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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
WEDNESDAY, 6 DECEMBER 2000 

 

Today:  Cleansing The Investment Pool

*** On every investor's Christmas list: The Greenspan Put

*** Big Bottom sighting... Nasdaq enjoys its best day ever: 
A present from Mr. Bear...or a trap?

*** If I were Mr. Bear...bad earnings...the euro falls...
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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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CLEANSING THE INVESTMENT POOL


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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