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THE DAILY RECKONING
Published Daily

 

Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

PARIS, FRANCE 
FRIDAY, 12 MAY 2000 

 

Today: BUSINESSES WITH WEBBED FEET

*** Happy Days Are Here Again...at least one happy day 
for TNT investors...
*** Take gold...please.
*** Poor Rudy has a heart...

*** After three days of declining prices, Wall Street was 
ready for a change. Besides, there was a reason to change 
direction. The latest report showed that retail sales 
fell by .2% in April, instead of rising .4% as expected.

*** Whoopee! You know what that means? It means the 
pressure is off the Fed to keep raising interest rates. 
Which means that the stock market can return to its 
preferred locomotion -- ascension.

*** So the wishful thinkers and cynical speculators bid 
up prices yesterday in an effort to stay ahead of the 
trend. The Dow rose 178 points. The Nasdaq went up 114 
points.

*** But does a .6% swing in retail sales in any given 
month -- especially April, when people have to pay their 
taxes -- really make any difference?

*** No, but it shows what kind of a market we're dealing 
with. No serious investor would buy or sell shares on the 
basis of this kind of information. Can you imagine Warren 
Buffett getting on the phone with Charlie Munger:

"Uh...Charlie...we'd better buy some more stock. Because 
retail sales are down. So Greenspan will probably ease 
off the rate increases. Shares might go up...."

*** Who would buy or sell a business based on a feeble, 
insignificant statistic...with a shelf life of less than 
24 hours? To many investors, stocks are not businesses, 
they're just electronic data...like Pokemon cards for 
adults...that you trade with your friends.

*** It's madness. But it's fun. And today, the PPI -- a 
measure of wholesale prices -- comes out. It, too, is 
likely to send the market reeling in one direction or 
another.

*** About 2,002 stocks advanced yesterday; 930 declined. 
There were 60 new highs; 72 new lows.

*** The dollar rose very slightly against the euro. Not 
much action there.

*** But take gold, on the other hand -- please. The 
yellow metal -- the ultimate competitor to both the euro 
and the dollar -- fell $2.20.

*** The CRB (commodities index) rose 1% yesterday -- 
boosted by a $1 oil price increase.

*** "You heard it here first," says "Real Asset 
Investor's
" Dan Ferris. "The top of the oil market 
occurred on March 8, when NYMEX spot crude closed at 
$32.10 a barrel." And because of a price band instituted 
by OPEC...the price will fluctuate between $22 and $28 
dollars a barrel. 

*** I argued yesterday that capitalism, as we have known 
it and as Karl Marx defined it, is doomed. But so what, a 
reader asked. The answer: the "new metrics" are based on 
the belief that this new age of capitalism will be very 
rewarding for investors. As a theoretical issue, this 
implies that an investor should be willing to accept a 
lower price/earnings ratio -- or less income from his 
investments -- because capital values will be rising. 
Capital itself will become more productive... 

*** Yet, if I am right, businesses might become more 
productive, but the source of the increase will not be 
the capital component -- but the knowledge component, 
which investors do not provide. Thus, even if the New 
Era/New Economy were a reality, investors still may not 
be able to profit from it. Instead, the people who would 
profit would be exactly the people who have already 
profited -- the entrepreneurs and the employees.

*** The democratic process becomes a greater farce all 
the time. Now we have the spectacle of Mayor Giuliani 
discussing not only his health, but also his marriage, on 
the front page of the "International Herald Tribune." "I 
am not interested in politics right now," says the 
candidate for the U.S. Senate. One gets the impression 
that the mayor has not yet fully mastered his trade. 
Otherwise, he would have cast his paramour, Ms. Nathan, 
aside...or at least hid her in a closet until after the 
election. 

*** Mr. Giuliani seems to be the victim of his own common 
indecency -- that is, the indecency that makes middle 
aged men want to leave their wives. It is a weakness, but 
a common one. And a source of great hope, if not always 
pleasure, to men all over the world. His opponent, on the 
other hand, along with her husband, seems to have risen 
above common indecency. They have scaled the peaks of 
indecency -- and breathe an air so thin and uncommon that 
few human hearts could survive on it. If you believe the 
reports, they are fully capable of shouting obscenities 
at each other...committing serial adultery, even 
rape...and still holding hands, clutching bibles and 
smiling for the cameras. The Clintons are real pros.

*** Among the achievements of the Clinton administration 
will be Janet Reno's attack on Microsoft. "Let's get to 
the real bottom line," advised the "Wall Street Journal" 
in an editorial on the "anti-trust" case against Bill 
Gates. "Washington's crusade against Microsoft has 
fulfilled its purpose, serving as a great lever to pry 
open the wallets of Silicon Valley. Where three years ago 
the technology plutocrats spent their surplus earnings on 
racing yachts and Ferraris and charity, now they 
patriotically send donations to Washington to support the 
fixer class and its retinue in the style to which they 
would like to become accustomed."

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* * * * * * * * * * * * * * * * * * * * * * * * * * * * * 
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * 

BUSINESSES WITH WEBBED FEET

"My mother...was a French prostitute...with webbed 
feet...My father...would make outrageous claims, like he 
invented the question mark...He would accuse chestnuts of 
being lazy..."

--Dr. Evil tells the 
story of his childhood 
to a support group

If the gains from the Bubble market of '98 to '00 were 
only "on paper," will the losses also be only paper ones?

That is the serious question I pose in today's letter. 

I also ponder the role of the past in determining the 
present and the future. 

"Character is fate," said Aristotle. Of course, to the 
ancient Greeks, character was everything. Almost every 
summer the free men -- mostly farmers -- called hoplites 
-- of the Greek city-states would be called out to do 
battle. Rarely trained, they followed a very simple 
battle strategy. They stood shoulder to shoulder, rank 
upon rank, and pushed toward the enemy. Every man counted 
on every other man to do his duty. To fight. To die. But 
never to run.

This, perhaps exaggerated, sense of duty to the community 
informs much of philosophy of ancient Greece. 

Even today, a person is hectored to pay his fair 
share...to pitch in and help...to take part in the 
process of politics that turns almost everyone into a 
fool, a stooge or a cynic.

And on Wall Street, short sellers -- who bet against 
their more numerous brethren on the long side of the 
trade -- are regarded with disfavor, and sometimes 
outright hostility. In times of financial stress - such 
as in the Malaysian markets of 1998 -- speculation is 
blamed for falling prices...and often banned. In some 
markets, usually the more primitive ones, short selling 
is never permitted.

But still, when prices are ready to go down...they go 
down. Yesterday Charles sch reported that its 
customers lost $56 billion last month -- or about 7% of 
their money. Not bad for one month's work. 

The Nasdaq is down about 30% from its highest point. And 
some of the shares formerly viewed as particularly high-
flying are now gliding at considerably lower altitudes -- 
and many are expected to hit the ground within months. As 
widely reported, a whole class of Internet companies -- 
the class of `97-'98 -- are about to run out of fuel. 
Unless there is an unexpected updraft of cash -- they 
will crash-land (or be bought out, merged or otherwise 
disappear) soon.

Not that there isn't plenty of money around. The venture 
capital people are raising and investing enormous sums. 
Recently, at least one of these firms -- OffRoad Capital 
-- is advertising directly to the public to find 
investors. 

One ad shows a distressed-looking man standing in the 
rain, looking in on what appear to be a group of happy, 
successful people. The poor man, for all his money, can't 
seem to get in on the good deals at the seed capital 
level. He's doomed to buy the stocks after the venture 
capital guys have taken their cut.

While the boom was in full explosion, venture capital was 
the place to be. The margins between start-up and the 
public markets were enormous. A company could be founded 
for a few hundred dollars. At the height of the Internet 
boom, an entrepreneur could raise a million or two of 
seed capital, set up a website, begin sending out press 
releases with incomprehensibly pretentious remarks and 
soon go public. If the fickle finger of the financial 
gods pointed in the right direction, the enterprise might 
be capitalized at a billion dollars. The venture 
investors became not only rich, but celebrity figures 
among the New Economy cognoscenti -- the latte-swilling, 
Armani-wearing, BMW-driving, McMansion-dwelling tres 
nouveau riche...who could read George Gilder without 
laughing.

But venture investing is not always such an easy 
enterprise. You might expect it to be more profitable 
than buying common stock -- because there's more work 
involved. Like owning ghetto apartments or a convenience 
store in a bad part of town, the return would have to 
compensate investors for the extra effort and risk 
involved.

And for every business that venture capital businesses 
backed -- many would never be profitable. That was the 
"hurdle" that venture capitalists used to have to jump. 
Businesses used to have to reach a certain level of 
profitability and stay there for at least three years 
before they were considered suitable for the public 
markets. That eliminated most projects. Because making a 
profit is tough. You have to offer a genuine service or 
product -- that people are willing to pay for. This is 
how the character of public companies was maintained. 

But in the `90s, the VC hurdle was lowered. It became 
possible to sell businesses to the public that had never 
made a profit -- and probably never would. The public no 
longer cared about buying businesses. It wanted Pokemon 
cards. Profits were no longer necessary. 

Not only did a business need no profits -- it didn't need 
any substantial operating history either. Just as modern 
art required no skill at art...modern business circa 1999 
required no business skill...or even a business. In a 
matter of months, an idea could be transformed into 
something that resembled a business -- like a rusty 
automobile on cinder blocks behind a West Virginia 
trailer resembles a work of "art." Even more 
unbelievably, people would pay as much -- and more -- for 
the imposters as for the real thing. 

Finally, the hurdle disappeared altogether in the mud. 
Greed was unleashed. Money was available for start-ups 
practically for free. The effect was to change the 
character of the companies that emerged. They began to 
grow webbed feet and imagine that they could do, or had 
already done, great things -- like invent the question 
mark. In pompous prose, they questioned the integrity of 
chestnuts.

I described a couple of these grotesque companies. Both 
MicroStrategy (down a lot) and Value America (down 96%) 
were once worth billions. Each developed its own freakish 
abnormality. 

But these were not the worst of the lot. The scoundrels 
involved in these businesses actually seemed to believe 
their hype and acted on their own delusions. Many other 
dot-com businesses are pure scams -- created by knaves to 
take money from fools. The founders, entrepreneurs and 
venture capitalists cut and run at the first adversity. 

Good begets good; bad begets bad. If character is fate, 
these businesses are doomed. 

But does the money go back to its rightful owners, as the 
old timers say of a bear market? 

Alas, I refer to "Anatomy of the Bubble," in which Garet 
Garrett described the aftermath of the '29 crash. The key 
to understanding the crash and the period that followed, 
he said, is to understand the character of the period 
that preceded them. Garret compares the bad investments 
of the late `20s to the building of the pyramids: 

"A delirious stock-exchange speculation such as the one 
that went crash in 1929 is a pyramid...Its stones are 
avarice, mass-delusion and mania; its tokens are bits of 
printed paper representing fragments and fictions of 
title to things both real and unreal, including title to 
profits that have not yet been earned and never will be.

"The labor that is lost," he wrote, "cannot be 
recovered... 

"You may think that since it was all a delusion on the 
profit side, the loss also must have been imaginary; that 
if nothing was added to the wealth of the country, 
neither was anything taken away. But that is not the way 
of it."

Nope. The lattes have been swilled. The imaginary wealth 
of the stock market boom has been borrowed against, or 
exchanged directly, for real wealth. And the real wealth 
has been consumed. 

Wishing you a beautiful spring weekend.

Bill Bonner



* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

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