In Today's Daily Reckoning:
*** Internets go bankrupt
*** Cash on the rise...another bullish signal
*** But the dollar slipped...and insiders are selling at
twice the normal rate
*** The Internets continue to suffer. Yesterday, the digital
humans at Living.com announced that they were filing for
bankruptcy. Living.com is one of Amazon.com's partners and
had been named the "best on-line furniture store" by
research group, Gomez.com.
*** If the best on-line store can't make it, who can? But
Amazon drifts along, through the jungle of competition and
the merciless alligators in the venture capital community.
AMZN sold off yesterday - but is still well above the
critical $30 mark.
*** During the 2nd quarter of this year, AMZN lost $110
million on its investments in companies such as Living.com.
*** The Internets owe a big debt to Henry Blodgett, the
analyst who made a name for himself by being so bullish on
the sector. As reported here a few weeks ago, Henry set
target prices for stocks such as Amazon at hallucinatory
levels. And then he held his bullish stance - even as the
whole group collapsed.
*** But last week, Henry downgraded 11 of his net favorites
- after they had declined 80.34% from their highs. Rumor has
it that Henry - who surely 'gets it' - has been offered a
job piloting Russian submarines.
*** The Dow gave back some of its gains yesterday. The index
retreated 109 points in very light trading. The Nasdaq went
nowhere - gaining just two points in the session.
*** The number of stocks making progress fell sharply
yesterday - just 1161, vs. 1690 falling back. Still, new
highs were impressive - three times as many as the new lows.
*** Here's another bullish signal - the St. Louis Fed
reports that cash, as measured by MZM (money of zero
maturity), is rising at an accelerating rate. MZM often
seems directly connected to stock prices. When cash
increases, so do stock prices. Over the last quarter, MZM
rose at a 5.6% rate.
*** The dollar slipped. Once again, the greenback approached
its May highs against the euro but could not go all the way.
A euro is now priced at more than 91 cents.
*** The battle between the dollar and the euro is probably
the most important one we're watching. Neither side has much
room for maneuver - with the euro backed up against the
rocks of 9% unemployment rates...and the dollar with a sea
of current account deficits behind it. Neither side can
raise interest rates easily. So, re-enforcements and retreat
may be out of the question. It's a fight to the finish.
Which will win?
*** You may not know what a "dol" is. I didn't either. But
it is a unit of pain. Will the "dollar," though, continue to
be the unit of joy that it has been for so long? We'll see.
*** Steve Leuthold reports that insiders are now selling
stock at twice the rate of the last two years. And bond
yields are now 8 times the yield of the S&P - a record. The
pros, the insiders, the smart investors cannot resist -
they're moving to the yield.
*** Gold and oil did nothing yesterday. But platinum rose
$8.20.
*** A price increase in paper came yesterday - with major
producers announcing an 8% hike.
*** DR reader VN opines: "Addison is right." [Addison, you
may recall, informed me that the Daily Reckoning itself was
proof that the Internet was not increasing productivity, but
decreasing it. People spent time reading DR instead of
working.] VN continues: "Productivity is crushed by the
Internet. Countless hours are left undone, flitted away
searching for the "Holy Grail" of benefits in a dream-like
state believing there is a pot of gold just over the
rainbow, one more click-through and the brass ring will
appear. The silicon valley yuppies spend 16 hours a day
working at their computers believing it is efficient when
actually it is the post-modern version of the seventies when
executives whined "how can I get any work done when I'm in
meetings all day?" It's all idea researching and praying the
buried treasure is just around the next website."
*** Another DR reader, who was kind enough to say he read it
anyway: "Quite right, Addison is, quite right, indeed. I
think every day of all the projects to complete, work to do,
books to finish, to read, but I sit here totally addicted to
the Daily Reckoning. Sometimes, like today, I sat down to
read three issues, when I should have been in my vegetable
garden doing what Mr. Deshais does. This is nuts, I think
sometimes. Think of the terrible drain on output there!"
*** Does time spent reading really depress output? Should we
12-step program for DR readers Information may be =
wisdom...is not. It takes time. And effort. You have to
think, as Heisenberg put it, "until your brain hurts." And
even then, you're almost as likely to be wrong as right.
*** So much for privacy on the Internet. The U.K. government
has just been granted the power to poke into any email
message it chooses. "Under the provisions of the RIP bill,"
comes the news report from London, "the U.K. government...
can demand encryption keys to any and all data
communications. Those not complying with the order could
face a prison sentence of two years."
There's a major crisis facing mining companies. And it could
mean big profits for you. You'll learn all about this dark
secret and the 3 companies perfectly poised to take full
advantage of it. Get the complete scoop on this spectacular
opportunity in our latest Investor's Library report click http://www.dailyreckoning.com/specialreports
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
What manner of men are these? I mean this new race - these
'Digital Men' whom Ed Yardeni has discovered.
"I will put my jobs anywhere in the world where the right
infrastructure is with the right educated workforce, with
the right supportive government." So declares the CEO of the
company which is acknowledged as the greatest company in the
history of mankind, Cisco.
"I can do that today with the technology we have," said John
Chambers, Homo Digitalis (and a credit to his race),
heralding the new super-competitive and footloose economy,
"but I can't do it socially. I don't know how to manage that
yet."
'Tis a pity. Analog humans get in the way. We are the
stumbling blocks of "progress"!
But Chambers is optimistic. "You give me a decade and I will
be able to do it extremely well."
And then, finally, Mr. Chambers identified the all-important
'it' that we Homo Analogians do not get. "That's what people
haven't gotten yet," he said, "This is global competition
like we've never seen before. The Internet is not just a
nice productive tool. This is about survival."
Today's letter will take a quick look at this "it" - to see
what it is that we don't get about it. Competition is
certainly not new. In fact, its presence in the New Era is
reassuring. The New Era cannot be that different from the
old one. Whichever era it is, and whether companies are run
by digital humans or analog ones, competition will force
down profit margins. That's what competition does.
Long-term Daily Reckoning sufferers may recall that I made
Mr. Chamber's point nearly a year ago. Referring to the
intersection between Moore's law - which describes the
increase in computer processing at an exponential rate - and
Metcalfe's law - which describes how collective systems,
such as markets (and the Internet), become more bountiful as
they grow - I dub, dub, dubbed it territory where Bonner's
Law ruled. Bonner's Law holds that Moore + Metcalfe =
creative destruction squared.
It may be presumptuous of me to point this out to Mr.
Digital Man, but the arrival of turbo charged competition is
hardly good news for Cisco, Amazon, Qualcomm, Nextel, or any
other of today's tech and net favorites.
"The New Era's stocks are far more vulnerable to competition
that the Old Economy's factories," writes Gary North in his
latest letter. "A century ago, J.P. Morgan put together the
United States Steel trust. His consortium bought Carnegie
Steel, which had kept lowering prices. The trust hoped to
create a cartel that would call a halt too 'ruinous
competition.' ...But the price of steel kept falling."
Not only did the price of steel rails fall - so did the
price of the railroad traffic that ran upon them. "The iron
horse," says the August 5 issue of Grant's Interest Rate
Observer, "changed the way people lived and worked, just as
the Internet-enabled cell phone has done (and continues to
do). Yet, although wondrous, the service the railroads
provided soon became a largely undifferentiated commodity."
Railroads were the Big Thing a century ago. So sure were
investors that they would be a big financial success that,
as Arthur Stone put it, they "might be expected to absorb
any ordinary burden of fixed charges [that is, debt] that
might be placed on a railroad." Even "an extraordinary
burden could be carried, provided drastic competition could
be, for the moment alleviated."
But competition was not alleviated. It was aggravated. When
investors get excited about something they do not stop at
putting ordinary burdens upon it. Nor do their expectations
stop at ordinary levels. They go all the way. And they are
not put off by the heat of competition and the hope of
fireball success. Instead, they are drawn in - like moths to
a flame.
"In a nutshell," Grants summarizes, "the railroads ran up
more indebtedness than their cash flow could service."
Hundreds of railroads went belly up. And, again quoting
Grants, "in 1916, the evident peak of the railroad
industry's fortunes, [after hundreds of the weaker companies
had been destroyed in bankruptcy] the combined return on
equity was 7%."
As Gary North puts it, "New Era companies cannot stop the
forces of competition. The closer they are to digital
wealth, the more vulnerable are any expected streams of
income that they may throw off. The heart of a New Era
company's profit is its ability to create value for
consumers while holding off the competition. The greater the
value created, the faster the competition shows up. There
are no huge factories to build. There are only digits and
code."
What was true of steel and railroads is also true, even in a
new millennium, of routers and switches. Chambers is right.
The Internet stretches the competitive horizon. But in doing
so, it speeds up the process of creative destruction in
which even the best ideas and world's best businesses are
brought down - first to average levels of growth and
profitability... and later to destruction.
Still analog, after all these years.
Bill Bonner
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Last modified: April 01, 2001
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