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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, 24 JULY 2001 |
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Today:
Pro Forma Life
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*** Wall Street gets depressed... 'information fatigue
syndrome' strikes the nation...
*** "Homeowners borrowing trouble..." Freddie Mac makes
trouble more readily available...
*** Global deflation gets serious...Japan at 16-year
low...London at 3-year low...Gold still in 20-year bear
market...but at least Henry is making money...
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*** I haven't heard from Eric this morning. Maybe he's
depressed. Merrill settled an investor lawsuit for
$400,000. The walls have been breached. Lawyers from all
over the country are said to be arriving at New York's
Port Authority bus station, having approximately the
same effect on Manhattan as the arrival of the Visigoths
in Rome.
*** But, heck, I've got the Internet...I can find all
the information I need about what's happening on Wall
Street. In fact, I can find more than I need.
*** The Detroit Free Press warned yesterday about a new
syndrome:
"Now mental health experts have come up with yet another
psychological disorder - 'information fatigue syndrome'.
Its symptoms include depression, anxiety, insomnia,
inability to focus, headaches, high blood pressure and
social withdrawal... Atlanta clinical psychologist
Harold Steinberg says some of his patients have even
answered their cell phones during therapy sessions. 'I'm
amazed at how many of them believe they have to take
every call, read every memo and respond to every
message,' he says."
*** Successful people are busy people. Everyone wants to
appear to be successful...so they need to feel busy. So
they pick up a cell phone...or get on the computer.
*** And....what's this....here's a news item....now
people will be able to get on a computer terminal while
they're eating a Big Mac at McDonalds. The terminals are
being placed in McDonalds by one of the nation's leading
debt pushers - Freddie Mac - in order to encourage low-
income families to get a mortgage.
*** But "Homeowners Might be Borrowing Trouble," warns
the Seattle Times. Mortgage applications are up 54% this
year over last. Nearly half of that is refinancing work.
*** "But some experts are spotting ominous signs in the
refinancing boom," says the Seattle paper. "Half of the
homeowners who have refinanced recently did it to pay
off credit cards, car loans and other consumer debts..."
*** In the refinancing booms of 1992-93 and 1998-99,
only about one in five borrowers paid down debt. Many
homeowners tapped so much of their equity that they now
must pay private mortgage insurance premiums to protect
the lender, a cost they did not have before refinancing.
One risk of consolidating consumer loans: it turns
unsecured debt into a bill that can cost you your house.
*** Get in debt...get a computer...get a cellphone
...get a lawyer - get busy! Is life in America, in the
21st century, great...or what?
*** While Americans are dripping ketchup onto computer
keyboards, the rest of the world is drooping its way to
recession. The London stock exchange dipped near to a 3-
year low yesterday. German confidence is at a 3-year
low. Dow Jones' world stock index hit a high of 19,256
in May of 2000; it now stands at only 12,892.
*** In Tokyo, stocks hit a 16-year low - erasing every
penny of stock market gain since 1985! Industrial
production in Japan is also falling - down 14%
annualized in the first quarter of this year....and 7%
in the second quarter.
*** Japan is, I remind you, the world's second largest
economy. I - and I alone - have opined that it might
also be the world's leading economy, in the sense that
wheresoever it goest the world's #1 economy - the U.S.-
may follow.
*** The Dow fell 153 points yesterday. And the Nasdaq
once again dropped below 2000 to end the day at 1988.
Amazon fell 5% in after hours trading (about
which...more below). GE ended off 3%.
*** The gold mining index - the HUI - gained 3% last
week. And guess what group of stocks has done the best
this year? Hard to believe, but it is the gold mining
companies - up 27.7%. But the price of gold has barely
budged. Go figure.
*** "SELL ENERGY??? Are you nuts?" writes John Myers of
Outstanding Investments. "Some die-hard Pollyannas will
argue about new technologies or giant discoveries just
waiting to gush to the surface. But if you talk to oil
insiders, a typically optimistic bunch, you see
unanimous conviction in their eyes that oil reserves are
rapidly dwindling. Meanwhile, our dependency on crude
grows each day." (see: The Crude
Truth)
*** What else? Well, Henry turns 11 today. The little
entrepreneur has made more than $50 by picking
blackberries and selling them at a local roadside
market. For whatever reason - Henry wants to make money.
*** After church on Sunday, we strolled through the
graveyard in West River, Maryland, where many of Henry's
ancestors are buried.
"There's Doctor McCeney," I pointed out. "He was your
great, great, great grandfather."
"What was so great about him?" Henry asked.
"Well, that just means he was...let's see...the father
of the father of the father of your grandfather..." I
reply. "And there's your great, great, great
grandmother, who died in 1898."
"Well, what did he die of?" asked Henry.
"I don't know," I reply. "Why do you ask?"
"Because I want to be a doctor when I grow up."
"Why do you want to be a doctor?"
"Because doctors make a lot of money."
"Oh..." we continue our stroll through family history.
"And there's another great, great grandfather, Henry. He
was a doctor too."
"Did he make a lot of money?"
"I don't think so, Henry. Doctors don't always make a
lot of money."
"Then, I think I'll be something else."
"Henry, making money isn't the most important thing in
the world."
"Oh, what's more important?"
"Uh...doing the right thing."
"Well, can't you do the right thing and still make a lot
of money?"
"I don't know, Henry, I don't know..."
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PRO FORMA LIFE
He don' plant 'taters.
He don' plant cotton
And dem folk dat plan' 'em
Dey's soon fogotten
That ol' man river... he just keep rollin' along.
"Once the Toast of the New Economy," writes David
Streitfeld in the Los Angeles Times, referring to one of
our favorite stocks, Amazon.com, "May Be Toast."
On January 4th 2000, I suggested to readers of the Daily
Reckoning that shares of Amazon.com - then $69.75 -
might be overpriced. Eighteen months later...at
$14.85...Amazon is still overpriced.
I feel some obligation to continue our coverage of the
Amazon.com story. Not that there have been any plot
twists - there have not. Nor have there been any moments
of high drama or suspense.
Instead, the big, muddy river just keeps rolling along.
Bezos' company continues to do just as we expected...
rolling along towards 'pro forma' profitability... and
GAAP bankruptcy.
What we find most interesting in the Amazon story is how
the distance between 'pro forma' and GAAP numbers - like
the space between opposing river banks - seems to widen
as the big river nears the end of its course. On a pro
forma basis, Amazon is expected to reach profitability
by the end of this year. But when normal accounting
rules are applied - the Amazon river may freeze over
first.
"Amazon said that it expects an increase in revenue to
between $625 million and $675 million in the third
quarter, and that it will hold pro forma losses at
current levels," says the report on CBSMarketWatch. "The
company maintains that it is on track to break even on a
pro forma basis in the fourth quarter. Pro forma
calculations are based on assumptions about the
company's business and exclude one-time charges."
Amazon.com had $2.8 billion in revenues last year, on
which it earned a minus $569.5 million. It has continued
its losing ways during the first two quarters of this
year - with a $168.4 million loss in the quarter just
ended.
I do not claim to be the most learned or sophisticated
financial analyst. But losing half a billion a year on
less than $3 billion in sales does not seem to be the
way to fortune, even in the New Economy. And yet Bezos
has made a fortune from Amazon. He, like others who have
made money on the company, has done so by selling the
shares. That formula has been a moneymaker ever since
Henry Blodget helped drive the stock up above $150 a
share. Even at $14.85 a share, Amazon still looks like a
better share to sell than to buy. Bezos seems to think
so. A recent report on insider trading shows Bezos
selling two blocks of 300,000 shares each.
"We went through a stage where online retailing was
going to conquer the world," said Eric Von der Porten of
Leeward Investments. "No one was ever going to go to a
mall again. But now it's going to settle down. It's
going to be a lot less exciting."
Especially unexciting is the growth in Amazon's sales.
Over $5 billion in sales were expected for this year.
The actual total is now estimated to be closer to $3.4
billion. The company's sales growth rate is little
different from what you might hope for in a laundromat
or landscaping business - about 17% per annum.
Worse, most of Amazon's growth is coming from selling
electronic equipment, not books.
"And there is the Amazon dilemma," explains Streitfeld.
"Where it is profitable it is not growing, and where it
is growing it is not profitable. Mark Rowen, analyst
with Prudential Securities, thinks this is because
electronics are still heavily discounted, while
discounts have been curtailed on books."
That is, however, only the beginning of Amazon's
troubles. After 17 consecutive unprofitable quarters,
Amazon has accumulated $2.7 billion in debt. The great
hope of the enterprise was that growth in sales would
reduce, proportionally, the debt burden to a reasonable
level. But now that growth rates have fallen, the
company will have to achieve - in rough numbers - a
profit margin of about 7% or so, just to service its
debt.
In a pro forma world, debt is no problem. But in a pro
forma world, nothing is a problem. Problems are
dismissed and forgotten. In a pro forma world, absent
earnings pose no more problem than missing Congressional
interns.
But Amazon flows through the real world - a jungle, in
fact, where it has attracted the interest of piranhas.
Amazon raised $700 million by selling bonds last year,
announcing a series of deals with Internet start ups to
prepare the market for its bond sales.
"On Jan. 21, 2000," Streitfeld recalls, Amazon said it
would receive $82.5 million over five years from
Greenlight.com, an online auto retailer, in exchange for
helping to introduce Greenlight to Amazon's customers.
Three days later, Amazon announced a similar deal with
Drugstore.com. Seven days after that, a deal with
Audible Inc., a provider of spoken-word recordings, was
announced."
Amazon forgot to use the magic words. It failed to
mention that these were not real deals, but pro forma
deals. No cash changed hands...just shares in other
often-worthless web companies. Now, it is being sued by
one of the hedge funds that bought its bonds. Soon, it
will be sued by other investors who believed 'pro forma'
numbers were the same as real ones.
Pro forma life can be anything you want it to be. Pro
forma, lawyers pose no clear and present danger to
Amazon. Pro forma, Amazon will break even this year.
Pro forma, Bill Clinton did not have sex with that
woman, and the weather is always perfect.
Bill Bonner,
Writing to you, pro forma, of course.
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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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