. "Now toy stores are filled 
with sock puppet dogs representing a company that no longer 
exists," Rick continues. 

Rick also nominates furniture.com for a Investor's Darwin. 
It was not the business plan that impressed our researcher, 
but its execution. According to reports, says Rick, 
"furniture.com shipped over $1 million in merchandise and 
never billed anyone for it. ...It was so focused on getting 
an IPO that it didn't consider developing the business."

And here's one for the 'What were they thinking?' column, 
says Rick: FooFoo.com. The business plan was to be a kind 
of parasite site, using the content and products of other 
sites to sustain itself. It aimed to get a percentage of 
the sales. But, of course, there was no reason for anyone 
to pay a commission to FooFoo. Nor did customers have any 
particular reason to go to the site. Still, investors put 
up $5 million in seed money, with which, says Rick, "the 
managers bought a life-sized, light-sensitive, talking 
Austin Powers doll to greet employees at the front door." 
FooFoo went belly up in May of 2000.

Have you ever been in the middle of nowhere and wanted to 
use a cellular phone? No? Well, no one else has either. 
People are in the middle of nowhere because they don't want 
to spend their time blathering on cellular phones. 

Still, you have to applaud the people who put up the money 
for Globalstar, a company that "provides mobile telephone 
service to regions of the world that are too remote to have 
standard cellular phone service." Hmmm... at least here was 
a proven business model. Unfortunately, it was proven not 
to work. Iridium had already tried it. Its satellites came 
crashing down to earth only a few months ago - after that 
provider of telephone service to remote areas blew up 
investors. Globalstar announced, this week, that is was 
defaulting on its loans.

Finally, Addison looked up from his bikinis. 

"Give it to me straight," I asked him, "What are they 
doing?"

"I have no idea," he replied. "But the photos are nice..." 
The company, with no visible means of support, is 
apparently out of business, though the website is still up. 
Life's a beach. Then you file chapter 11.

I have been cogitating, this week, on the lack of 
imagination that keeps people from seeing the unintended, 
and often obvious, consequences of their actions. The 
Soviet mine sweeper brigades knew exactly what they could 
expect. And yet, they marched forward. Even a 1 in 10 
chance of escaping death in the minefield was better than 
summary execution.

Could investors in Angryman.com have been any less sure of 
their fate? Angryman offered surfer-men an opportunity to 
share their bile and lose their money online. But to what 
end, other than a bad one? Courting the choler of the 
masculine sex must have been the result of something worse 
than a capital death wish. These guys must have had some 
kind of emotional problem. Thankfully, they have removed 
themselves from the financial markets. The only trace of 
the project today is an emphatic announcement on the web 
page that the site is OFFLINE! So take that! 

But there were several strong candidates in the "men and 
women with issues" category. Another manly site, 
TheMan.com, was supposed to offer online sports and sex 
chat. Rick reports that just to make sure they would not be 
confused with legitimate businessmen or dignified human 
beings, the founders went so far as to get the company logo 
- a two-inch man in a suit - tattooed on their ankles. The 
company went out of business, thank God, in November of 
last year.

And, of course, there were the women's sites. iVillage was 
such an obvious loser that I wrote about it 6 months ago. 
You could have bought the shares then for $6.47. But it 
would have taken a much less selfish man than I am to buy 
them - someone who just wanted to finance a cyber home for 
feminine kvetching...or blow himself up in a foolish cause. 

In theory, women would want to go for a site "for women" 
just as men would want to go for one "for men." But 
investors in these sites must have experienced a total 
imagination failure. Who could not have seen that the 
concept was as flat as a California lawmaker's EEG? And 
yet, at one time - scarcely a year ago - iVillage and its 
sister site, Women.com represented as much as $2 billion of 
investors' money.

Investors deserve an award for the scale of their losses as 
well as the absurdity of them.

iVillage is still in business. But shares are down 97% from 
their high...and at $1.38, nearly 80% from where I panned 
it. 

Investors ponied up much less money for AllAdvantage. But 
the business model was at least as ridiculous. The company 
hoped to make money by sending checks to college students, 
layabouts, and shiftless people with time on their hands. 
The idea was to pay people to use the company's 
browser...and make a profit by selling them things. But who 
would want to click around the worldwide web just to get a 
measly check from AllAdvantage? 

My son, a college student, alerted me to the AllAdvantage 
business plan when he told me that his friends were all 
getting checks for surfing the web. He then explained that 
they had rigged up their computers to surf while they were 
sleeping. 

Hmmm...my quick wit thought it detected a problem. What 
kind of commercial advantage could you get by paying people 
to surf the net in their sleep? 

Well, none. In the first quarter of last year, for example, 
AllAdvantage sent out $32.7 million in checks to its drowsy 
members. It collected $9.1 million in revenue. Hmmmm, 
again.

And now, the company seems to have hit a landmine. 

"The idiots owe me" says one comment posted on Dot.com 
Failure. "I never got one cent from these dorks and I am 
still waiting for the $14.53 they owe me."

Apparently, there are many people who are waiting for 
checks from AllAdvantage. "Good luck," says another. "They 
owe me $50..."

"They raised the min. payout amount," explains a third, 
"...and the pay rate to 10 cents an hour, 10 hours max. a 
month. Looks like they are flat out of cash... These people 
need to start over with a new business model."

Yet another poster offered this assessment: "Pay to visit a 
site? Really? Is a little more research in order here?"

But a little more research is not the way of the landmine 
detectors. They simply charge ahead, heedless of the risks. 
It is dangerous work. But thank God, someone's got to do 
it.

Your correspondent,

Bill Bonner
 
 
 
 
About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.

 

 
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Last modified: April 01, 2001

Published By Tulips and Bears LLC