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Co-brand
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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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BALTIMORE, MARYLAND
TUESDAY, 10 JULY 2001 |
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Today:
Ruinous Disorders
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*** Americans getting poorer in stocks...richer in real
estate?
*** Webvan makes its last delivery...
*** Layoffs, help wanted ads...Russian wrestling
refugees...and more!
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Americans are now getting nothing from their money
market funds and CD's - after inflation. And they've
been losing money in the stock market for the last two
years.
In January, USA Today published a list of 50
stocks chosen by 10 top analysts. The list is down 22%
on average, with 43 of the stocks in the red.
"For the first time in the 20-year history of the
popular 401(k) retirement savings plan," reports the NY
TIMES, "the average account lost money last year, even
after thousands of dollars of new contributions. And
despite some strengthening of stock prices in the last
couple of months, recent estimates show, the declines
persisted in the first half of this year."
The average account shrank to $41,919 in 2000 from
$46,740 in 1999, according to a report from Cerulli
Associates, a benefits consulting firm.
Rather than give up the hope of easy money,
Americans seem to have turned to real estate. "Home
sales profits fuel real estate bubble," says a headline
in Detroit's Free Press. Last year, the median gain on a
sale was $28,700 nationwide and $40,000 in California.
In total, nearly $200 billion of home sale profits - or
2% of the entire nation's GDP - entered the economy.
This year, mortgage applications are running 54%
ahead of last year, and 44% of them are refinancings.
It is possible for a few people to get richer -
buying and selling real estate carefully. But is it
possible for an entire nation? What happens when all
house prices rise?
"At all times, but especially in the last few
years," commented Fredric Bastiat, a 19th century French
economist, "people have dreamt of universalizing wealth
by universalizing credit... This solution, alas, has at
its foundation merely an optical illusion, in so far as
an illusion can serve as a foundation for anything.
These people begin by confusing hard money with
products; then they confuse paper money with hard money;
and it is from these two confusions that they profess to
derive a fact."
The fact they have derived lately is that they are
getting richer. Are people really richer when their
houses are more expensive and they have bigger mortgages
to pay?
"You can end up with more debt, longer repayment
periods and be unable to even dig yourself out," says
Gerri Detweiler, author of "The Ultimate Credit
Handbook."
But let's turn to Eric before we get depressed:
*****
- Stocks bounced lackadaisically on Monday. The NASDAQ
gained a little more than 1% to 2,027 and the Dow less
than 1/2% to 10,299. Comcast's $58 billion unsolicited
bid for AT&T's cable unit sparked some excitement early
in the day - perhaps because it was the first news to
come out of the telecom sector in quite a while that was
not unequivocally horrible.
- But after the close of trading, it was back to bad-
news-business as usual. Fiber-optic component giant
Corning announced plans to cut 1,000 jobs, close three
plants and take a $5.1 billion charge. Corning also took
the rather extreme measure of eliminating its common
stock dividend. Presumably, business is not booming in
the once-hot telecommunications sector.
- With last Friday's disappointing jobs report, the
unemployment trend has taken center stage on Wall
Street. And the performance is looking decidedly more
tragic than comedic.
- "Help-wanted ads drop to recession levels," ISI
observed. "Most labor market indicators such as help-
wanted ads, unemployment claims, layoff announcements,
and employment have weakened significantly." ISI
calculates that the nation has lost more than one
million jobs in just five months - the biggest decline
since 1980.
- The hard-hit manufacturing sector has shed jobs for 12
months in a row. And the once-stalwart service sector
added a negligible 9000 jobs in the second quarter - the
smallest quarterly increase since 1970. Back then,
manufacturing industries so dominated our economy that
few service jobs existed apart from those that required
wearing a miniskirt for PSA.
- The layoff trend shows no sign of slowing down. ISI
points out that job layoffs announced in June totaled
nearly nine times the number announced in June of 2000.
The Wall Street Journal just released its semi-annual
forecasting survey of economists. It will probably
surprise very few readers to learn that the economists'
forecasts are rarely correct. In fact, Bianco Research,
L.L.C., calculates that "they have correctly predicted
the direction of interest rates only 28% of the time
since 1982."
- So what, you may be wondering, does this woefully
inaccurate crowd now expect? 10-year interest rates will
be lower by year-end, they predict. Maybe it's a good
time to think about locking in that new 30-year
mortgage.
- As no one believes that Wall Street was created in
seven days, almost no one will argue that economic
Darwinism holds sway in the stock market. The evidence
is plain enough. Over the last 15 months, hundreds of
the NASDAQ's least fit issues failed to survive. In the
month of June alone, 82 companies were delisted.
- The latest casualty is Webvan, the once high-flying
online grocer and Internet icon. Webvan, which raised a
staggering $1 billion to build a grocery delivery
company, announced yesterday that it will cease
operations, file for bankruptcy and allow the Nasdaq to
delist its shares. The stock that once traded as high as
$34 per share is now worthless. [More below... Bill]
*****
Back to Bill in Baltimore:
*** "We take care of garden," said the young woman in a
deep voice. Returning to the U.S. after 2 years in
Europe, we found our yard and garden in pretty good
shape. The people responsible were standing right in
front of me.
*** The woman spoke with a heavy eastern-European
accent. She and her partner looked as though they might
have defected from the Russian women's wrestling team.
They had stocky bodies mounted on short legs...and long,
muscled arms. One had an impish grin. The other seemed
to suffer from a form of melancholia. She never smiled.
*** Gardening is not a genteel pastime nor even a casual
employment for these girls. It is more like a life or
death struggle. They don't merely pull up weeds; they
tear them out and then thrash them as if to teach them a
lesson.
*** "Where did you find these girls," I asked John, who
looks after the place when we're gone.
*** "It was amazing," he replied. "I ran an ad in the
help wanted section. I didn't expect to get much of a
response. I mean, it's a full-employment economy. And
who wants to work out in the hot sun for $10 an hour?
But I must have gotten 50 phone calls. There are a lot
of people out there who need a little extra money."
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RUINOUS DISORDERS
We have seen the best of our times. Machinations,
hollowness, treachery and all ruinous disorders follow
us disquietly to our graves.
(King Lear I.ii. 112-114)
One of the most majestically hollow business concepts of
the Internet bubble finally gave up the ghost yesterday
- after having wasted more than a billion dollars of
investors' money.
Like stale bread and rotten fruit, Webvan has been
tossed out to feed creditors and piggy bankruptcy
lawyers. Its fleet of trucks is being auctioned off. Its
customer service lines are dead. Its website is going
dark.
Amazon.com still takes orders. TheStreet.com is still
giving bad investment advice. But Webvan lies as dead
and lifeless as yesterday's news. The media reported the
event without emotion. There was no weeping or wailing,
nor even amusement.
But, excuse me if I get a little misty-eyed; I will miss
Webvan. Next to Amazon.com, no dot.com company served as
such a bright, shining illustration of how blockheaded
people can be, and how - even in this Age of Information
- the most well-informed, best-educated, and smartest
people can act like complete jack-asses.
Among the fools in the Webvan story are some of the
biggest names in the information economy. The Financial
Times explains:
"Founded in 1996 by Louis Borders of Borders Books,
Webvan managed to lure George Shaheen, managing partner
of Andersen Consulting, to be its chief executive. Its
board was filled with some of the most revered names of
the era: Christos Cotsakos of E*Trade, Tim Koogle of
Yahoo and Michael Moritz of Sequoia Capital. Its money
came from such Silicon Valley powerhouses such as
Softbank Capital Partners and Benchmark Capital, and its
shares were touted by Wall Street's best-known
investment banks.
"Goldman Sachs said in February 2000 that Webvan could
become an Internet franchise to rank alongside AOL and
Yahoo. 'Webvan has re-engineered the back-end
fulfillment system to create a scalable solution to the
last-mile problem of e-commerce,' its analysts wrote.
Having such names behind it ensured that Webvan was able
to come to market - with Goldman as lead underwriter -
after only a few months of trading, in which it had
managed to sell just $3.2 million worth of goods.
"Nonetheless, its executives assured investors it had a
vast opportunity. Groceries represented a far larger
market than books, videos or music - areas in which e-
commerce made its first forays. The typical US household
spends $5,000 a year on groceries and goes food shopping
more than twice a week.
"From the start, the company had big ambitions. Rather
than starting off in a large city or two, learning from
its mistakes and perhaps making a small profit before
expanding, it decided to open in 26 markets within three
years.
"Each distribution centre would be 18 times the size of
a typical supermarket and would cost $35m. Almost five
miles of conveyor belts would bring products to the
packers at each site and refrigerated vans fitted with
sophisticated global satellite positioning systems would
allow each warehouse to serve a 50-mile radius."
Meanwhile, in Paris - a city not known for its
commercial avant-gardism - my wife picked up the phone
and called the local grocery. Within a couple of hours,
a young man appeared at the door, carrying a week's
worth of comestibles. She paid the bill, gave him a tip
- unaware that she was undermining nearly every
pretension of the Internet Age.
"Wouldn't you save money by just going to get the
groceries at the store," I asked her.
"Well, not much...and I can't carry all these heavy bags
anyway."
If local grocery stores - even in Paris - will make home
deliveries at only slightly higher cost than shopping in
the store, why would anyone think they could make money
trying to by-pass the entire food distribution system in
order to bring food to your door?
At least, shopping at a local store, you know what
you're likely to get. And if you don't like what you
get, you can always go to a different store. Why would
anyone think the Webvan concept would work? And even if
it did work, couldn't it be tested somewhere before
being applied everywhere?
But for the boom on Wall Street, Webvan might have been
just another bad idea by just another penniless
entrepreneur with a grocery store. He might have
borrowed a few dollars from his mother-in-law and bought
a battered delivery van. Setting up a website in his
office, he could have taken orders, had a few teenagers
to fill the bags, and deliver them around the
neighborhood.
Perhaps the innovation would prove to be a dead-end
mutation - like a three-legged cow or a sentimental tax
collector. But, if the service proved popular enough,
and profitable enough, he could have bought another
grocery store in a different part of town and tried to
duplicate it. Maybe it would be 'scalable,' and maybe it
wouldn't.
Once the concept had been proven out, he might have gone
to venture capitalists in attempt to roll it out
statewide...or even nationwide.
But in the late '90s, theory triumphed over
experience... and there was enough capital sloshing
around to waterlog almost any good idea. Dot.coms
thought they needed to move fast to get out ahead of the
competition.
Besides, money was being pumped at them as though
through a fire hose - they had to do something with it.
And, in the lush, green fields of the dot.com era, even
three-legged cows could survive.
"Genetic mutations that would never have been replicated
in a normal intensely competitive population are
afforded that opportunity in an isolated, well-nourished
group," explains Michael Rothschild in his book,
"Bionomics."
Why would investors want to buy stock in an untested
grocery delivery company founded by a guy who wouldn't
know a rutabaga from a cassava melon...and who had
probably never delivered even a newspaper, let alone a
sack of groceries?
Yet, on its first day of trading, Webvan sped
immediately into the fast lane and became worth $8.7
billion - an amount equal to nearly 1% of the U.S. GDP.
What? An $8.7 billion business would have to earn, say,
at least $500 million per year in order to give
investors a decent return on their money. Can you really
earn that much delivering groceries?
Margins on groceries are tight. Families know what
groceries cost and watch their expenses. Experienced
chains - such as Krogers - are lucky to have margins of
2% to 5% of sales. To break into the business, Webvan
figured it had to undercut the established grocers -
which left it with almost no margins...and
preposterously high capital costs.
As time passed, more and more three-legged cows competed
for the rich pastureland of American capitalism. But
soon, the fields became treacherous. Investors stopped
worrying about the return on their capital and became
anxious about the return of their capital.
"Once population expansion caused crowding to resume,"
Rothschild continues, "natural selection begins
gradually to shape the offshoot population into a new
species tailored to the nuances of its niche. Except for
these intermittent pulses of evolution, a species will
remain largely unchanged for millions of years."
And so, the grocers are still with us. A few have added
websites to take orders on-line. In Paris, you can go
on-line to one of the city's major department stores and
get anything you want.
But you won't see any Webvans on the streets. Neither in
Paris, France nor in Paris, Texas. Webvan is no more.
Sniff. Sniff.
Bill Bonner
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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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