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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

BALTIMORE, MARYLAND 
TUESDAY, 10 JULY 2001 

 

Today:  Ruinous Disorders

*** Americans getting poorer in stocks...richer in real 
estate? 

*** Webvan makes its last delivery...

*** Layoffs, help wanted ads...Russian wrestling 
refugees...and more!

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
 
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: July 10, 2001

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