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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 26 APRIL 2001 |
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Today:
Getting
Personal With The Techs
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*** Faith...and the Fed's greater purpose...
*** Consumers getting squeezed...layoffs starting to
pinch... energy costs in a vice...
*** "Watching Rome burn"...a bear market in breast
implants...and much, much more...
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*** "The Fed has cut its overnight Fed Funds rate
four times this year," reports the Washington Post,
"reducing it from 6.5 percent to 4.5 percent.
Another cut is expected when the Federal Open Market
Committee meets May 15. The aim seems to go beyond
reducing consumers' and businesses' debt burdens or
even stimulating new borrowing. The greater purpose
seems to be to provide reassurance - to sustain the
faith that the economy has not started a downward
spiral and, thereby, encourage the consumer spending
that may prevent it from happening.
*** "The Fed is playing for time, hoping that
consumer spending and confidence - already somewhat
shaken - remain resilient until the worst of the
investment cutbacks have passed. As a monetary
maneuver, this has a high degree of difficulty:
somewhere between daunting and impossible."
*** Daunting? Why? Consumer confidence - as measured
by the Conference Board Index - fell fell to 109.2
in April, a 4 � year low. This was the 6th decline in
7 months. "Consumers are becoming more realistic,"
said an economist at Merrill Lynch.
*** Consumers are getting squeezed. The Fed is
trying to help them, by lowering interest rates. At
first, the lower fed funds' rates helped reduce
mortgage interest rates. Consumers rushed to
refinance and managed to save a a little on their
monthly mortgage payments. But now mortgage rates
are back up to 7.14% - higher than they were at the
end of last year. If long term rates refuse to bend
to the Fed's desire - it is powerless to help
consumers.
*** Layoffs are beginning to be noticed too. When
the pink slips first began to appear, the economy
still had enough momentum to vacuum up laid-off
employees quickly. But now the number of people
looking for work has increased to the point where
they are beginning to compete with each other for
jobs.
*** The price of gasoline rose 15% in the last
month. AAA predicts $2-a-gal. prices this summer.
*** Still, it can take a long time for people to
realize that their personal situations are at least
as persuasive as public myths they hear in the
media. Economists talk about a 'second half
recovery.' Abby Cohen says stocks will be higher at
yearend. Brokerage houses urge their clients to
"hold for the long-term."
*** A UBS Paine Weber study found that investors
have reduced their expectations. In March, they said
they believed that stocks would gain only 8.7% in
the next 12 months - a record low expectation for
this cycle. And yet, 8.7% is nearly twice the
average gain from stocks over the last 50 years.
*** Most major magazines have carried pictures of
the bear on their covers...people discuss the damage
done to the Nasdaq, and the wreck of the dot.coms
everywhere. But almost no one actually believes that
stock market investors can lose money over a very
long period of time.
*** The Dow rose 170 points yesterday...and the
Nasdaq rose 43.
*** The dollar was down a tad. But gold was down
more than a tad - $2.10. Bonds also fell,
effectively increasing long-term borrowing costs.
*** "New York is a reincarnation of ancient Rome at
its peak," the NY Observer quotes a 'Swaggering
Relic of the Boom,' an obnoxious stock broker named
Lee Munson. "Not at its peak - at its decline! When
Nero was ...watching Rome burn...That's what we're
going through right now, and God Bless it! I want to
be a citizen of Rome, and to do that, you have to be
a broker."
*** "The New York experience is everything I ever
dreamed of," continued the former St. John's College
student and would-be master of the universe. "Just
being able to be like a rock star, have the
financial power to bully-not people - but bully the
city around..."
*** But the International Herald Tribune reports
that life is getting tougher for people like Munson.
Hotel occupancy rates are down. "High-end breast
implant" salesmen (thank God they don't try to
implant the things on the other end) say revenues
are off 50%. There is a "fireside sale on Gulfstream
and Lear private jets." Plastic surgeons say they
are seeing fewer tummies that need to be tucked and
fewer tushes from which to suction the lippo. "The
party's over," declared Charles Brecher of the
Citizen's Budget Committee.
*** Both of my daughters were in tears yesterday.
First, Sophia, got another rejection notice. She is
applying to colleges and other programs - and so far
has gotten only negative responses. Then, Maria got
an unexpected boost - an invitation to be in a TV
commercial for Chanel perfume. This exciting news
caused her to wind herself up so tightly that
something was bound spring loose. It did. And the
day ended badly. Bad news or good ...it doesn't seem
to make any difference. Both end in tears. More
below.
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GETTING PERSONAL WITH THE TECHS
"If everyone swept his own doorway...what a clean
world it would be."
Goethe
I had dinner last night in our neighborhood
restaurant, Le Mozart, with my daughter, Sophia.
Sophia is a nice girl with many fine qualities. But
she is weak in one area: academics. And academics
happens to be the only thing that America's colleges
and universities care about.
"You know, Sophia," I tell her, "getting into a top
school is not everything in life. Later on, it won't
really matter to you. What really matters is working
hard, being dependable, doing the right thing..."
"Dad," she replied, cutting off my drift into
Essentialism, "I'm not even trying to get into the
top schools. I'm getting rejected by second-rate
places. I've had it...I just don't care if I get in
or not..."
What do you say? Sophia is being judged on her
grades and test scores. What else does she have to
show? You and I know that there is a lot more to
life. But Sophia, at 18, feels like a failure. I
would like to help her...but how?
Life's most important battles, dear reader, are
fought at home. Alone.
So desperate is the fighting...so futile...and so
dangerous...that most people will do practically
anything to avoid it. No 'big idea' is too absurd if
it helps keep us from having to come to terms with a
little one. No lie is too preposterous if it shields
us from the truth.
Napoleon, unable to conquer the heart of his
Josephine, launched an assault on Russia. The odds
were better and the stakes were lower. In war,
unlike battles at home, the worst that can happen is
that you will die.
Hitler and Stalin, neither of whom had any home life
to speak of, pointed the finger at enemies
everywhere, attacked everyone who got in their way
and attempted to restructure the lives of millions
of people. Why not? They had nothing more important
to do. With no business of their own to mind, they
minded other people's business.
But today's letter is neither about politics nor the
tribulations of raising teenagers. Instead, I merely
use this feeble bridge to cross over to the subject
of most interest to us both: money.
Investors are as quick as anyone to lay the blame
for their losses on someone else. Nor do they
hesitate to embrace big ideas...in order to avoid
having to do the hard work of studying the balance
sheets and operating budgets of their own
businesses.
Rather than look carefully at the big tech companies
they actually owned, for example, investors were
happy to buy into the myth of the "New Era" and the
"Information Age." And they flattered themselves by
believing that they were among the few, the New Men,
who 'got it."
Today, even after suffering huge losses, they still
think in big terms and hollow slogans. "Tech will
come back." "Tech is cheap." "Invest for the long-
term." "Wait for the second half recovery."
Just as it is easier to have an opinion on law
enforcement in Colombia than it is to keep your own
children away from drugs...it is still much easier
to talk about the 'next phase of the information
revolution' than it is to figure out how to make a
buck on a website. Or, as the Washington Post put
it, "it's easier to zap huge amounts of data around
the world than it is to find ways to make it
profitable."
Will Ebay come back? It's selling for only half what
it was at the end of 1999. But at $34, it's still at
136 times 2001 earnings. The company says it will
grow more than 50% per year for the next 4 years.
How likely is that?
"Ebay is a solid company," wrote J.T.Farley of
Upside.com, "but I wouldn't bid more than $30 a
share for it...even if they threw in a Beanie Baby."
Likewise, Cisco projects earnings growth of 28% per
year. EMC says it will grow at 30%. And Sun
Microsystems tells investors to expect 22% growth.
How likely are any of these numbers? I don't know,
but you have to take the company home and get
personal with it to find out.
As mentioned yesterday, David Dreman did a study of
some of the biggest and best of the techs (in
Forbes). He extrapolated growth and earnings - using
"'the most optimistic of analysts' late-1999
estimates." That is, he took their own projections
from the very moment when they were most confident.
These earnings and growth projections seem
ridiculous now. Back in 1999, Yahoo forecast
earnings growth of 100% a year. But this year, it
will suffer an earnings decline - of 84%.
Nevertheless, Dreman used the earnings projections
from '99 and then discounted the future income
stream to arrive at a "present value of discounted
earnings." What he found was that even at today's
"bargain" prices, most of the companies were still
too expensive.
Ebay, for example, would be worth only $4.75,
according to this model. Yahoo should be priced at
only $10, not its current $15. Double Click should
be about half of what it is today.
Ray DeVoe looked at another group of former high-
fliers - what he calls his "Klinker Index." These
are companies that have fallen by at least 98% and
now find themselves priced in the single digits. You
can buy, for example, CMGI - once a $163 stock - for
just $1.75. Akamai Technology, formerly selling for
$345, is now available for $5.50. Razor Fish, Inc.,
the subject of the lawsuit mentioned yesterday, is
yours for just 31 cents a share.
Is it time to buy these "bargains?"
Alas, "Single Digits are Often the Kiss of Death,"
declares a headline in the NY Times. The article
describes a study of klinkers going back to 1985.
"Of those publicly traded companies (since 1985) in
the technology sector whose stocks had fallen to
single digits, only 3.4% rebounded to $15 or higher
within the next year. Worse, most of those that
didn't bounce back in the first year never did."
One of my favorites on the klinker list is
MicroStrategy. Three-hundred and thirty-three
dollars would have been needed to buy a share of the
stock at its peak.
The company's founder and CEO, Michael Saylor, was
prominently vocal in his support for the Big Idea
behind the Information Age. You didn't have to look
very carefully at the companies' numbers, he would
have you believe, you just had to "get it" - to
understand that it was a New Era in which
information would flow "like water," creating a tide
of liquidity that would make us all rich.
But when a sourpuss accountant did caste a cold eye
at MicroStrategy's books, he found evidence of a
master chef at work. The books were cooked. The SEC
forced MicroStrategy to redo its numbers and a
shareholder suit followed. Today, you can buy the
stock for just $4.10.
And now MicroStrategy is once again, back in the
news - and once again, the company seeks to shift
attention from the homefront to matters and
malefactors elsewhere.
"MicroStrategy spent 70% of its letter to
shareholders explaining how stockholders can subvert
the evil short sellers," reports The Prudent Bear's
Rob Peebles. "MicroStrategy remember, was not only a
bubble company, but a creative one with the books.
The letter comes on the heels of the settlement of a
class action suit that gives investors no up-front
money, but an I.O.U. These are investors who bought
the stock before the company admitted overstating
earnings and revenues. According to the company's
annual report, the deal 'may result in substantial
dilution' of investors' holdings and 'may result in
downward pressure on the price' of the stock. Don't
tell that to the short sellers."
I won't say a word. It's none of my business.
Your reporter, minding his own business...
Bill Bonner
* * * * * * * * * Advertisement * * * * * * * * * *
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* * * * * * * * * * * * * * * * * * * * * * * * * *
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| About
The Daily Reckoning: |
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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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