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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 31 OCTOBER 2000 

 

Today:  The Destruction of Technology

*** What a great market...everything is as it should 
be...
*** Buffett's revenge...bad day for Bezos...
*** Has the 'soft landing' already happened? Where's the 
runway? The flighty euro... Information Overload...and 
more!

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A Collective Manic Euphoria Swept the Land... 

At the beginning of the decade, the tech stocks of the 
day... radio... automobiles...electric utilities... 
airplanes... were driving the market up wildly. It truly 
was a New Era... If you had invested $10,000 in General 
Motors in 1919, it would have been worth $1.5 million in 
the summer of '29. 

But by 1933 unemployment had reached nearly 24%...
What happened? Is it happening again? 

Yes. Says a respected Austrian economists - and you'd 
better be prepared. Falling technology shares 
are only the beginning. Here's what you need to do 
- right now - to prepare yourself for the collapse of 
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*** I love this market. Hardly a day goes by that I don't 
get to report that the Big Techs, and what's left of the 
Internets, are falling in price.


*** It's not that I like to see people lose money. It's 
just that it's good to see these stocks get what is 
coming to them. God is in his heaven, the queen is on her 
throne...and the hypesters and humbugs of the New Era are 
getting put in their place too.


*** The Dow enjoyed another big day yesterday. The old 
economy index rose 245 points, or more than 2%. 


*** 1836 stocks advanced on the NYSE yesterday; 1044 
declined. 101 hit new highs; 63 hit new lows. 


*** Warren Buffett had a good day yesterday - Berkshire 
shares rose $2,525. Jeff Bezos, though, had a bad one.


*** Nasdaq, home of the Techs and Nets, fell again - down 
86 points, almost 3%. The Nasdaq 100, measuring the 
progress of the Biggest of Big Techs, fell almost 4%.


*** It was an especially bad day for the Cisco Kids. A 
Lehman Bros. Analyst decided that $90 might not be a good 
target price for a stock trading around $50 and 
apparently headed in the wrong direction. So he revised 
his target to $60-$65. 


*** When even the analysts give up on a stock, investors 
really get spooked. Analysts, for those who were not 
aware, are like the Italian general who remarked: "there 
go my men...I must follow them, for I am their leader."


*** Cisco is, of course, a great company - like Amazon. 
With a great product too. I love Cisco's routers and 
switches, don't you? They're cute little things. They 
will make good landfill when the Information Age is 
finally superceded by the post-Information Age, next year 
or so. The Cisco Kid's accounting methods are cute 
too...about which more below...


*** Cisco stock ended down about $2.50, after being down 
almost 10% earlier in the day. Nortel, which almost 
single-handedly collapsed the Toronto stock market, fell 
another $2.50 too. JDS Uniphase dropped about $6. Juniper 
lost more than 8%. 


*** And, what a surprise, Amazon lost about $2.75 
yesterday, ending a hopeless rally. Analysts, said the 
Reuters report, "took a closer look" at the net company's 
latest quarterly report. I suspect that what they really 
did was read the article in Barron's that questioned 
Amazon's operating income. Then, they probably worried 
about seeming out of step by being too bullish on the 
River of No Returns stock. 


*** Meanwhile, Amazon admits that the SEC is looking at 
its books. And the company filed a report with the SEC on 
Monday saying that it "may sell additional debt or equity 
to obtain credit." Hmmm... maybe the company is closer to 
running out of cash than we think.


*** But cheerleader, I mean analyst, Henry Blodget says 
he is "comfortable with the company's calculation" of its 
cashflow." The "3rd quarter is likely to be an inflection 
point for the company and stock." Henry thinks he sees a 
bottom.


*** On the other hand, "you can conclude this bull market 
has lost its nerve," writes the Fleet Street Letter's Dan 
Denning. "In October, disappointing earnings growth in 
technology stocks signal, for us, that the bullish 
psychology has finally been broken." Fourteen technology 
stocks - the likes of which include Cisco, Microsoft, 
Dell, Hewlett Packard, Lucent, Motorola, Intel, Oracle, 
Texas Instruments, WorldCom - can account for $2,041.8 
billion in market cap losses. (see: What Went Wrong With 
Wall Street 
http://www.dailyreckoning.com/body_headline.cfm?id=673)


*** In any case, The Destruction of Technology is 
entertaining and long overdue...but what about the rest 
of the stock market? I expected the entire market to 
retreat along with technology. Instead, the Old Economy 
seems to be roaring back to life. What gives? More 
tomorrow...


*** Money leaving the Nasdaq seems to have gone 
conspicuously to the financials - brokerages and banks. 
Investors are seeking the safety of companies with 
earnings. And they are anticipating a pop in the 
financials when Greenspan loosens credit after the 
election. In the imagination of the lumpeninvestoriat the 
'soft landing' is not just dream...it's a fact. And the 
Fed will address the slowdown with lower interest rates.


*** And yet, reports from the economic front are mixed. 
Incomes rose 1.1% last month. Spending rose 0.8%. Plus, 
the gap between 10 year Treasuries and 10-year TIPS, the 
inflation-adjusted bonds, is widening. It is still a very 
modest 1.89%...but headed in the wrong direction for an 
interest rate cut. The widening gap is telling us that 
investors are becoming more wary of inflation.


*** Besides, the slowdown in the U.S. economy is not a 
consequence of too little credit, but too much. Credit 
quality has deteriorated, while the quantity has 
expanded. Ordinary families and major financial 
corporations alike are up to their derrieres in debt. 
Much of the debt, like much of the equity, must sooner or 
later be marked down - as it represents investments and 
purchases that never should have been made.


*** But "fears of the economy falling off the cliff are 
overdone," said Bill Meehan, with the unlikely Cantor 
Fitzgerald company. Who knows? Maybe not.


*** German Finance Minister, Hans Eichel, noticed the 
same thing we did: Europe may be growing faster than 
America.


*** But you'd think the euro was like a mushroom with red 
spots - "Don't touch them," Francois advised me, "they're 
poison." 


*** "Euro Bears Gloat as another Bounce Goes Begging" 
reports Reuters, trying to work as many metaphors into a 
single headline as possible. Later in the article, 
subheads such as "Flighty Euro, Steadfast Dollar," and 
"Americans put Faith in America" tell the story. "No one 
is more downbeat on the eurozone and more upbeat about 
the U.S. economy than the Americans," continues the 
report.


*** What actually happened in the markets yesterday was 
that the euro rose to 85 cents and then slipped back to 
84 cents. Where it goes from here is still anyone's 
guess.


*** Not much change in oil or gold markets.


*** An Internet message entitled "INFORMATION OVERLOAD" 
found its way to me: "A survey of thousands of workers in 
Britain, Canada and the USA, conducted by both the 
Institute for the Future in California and the 
Pitney Bowes office equipment company, found that the 
average office worker is overwhelmed by 169 telephone, e-
mail, voice mail and regular mail messages per day. The 
study found that this message overload results in workers 
spending an undue amount of time and energy trying 
to respond to the message bombardment. The survey further 
found that about one third of executives also felt 
overwhelmed by the quantity of messages they received on 
a daily basis."


*** "I can't help but question," wrote Doug Casey 
recently, "whether the whole email/Internet phenomenon 
really makes people that much more productive...how do 
you account for the huge amount of time you spend reading 
and answering emails? ...I know in my case, it's a burden 
and the Delete button is getting more of a workout as 
time goes on."


*** My friend Brian says that I am the source of most of 
the email glut in his mailbox. But wait, Brian, I'm 
saving you the trouble of having to read all those other 
messages about the economy, the stock market and the 
meaning of life. Please don't delete me, dear reader...


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THE DESTRUCTION OF TECHNOLOGY


The Big Techs are being destroyed...like Napoleon's 
soldiers in their retreat from Moscow. One by one...and 
sometimes by the hundreds...they are dropping. Never to 
rise again. 


Half the companies listed on the Nasdaq are down 50%. 
Some of them are down far more - so far down in some 
cases that only the tops of their campaign hats still 
protrude up out of the freezing mud.


What began as a march to glory is now in full retreat... 
with some sectors already routed. Rag tag bands of 
survivors huddle here and there...overlooked by 
investors. And a few groups still sit tall in the saddle, 
flags flying and their shiny brass buttons and tunics 
still un-bloodied.


But it is probably over for technology.


Alan Greenspan still shills for the tech sector. Diehard 
tech buffs still believe that piling up digits will 
improve the lot of mankind. Na‹ve investors still buy the 
dips. But the stocks have lost the magic. They are no 
longer invincible to the weather, the economy, interest 
rates, earnings, competition, or any of the other forces 
of financial nature that normally bring booms to an end.


Without knowing anything about technology itself...or the 
miracles of modern science that will happen next week or 
next month - I can tell you that the end has come for 
Technology as an investment phenomenon. 


Why? Because the voice of crowd thinking - the financial 
press - has turned against it.


For example, accounting irregularities are, for the first 
time, getting press coverage. Cisco, so recently the 
mustest of the "must own' companies of the New Economy, 
has fallen dramatically in price. Investors and the 
financial media are beginning to understand the financial 
game the Cisco Kids have been playing.


Over the last 6 years, Cisco bought companies more often 
than you or I bought beer. Using its own, sensational 
"Cisco scrip" - that is, its own stock - as currency, 
Cisco bought another company nearly once a week. 


As Doug Casey put it, "any company that has made some 240 
acquisitions in the last six years can't possibly digest 
them or manage them properly."


"In fact," Doug continues, "that rate of acquisition is 
reminiscent of the conglomerates which were temporarily 
popular back in the 60s. A major object of the 
acquisitions back in those days was to hype the stock, 
making it easier to make the next acquisition, hopefully 
ad infinitum. By the time the bear market of 1969-70 
bottomed conglomerates were a synonym for bankruptcy."


Cisco's popularity has been much greater and has lasted 
longer than expected. Surely, its products are marvels. 
But the company's spectacular success on the stock market 
has little to do with the engineers in the design 
department...and a lot to do with the engineers in the 
accounting department. Cisco, in other words, is not so 
much a triumph of technology as it is of folderology.


As I reported to you, the magicians in Cisco's accounting 
office - perhaps recruited from the Bureau of Labor 
Statistics - reduced the acquisition cost to a fraction 
of the actual price, thus bringing in revenue streams and 
huge increases in assets to Cisco itself.


And sometimes, the acquired company is also a customer - 
perhaps even a customer having a hard time paying its 
bills.


"[I]t's whispered," writes Grant's Eric Fry softly, "that 
Sweden's Bredbandbolaget is getting financing to buy more 
goods from its oh-so-generous benefactor." The story 
develops:


"Swedish Internet company Bredbandbolaget (no relation to 
Henry Blodget) postponed its $400 million IPO scheduled 
for October 9 due to 'unfavorable market conditions.' The 
postponement by B2 (as the company is known) would hardly 
warrant a headline were it not for what happened next."


"'Cisco has come to the aid of Bredbandbolaget," Sweden's 
Svenska Dabladet newspaper reported on October 11. "The 
U.S. equipment supplier will guarantee Bredbandbolaget's 
continued operations for the next two years..."


"Why did Cisco ride to the rescue?" asks Fry.


"If the rumor mill is to be believed," he continues, 
answering his own question, "Cisco financed a sizable 
Bredbandbolaget purchase of Cisco products. If so, that 
raises a few questions: Is B2 emblematic of other credits 
on the Cisco ledger? Might other B2-like accounts 
receivable lurk in Cisco's accounting department? Will 
Cisco lend financial support to them all, like some sort 
of techno-IMF? Michel Camdessus, please forward your 
resume to: 


Cisco Systems Human Resources
170 West Tasman Drive
San Jose, CA 95134 ..."


Doug Casey likes to compare the Tech Stock Boom to the 
periodic booms in junior mining companies. He reminds us 
that almost every boom in the junior mining stocks was 
capped with the discovery of a huge fraud. 


"Net stocks," he says "lend themselves to this activity 
quite as well as mining stocks." Mark Twain described a 
gold mine as a hole in the ground with a liar standing 
next to it. Investors have no way of knowing what's in 
the hole. Nor do they have any way of knowing whether a 
new tech company is an Iridium or a Microsoft. So, fraud 
flourishes like worms in a manure pile.


"So what will be the Bre-X look-a-like of this tech 
market," Doug asked in August, referring to the fraud 
that brought down the most recent boom in the junior 
mining sector. 


"Well," he whispering softly, "I have something that you 
won't hear anywhere else. Over 15 years ago, a very well-
connected source told me that Ronald Reagan had early 
stage Alzheimer's. When I reported that outrageous 
data...at least one subscriber cancelled, incensed that 
I'd spread such a seemingly malicious rumor about his 
hero. Of course, it turned out to be accurate... This 
same source assures me that the FBI is quietly 
investigating Cisco and several of its top executives for 
various types of crime."


"The story goes that the purpose behind many of Cisco's 
acquisitions to date wasn't so much to grow the company 
as to hype the stock and enrich some top execs. The way 
it supposedly works is when Cisco eyes a company, the 
executives are given options or cheap stock in it, to 
insure the deal goes through...when the deal is done, the 
stock soars." 


My guess is that the above passage...written only a few 
weeks ago, should now be put into the past tense. 


Technology, whatever it is, will continue developing in 
its own quirky and unpredictable fashion. But the 
Technology boom in stocks seems to be over.


But what surprises me is that the retreat of the techs 
and nets did not cause a general collapse in equity 
prices. Just as Napoleon beat a fast retreat back to the 
West side of the Rhine, investors seem to think they will 
be safe if they get out of tech and into Old Economy 
stocks. But Napoleon's magic was gone after the Moscow 
campaign. The end was already in sight. 


And so, the question I pose in tomorrow's letter: when 
will investors meet their Waterloo?


Bill Bonner


P.S. Enjoy Halloween. Boo!
 
 
 
 
About The Daily Reckoning:
The Daily Reckoning... "more sense in one e-mail than a month of CNBC."  That's what readers are saying about The Daily Reckoning.

Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
advisory letter in the English language has consistently delivered
invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 01, 2001

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