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*** Alan Greenspan's belly practically shook, when he
laughed, like a bowl of jelly as the Fed chairman hinted
that he intended to bring cheer into investors' hearts this
holiday season.
*** The dreamers and schemers who still believe in the New
Economy think they have identified the cause of the
Nasdaq's malaise: the Fed has hiked rates 6 times in since
June of '99.
*** Now it is time, they reason, for Greenspan to reverse
the damage...to pull out the `Greenspan Put' and send rates
back down.
*** The old inflation hawk "was as dovish as you could ever
expect him to be," commented one analyst following
Greenspan's speech yesterday, "a signal that the Fed may be
willing to focus on economic growth rather than inflation
risks."
*** A Reuter's poll found `primary dealers' - those who
deal directly with the central bank - to be unanimous: the
Fed will switch to a `neutral' bias next week, preparatory
to reducing rates early next year.
*** And so the street thought it had caught sight of
Santa's Big Bottom and celebrated with the kind of sharp
rally that is common in bear markets. The Nasdaq had its
best day ever - rising 10%. The Dow rose 338 points, or
3.21%.
*** Almost all the big techs joined in the fun. Cisco rose
more than $6. Intel more than $3 (though still only half
what it was a few months ago). And the world's largest
mobile phone maker, Nokia, moved up almost $7.
*** Everything seemed to be going Wall Street's way
yesterday...the economy looked weaker, with new factory
orders down 3.3% in Oct. ...suggesting rate cuts sooner
rather than later. The election looks as though it is going
to be finally resolved. Investors were perfectly content
with the hung-jury election...but the media's tiresome
election coverage was depressing everyone. Even the price
of energy fell...with oil at a 4-month low.
*** But investors will still find some bargains this
Christmas season. For while Energy, the Election, and the
Economy all seemed to line up nicely, the 4th E, Earnings,
is still a problem. Amazon, with no earnings in sight, fell
more than $1 after its website crashed. The stock was $113
last Dec. This year, investors can stuff their stockings
with it at an 80% discount.
*** 3Com announced higher-than-expected losses. Investors
decided to discount that stock by 25%. And Apple reported
falling sales and its first quarterly loss in 3 years.
Shares fell to $15 - again, about a 75% discount from their
price in September.
*** Another discounted stocking-stuffer is Xerox.
Yesterday, the company's bonds were downgraded by Moody's
to junk status - and both its bonds and stocks took a
beating, with shares losing 20% of their value.
*** Xerox is the subject of a book by Douglas K. Smith and
Robert C. Alexander, "Fumbling the Future: How Xerox
Invented, then Ignored the first Personal Computer."
*** As Jim Davidson explains, "researchers at Xerox
correctly anticipated the technology of the modern office
[nearly 20 years ago], only to see the corporation for
which they toiled ignore the multi-billion dollar
commercial potential of their inventions. Not only did
Xerox invent the personal computer, Xerox also invented the
fax machine, and kept it lying around gathering dust, never
to exploit it...Xerox researchers also pioneered the idea
of parallel computing...[and] invented the laser printer,
but stood back to allow other companies to pocket most of
the billions that derived from their invention."
*** An observation: inventions are like votes and kisses,
it's what you do with them that counts.
*** "If I were Mr. Bear..." I wondered, as I peered into
his perverse and cynical heart ...I would give investors a
break during the holiday season, let them shore up their
balance sheets and their courage. Yesterday's rally could
peter out today, but don't be surprised if it continues.
Friday's unemployment numbers should be weaker - and should
tease investors with hopes of coming rate cuts - like
visions of cherry plums dancing in their heads. Investors
will continue to believe in Santa Claus...I mean in the
Greenspan Put...until it fails them. More below.
*** If my guess is right, Mr. Bear is giving a present to
those who know what to do with it...and setting a trap for
those who don't. The Xmas rally...to the extent it
develops...will be a good time to sell. Sell stocks...and
the dollar.
*** The dollar rose slightly yesterday - to 88 cents/euro.
Wouldn't it be nice if the euro would go back below 85
cents?
*** TheStreet.com reports that there were 182 funds that
gained more than 100% last year. Guess how they're doing in
2,000? Only 6 are in the black at all. And the top 10 -
which averaged 300% gains for '99 - are showing a 43% loss.
*** We took the Eurostar back to Paris last night. Sophia
had done her shopping and been to a few museums. I had
attended a couple of board meetings, pretending to keep a
close eye on the business. London is a terrible place in
the summer - packed with tourists, often hot enough for
air-conditioning but with little of it to be found. But it
is a wonderful place before Christmas - with holiday
decorations everywhere...and cozy fires in hotel lobbies.
*** Anyway, I spoke to the steward in French and we sat
down next to two businessmen - one from England and the
other from France. The two must not have realized that we
were American, because they immediately began a discussion
about how hard it was to deal with their American
counterparts.
*** "They just don't seem to understand anything," said
one. "Yes," said the other, "they are nice...like that Ms.
Johnson we had on the phone in the conference call
yesterday...but they are all so stupid."
*** Sophia suppressed a giggle. Should I interrupt? Or just
say something in Americanese to Sophia so they would feel
embarrassed and quietly change the subject? I decided to
listen: It turned out, they worked for a global telecom,
headquartered in the U.S. And as they described the
blockheaded things their U.S. colleagues were doing - I
found myself in agreement with them.
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Included in Dan Denning's report from San Francisco was a
glimpse into the very bright future of biotechnology.
According to Michael Murphy, Dan reports, you will be able
to "grow your own organs...there will be gene therapy to
treat any disease. We will be able to genetically modify,
and presumably improve upon, the species itself."
"If only Marx had been born a century later," Dan laments,
"he wouldn't have had to change man's nature through
communism and compulsion. He could have just redesigned
the prototype, `designer children' as Murphy calls them."
"It is as easy as customizing the features of the car you
want to buy on the web. Blue eyes, blond hair, great curve
ball, can hit the ball to the opposite field. Very
promising."
That is the thing about technology and the future - it is
always very promising. And, thank goodness, there are some
investors selfless and brave enough to try to develop it.
Even in their failures, says Prof. Josh Lerner of Harvard
Business School, "there could be a substantial social
return because they led to a greater understanding of what
business models did and did not work."
One of my favorite among the Darwin award winners was a man
who essayed to harness the power of technology for his own
glory or amusement. He bolted a booster engine from a
military jet to the back of his car. Since the booster had
the power to lift a multi-ton aircraft off the ground, the
promise of thrills it held out, when attached to an '82
chevy sedan, was irresistible.
And yet, in this brief recitation of the circumstances
existing at the moment of ignition, readers may be able to
see beyond it...into the future. Something bad was bound to
happen...and indeed it did.
As near as experts were able to determine, the first couple
of seconds lived up to the promise. The driver must have
been thrilled as the car accelerated faster than any
automobile ever had. But the next few seconds even
surpassed his expectations - as the car took off like the
rocket it almost was, and smashed into a distant hillside.
Once the booster engine blasted off, a bystander...even one
with no power of clairvoyance and no knowledge of rocket
science...might have anticipated the results. Nearly
irresistible force would sooner or later meet an immovable
object.
So, I come to the burden of today's letter: some things are
so manifestly suicidal that the consequences can be
foreseen. There is smart money in the markets. And there is
dumb money. And there is money so imbecilic that it
practically cries out for euthanasia.
What brings this to mind are the reports of all the many
dumb things done in the investment world in the Great
Bubble of 95-99.
In particular, a recent article in Forbes reminds me of
just how absurd many of the promises for the new technology
really were.
"Before the April Internet stock crash and the subsequent
tech stock crash..." remembers a Forbes' reporter, "people
were telling me with a straight face that I'd be talking to
my car, which would have a wireless Net connection
coordinated through a hand-held device and all my other
gear. An example of life in the future: The car would know
I was stuck in traffic and that I'd be 15 minutes late for
a lunch meeting. The car would send a message to my
computer, to the person I'm supposed to meet, contact the
restaurant, change schedules and confirm the revised plans.
Everything would be seamlessly coordinated over the
Internet and via emerging wireless technology. Then with
bugged eyes, the person outlining this scenario would say,
"Isn't that going to be great!"
The Forbes article cited a TV commercial for IBM - in which
a household appliance had called a repair service. And many
writers imagined refrigerators keeping an inventory of
their contents and ordering supplies via Internet.
"The next thing you know," continues the Forbes piece,
"you're getting a quart delivered from Webvan within
minutes. How could this work? Barcode readers don't even
work at the store half the time. Kids leave milk containers
all over the house. Webvan has a delivery charge that
requires you to order enough to make it worthwhile.
Furthermore, there is no assurance that home delivery of
groceries is even going to succeed. And I don't know about
you, but I don't want my appliances calling anyone and
having people show up at the door unannounced."
"This is all crazy nonsense..." Forbes concludes. "The
future is simply not as wacky as we were imagining."
As wacky at it was, these visions of the future attracted
thousands of investment pioneers and billions of dollars
worth of real money.
The Financial Times reports that between '95 and 2000,
venture capitalists invested a total of $26.5 billion in
Internet-related new tech companies alone.
Those companies that made it to an IPO raised another $75
billion...and some went on to follow-on offerings that
raised another $51 billion. And then, of course, investors
drove up the stock prices faster than a rocket-propelled
chevy. A year ago, these investments looked as though they
couldn't lose. One investment newsletter called them
"profit rockets," and launched an investment service with
that name.
The VC investors often got out early - with as much as
1,000% profits. Many other investors sold out too - at
prices much higher than their acquisition costs. But those
who held should qualify for the investment equivalent of
the Darwin Awards. These pilgrims strapped the "profit
rockets' to their own portfolios - and blasted off. We owe
them a debt of gratitude. And a silent prayer, perhaps: Not
only did they help to show what business models didn't
work... they cleansed the investment pool by taking their
own dumb money out of it.
With so much cash in their pockets, the companies went on a
buying spree. Pets.com spent $103 million on sales and
marketing, at a cost of $179 for every customer it
acquired. The idea, as every business man knows, is to
bring in customers at lower cost than the competition.
Spending $179 for each customer was suicidal.
The FT reports: "Of the money that reached the companies, a
high proportion...up to 80% -- was spent on advertising in
an often futile attempt to attract an audience and build an
enduring brand. eToys lost $4.04 on every order. Webvan,
[the on-line store your refrigerator was supposed to call],
lost $12.90. And Drugstore.com lost $16.42 on every order
for non-prescription goods."
`Lose a little on each sale, then try to make it up on
volume' is the classic formula for going broke. You didn't
have to be a soothsayer to see it coming.
Your correspondent, ready to put the dumbest money out of
its misery...
Bill Bonner
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Last modified: April 01, 2001
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