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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

OUZILLY, FRANCE 
THURSDAY, 28 DECEMBER 2000 

 

Today:  Backlash Against Wall Street

*** The rally continues...for now...

*** A backlash against Wall Street...Blodget, Meeker...and 
other mountebanks...

*** Phillip Morris is smokin'...Amazon is 
choking...Women.com is croaking...and, of course, more!

*** The Santa rally continued yesterday. The Dow rose 111 
points. The Nasdaq climbed 43. 

*** The Dow looks pretty good. Twice as many stocks rose as 
fell - 2048 to 908 - on the NYSE. And it is widely believed 
that a rate cut by Mr. Greenspan in January will put stocks 
back in growth mode.

*** So, it is possible that the index will continue to go 
up, for a while at least. My guess is that the Dow will be 
undermined by a sinking dollar, falling earnings, 
bankruptcies and recession. Greenspan will cut rates... too 
little, and too late... But all of this is in the future.

*** Speaking of which, it is almost time for our Daily 
Reckoning Predictions for 2001. Stay tuned...

*** One of the predictions offered by Mark Gilbert, a 
Bloomberg columnist, is that there will be a "backlash 
against analysts." People will want to know why Henry 
Blodget, for example, maintained a "buy" on Amazon.com as 
the stock fell 85%...and then switched it to a "near term 
accumulate." They'll also be curious as to why Mary Meeker 
gives eBay an "outperform" rating, when the stock is clearly 
in a dead heat with AMZN and others for the title of one of 
the most dreadful disasters of the year. Is it because they 
really believe their own hype? Or because their corporate 
finance departments would nail their hides to the wall if 
they told the truth?

*** One of the best-performing stocks on the Dow this year 
has been Phillip Morris, which rose to $45.25 yesterday. I 
am happy to point this out because I suggested the tobacco 
company to you early last year - when people were sinking 
every available penny into the big techs and MO was 
considered hopeless.

*** While most stocks did well yesterday, the Internets 
continued their decline. TheStreet.com Internet index fell 
another 4%. Network Associates, a company specializing in 
software protection, fell 61% after announcing a loss for 
the 4th quarter of $130 to $140 million. 

*** Yahoo! and Amazon also lost ground. AOL dropped to its 
lowest level since Feb. '99...and Cisco - at $40 - has given 
up more than a year of stock gains.

*** The Index of Leading Economic Indicators fell 0.2% in 
November, after a 0.3% decline in October. It has fallen in 
6 of the past 11 months. 

*** "Heating Fuels Soar as Frigid Weather Blankets Northern 
U.S." a Bloomberg headline reports. The cold weather has 
turned natural gas stocks hot. Is it time to sell them? 
Maybe.

*** And this cheerful item from the San Jose Mercury News: 
"Nasdaq reflects road to '29 crash analysts warn." The 
article compares the Nasdaq of the last 5 years to the Dow 
of the five years running up to '29 and remarks on other 
similarities. 

*** Nasdaq losses have already taken $3 trillion out of the 
economy. Bringing the index back to a more comfortable P/E 
of 40 (or about twice the Dow P/E) would mean a drop of 
about 60% from current levels - or about another $2 trillion 
of nominal wealth.

*** Could the Nasdaq collapse on its own - while the Dow 
remains relatively untouched? Not likely. The stock market 
IS the economy. $5 trillion in losses cannot be ignored. 
That amount equals about $50,000 per family. People cannot 
take that kind of loss without changing their spending 
habits. They will buy fewer, cheaper goods and services - 
and postpone major outlays until things begin to look 
better. When will that be? Hmmmmm... 

*** Here's a hint from the dark side of the planet - 
"Japanese Gloom Deepens." After 11 years of a bear 
market/deflation/recession, earlier this year economists had 
begun to think Japan was on the road to recovery. Alas, 
consumer prices have fallen about 1% in 2000. The Tokyo 
stock market is very near its 1998 low...and yesterday, it 
was announced that industrial output fell 0.8% in the month 
of November.

*** What's wrong with the Japanese? Have they no central 
bank? Have they no knobs to turn, no pedals to push, no 
levers to switch? Maybe the principles of economic 
management don't work east of the Urals...or West of 
Honolulu? Or maybe an economy is not quite as simple a 
machine as most economists and investors seem to think. 

*** The dollar bounced very slightly yesterday. Remember, 
the 10- to 15- year cycle that has favored dollar-
denominated assets has come to an end. It is time to switch 
to anti-dollar investments.

*** The poor yield curve! It is "inverted." Should it get 
out....make some friends...have some fun? Nope. What this 
means is that short-term loans are cheaper than long-term 
ones. This is an anomalous situation - which has been a good 
indicator of coming recession. Normally, and reasonably, 
people want a higher interest rate on longer-term lending. 
The longer the term, the more that can go wrong. So, lenders 
expect to earn a higher rate of interest on longer-term 
loans to make up for the additional risk. When short term 
rates go higher than long ones, it means that credit is 
getting tight...with lenders unwilling or unable to make 
loans. They may be happy to lend the U.S. Treasury money for 
30 years at 6% - because they can be reasonably sure the 
treasury is good for the money. But they're not so sure 
about corporate 30-day notes. 

*** My friend John Mauldin reports that the yield curve has 
never been more inverted than it is now. "There should be no 
denying," adds Doug Noland of the Prudent Bear recently, 
"that we are in the midst of an historic and systemic 
collapse in credit quality."

*** The season, here in France, has been very mild. But this 
morning, we awoke to a dusting of hoarfrost. And Mr. Deshais 
tells us that it is expected to snow tomorrow. The kids are 
excited.

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BACKLASH AGAINST WALL STREET

In the early stages of the Internet bubble, we all had many 
chances to get rich.

One of them came to me in the form that was both especially 
absurd and especially promising.

"You gotta get in on this," said a friend of mine, a partner 
in a major investment bank. "This can't miss." My friend is 
no fool. He was not suggesting a buy and hold 
investment...but a buy and dump speculation.

But, alas, I decided to stick to my value investing, stick-
in-the-mud principles. 

At that stage of the blossoming mania, the most promising 
business plan buds were those of websites that would attract 
the largest number of eyeballs and sell the greatest amount 
of advertising. And thus did some shrewd hustler notice that 
a little more than half the eyeballs of this world belonged 
to a group of people theretofore relatively ignored by the 
techno geeks and slightly addled sci-fi prophets.

Women!

Of course! The concept was almost irresistibly preposterous. 
Soon, women would spend hours on womens' sites - kvetching 
about the men in their lives...exchanging 
recipes...retelling sad stories of their diets and skin 
tightening...their relationships...their bosses and co-
workers. And all the while, they would be buying 
things...directly from the site....cosmetics, vacations, 
clothes, insurance...you name it.

If ever there was a winning concept in the dot.com mania 
world, this was it. And if ever there was a winning concept 
in the business world, this was not it. 

For the only thing that would supposedly attract women to 
this site - rather than to any of the thousands of others 
that might provide more specialized attention - was that 
they were not men. The winning concept in business is to be 
able to identify a particular group and provide them with 
goods and services better than anyone else. The losing 
concept in business is to try to sell everything to 
everybody - with no competitive advantage in any niche. And 
the Internet was supposed to amplify the need for 
specialization - making it possible to segment the market in 
smaller and more particular ways.

Women are not `everyone.' But they are every other one. And 
yet, here was a proposal whose business premise was nothing 
more than the idea that the distaff half of the human race 
would be happy to do their inter-networking on a 
condescending site which identified them purely on the basis 
of their fair sex. 

"You've got to be kidding," I replied to my friend. "There 
is no way that will ever work."

Until about two years ago, it was customary for venture 
capitalists to fund start-up enterprises until they proved 
themselves. A company was expected to have at least three 
years' of profits and growth before it went public. Until 
that time, the VC investors took big risks - but they 
watched their investments closely and stood to earn huge 
profits if they succeeded. 

But as the Internet mania flowered, the investment banks 
discovered that they could take companies public even 
without proof that the business models worked. Morgan 
Stanley collected $2.6 million in fees for laying Women.com 
shares on their clients at $10 a share near the end of 1999. 
Goldman Sachs did even better selling Candace Carpenter's 
Ivillage shares at $24 apiece in the first offer... and then 
a secondary offering at $28 each.

A few months after Women.com went public, the $50,000 in 
seed capital I might have invested in the project was worth 
about $5 million. In this case, as in so many others, I 
missed my chance to get rich. 

But now, yet another 9 months have gone by, and Bloomberg 
columnist Christopher Byron updates us on what happened:

"In the last year, the financial underpinnings of these two 
companies - propped up with IPO money from the latter stages 
of Wall Street's great dot-com investment bubble of the 
1990s - have all but collapsed, with both concerns now 
looking, for all the world, to be in a flat-out race to 
extinction. Coming down the home stretch, it is almost 
certain to become a photo finish."

Women.com was worth almost $1 billion a year ago. Since 
then, the company has lost 98% of its value. Ivillage stock 
has sunk 97%. It too was worth nearly a billion dollars at 
the peak of the Internet mania. Now, it has a market value 
of $22.3 million.

Neither company has much to show for all the money they've 
spent and all the hype they've generated. Each has some cash 
left, but that is about all. Byron calculates that Ivillage 
should have a book value - based on the cash in the till - 
of no ore than about $1.50 a share. Women.com has less than 
half that amount. They are each burning cash at the rate of 
$10 million per quarter...and both are expected to run out 
of money before the end of 2001.

The business model turned out to be as comic as it first 
appeared. Women.com's revenues are falling - with only $8.9 
million in the most recent quarter. "At that rate," says 
Byron, "Women.com will, for all practical purposes, be 
generating almost no revenue at all by June. Meanwhile, its 
losses keep widening, from $15.5 million in the three-month 
period ended in March, to $30 million in the September 
quarter."

Ivillage is not doing much better, when you look behind the 
numbers, says Byron. The company "is now drowning in charges 
and write-offs. In 1999, the company bought a bunch of 
women's issues-type Web sites for $156 million in mostly 
IVillage stock, then wrote off roughly $25 million of it as 
goodwill. Now, it has written off almost all the rest - some 
$98.1 million in all - as being basically worthless."

But Candy Carpenter may have gotten another opportunity to 
make some money on the Ivillage concept. According to Byron, 
British supermarket chain Tesco has given her $20 million to 
start up an Ivillage site in England.

Bully for Ms. Carpenter! But soon, investors may be asking 
Goldman Sachs and Morgan Stanley how come they sold shares 
in companies that were obviously hopeless.

Your correspondent,

Bill Bonner


For more on The Daily Reckoning please visit:
http://www.dailyreckoning.com


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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...

"My small portfolio has followed true to my wife's description of my
investment philosophy, "buy high and sell low." However, that has changed since I started religiously reading DR... I credit this reversal of fortune directly to The Daily Reckoning"
(Timothy)

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serious warnings and the state of the market with gentle humor"
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get"
(Joe)

"Your statements and philosophy have kept me from storming into the market and in fact [I'm] making some money in put options" (Frank)

Open your mind with the most stimulating e-mail newsletter that you'll ever read, The Daily Reckoning. To receive this free daily email newsletter click here now.

 
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Last modified: April 01, 2001

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