*** 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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"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.
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Last modified: April 02, 2001
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