*** The rally didn't hold up...an amateur's market
*** E-tailers getting ready for "Going Out of Business"
*** Suicide by passenger train
*** "The rally didn't hold up," said a director of Wit
Soundview in a Reuters report, "because there wasn't a
lot of volume." Typical of bear market rallies, there
weren't enough people with enough money to sustain
Tuesday's surge in prices. So it petered out yesterday.
*** The Dow fell very slightly -- 4.8 points. The Nasdaq
registered a 58-point decline.
*** But this is amateur's market. And the amateurs are on
full "data watch" this week. Today the numbers from the
purchasing managers come out -- showing the increase in
prices at the wholesale level. And tomorrow the jobs data
arrives. Anything could happen.
*** Home sales fell 6.2% in April. Consumer spending
slowed, too...though it is still rising at 7.5%,
*** "The one truly distinctive feature of the New
Economy," wrote Robert J. Samuelson recently, "is that
consumers, as a group, have virtually stopped saving. In
1991, the personal savings rate (savings as a share of
after-tax income) was 8.3%; in 1999 it was 2.3%."
*** Samuelson notes that even with computers,
productivity gains were larger in the 1950s than in the
1990s -- a point I've made to you often. Unemployment,
too, was lower in the late-`60s than it is now. So what's
new about the New Economy?
*** Well, Samuelson, goes on: "Every percentage point
drop in the savings rate is worth about $66 billion in
extra consumer spending. Americans may still make
deposits in savings accounts or 401(k) plans. But
consumers offset these savings by borrowing or by
spending stock profits. It is this spending spree --
based heavily on people's stock wealth -- that has
expanded the economy, profits and hiring..."
*** But spending money does not create wealth -- it
destroys it. It creates the illusion of wealth, in the
form of economic activity...and consumption. But real
wealth is created by saving and investing -- not by
*** But, bulls will reply, billions of dollars ARE being
invested in the New Economy. More than ever before,
venture capital funds...and ordinary stock buyers...are
contributing to the world's wealth of capital. More
entrepreneurs are starting up enterprises. More tech and
business innovations are being tested.
*** Alas, when a dead-end dot-com rents office space,
buys equipment, hires people with body piercings and
orders out for pizzas, capital is not created -- it is
consumed, just as it is used up by people who take a
holiday in Paris. For the world's wealth to increase,
there must be a return on the capital invested. The new
companies must produce a benefit that society is willing
to pay for...and willing to pay enough for so that the
company can clear the "hurdle rate" -- returning enough
profit to make the whole thing worthwhile. When the
hurdle rate goes to zero -- as it did for the Nets and
techs -- the whole thing becomes an exercise in self-
deception. Investors pretend to invest. Entrepreneurs
pretend to create wealth. And stock market indexes
pretend that everyone is getting richer.
*** According to Forrester Research, which keeps track of
trends in the Internet business community, most of the e-
tailers operating entirely on the Internet will be out of
business within 12 months.
*** The whole thing -- the boom, the New Era, the New
Economy, the explosion of new wealth supposedly created
by new technology -- is an imposter.
*** When will the counterfeit be exposed? "If the market
doesn't upset consumers," says Samuelson, "the boom
continues. If the market terrifies consumers, the boom
stops. Between those two extremes, there are endless
*** The popular press is catching on to many of the
themes we've been discussing here for months. David
Dreman wrote an article in April's "Forbes," entitled,
"What New Economy?" E-tailers, whose sales are growing
strongly, "accounted for only 0.6% of all retail sales in
1999's fourth quarter," he says. And, "in the four years
that online booksellers have been in operation,
Amazon.com and the other Internet sites have captured
only 8% of the retail book market. They have accumulated
losses in the billions. Hardly...a category-killer...
"At the end of 1999, 400 large Internet-related companies
had a market value of $1 trillion (27% of the Dow). This
group reported combined revenues of $29 billion; that's
only 2% of the Dow's revenues. More tellingly, the
Internetters will collectively lose $9 billion this year,
while the Dow stocks will probably earn close to $150
*** Oil went down by $1.34 a barrel after the Saudis let
it be known that they, too, would respond to the
"automatic" trigger (an oil price over $28) by pumping
*** And bonds rose. The yield on a 30-year T-bond dropped
to almost 6%. Bonds won't make you rich overnight, but
they're not a bad place to sit out a bear market. A
portfolio of bonds could turn the tragedy of high losses
into the entertainment of low comedy.
*** While the rally stalled, it also inexplicably
broadened out. There were 1,719 advancing stocks
yesterday, as opposed to only 1,267 declining ones. And
in a remarkable departure from recent custom, 89 stocks
hit new highs; 54 hit new lows.
*** The Japanese are throwing themselves in front of
trains. Suicide by train is such a problem that they're
putting up mirrors so that, as a railway official put it,
"people will reflect before acting."
*** There is no shortage of distractions in Paris. But
even out here in the middle of nowhere -- Addison and I
have to use iron discipline to keep focused on our work.
Our office was invaded by a chicken. There being no
representatives of the Animal Rights League present, I
booted it out of the window... Then Mr. Deshais insisted
upon showing me his latest oeuvre -- a row of tomato
stakes that looked as though they had been lined up with
a laser transit. They were so absolutely straight and
true, I marveled at how precise a drunk can be.
+ + + + + +
In a recent article appearing in the "Wall Street
Journal," Fleet Street Letter's Marc Faber notes that "no
investment mania has ever ended without peak prices
collapsing by at least 70%. In other words, the recent
volatility of the Nasdaq and other markets is only the
To find out how it ends, and which investments will hold
up over the course of a volatile summer, please read our
special report on the collapse of the dot-economy by
+ + + + + +
The final academic stage of the teenaged years in France
is called "Terminale." It is the last year of the French
equivalent of American high school, but typically at a
level more closely parallel to the second year of a U.S.
After Terminale, there is a big hurdle for the students
to jump -- the baccalaureat, a national test so dreaded
and so important that people spend years trying to
achieve a passing level. Without the "bac," girls fear
they are doomed to be charwomen and boys expect they will
spend their lives on the dole.
Still, the Terminale students were in high spirits
yesterday -- which was, the last day of school for them.
Maria reports that a group of girls dressed up in the
most abbreviated costumes she had ever seen on the
streets of the 16th arrondissement -- our conservative,
bourgeois neighborhood. To the accompaniment of an
impromptu band, they sang Tom Jones' big hit, "Sex Bomb,"
in their Franglais accents, swinging their hips and their
arms as though they were about to become unhinged.
Jules, meanwhile, reports that a group of Terminale boys
marched through the streets with a live chicken, whose
significance Jules failed to detect, throwing eggs.
Passers-by ducked into shops and around corners to avoid
Ah...the high spirits of youth at the end of its most
"A common feature in the terminal phase," writes Marc
Faber, speaking of bubble stocks, rather than bubble-
headed teenagers, "is a sharp rise in credit demand
(margin debt), huge volume in the most speculative
sectors of the market and extreme volatility."
Volatility, excess, boisterousness -- how better to
describe the terminal phase -- whether of bubbles or
teenagers? And don't forget uncertainty...
"During the terminal phase," Marc continues, "the advance
becomes very narrow and dangerously concentrated...with
just a handful of stocks reaching all-time highs, while
most stocks are already in well-established downtrends."
"Investment manias involve a great deal of uncertainty.
The discovery and exploitation of natural resources, the
opening of new territories, the application of new
inventions, or the introduction of new products [or the
raising of a child...] all involve a high degree of
uncertainty as to their future profitability. Thus,
bubbles proliferate particularly among assets and
investment themes whose value is almost impossible to
Marc reminds us of the auto and airline industries. Of
the hundreds of U.S. companies that entered the field,
only three remain. Those three will not disappear easily
-- there are huge barriers to entry that keep competitors
out. On the other hand, their growth is not likely to
surprise the world, either.
Airlines, meanwhile, attracted a lot of competition over
the last two decades. But 129 airlines filed for
bankruptcy in the period. And according to Warren
Buffett, during the entire history of the airline
industry, investors -- overall -- never made a profit.
What will the Internet and other new technologies
produce? "Even if one could reliably forecast the growth
rate, final market penetration and profitability of the
Internet," Faber writes, "who can know which companies
will survive and thrive, and which ones will fail?
Possibly the most successful future Internet players have
not yet been formed."
"The uncertainty..." he says, "increases the volatility
in the terminal phase." The stocks could be worth a lot.
And guess what. They will be.
The terminal phase of a bubble marks the transition from
infinity to nothingness. Expectations that were nearly
limitless are reduced to hopes that are almost
negligible. Values that formerly were thought to have no
ceilings are discovered to have no floor. Investors who
had expected to make a fortune are delighted to get back
a fraction of their original capital.
Of course, there is no guarantee that we have reached the
terminal phase. This teenaged market could have a year or
two left at home -- struggling to pass the bac.
But the mania seems to be winding down. The e-tailers
certainly seem to have reached the end of their growing
years. Drkoop looks terminal. Many other companies still
have a pulse but have sustained such brain damage that
they will expire as soon as they are taken off life
Even overseas, where the bubble has been generally less
inflated, Boo.com collapsed in the United Kingdom.
WorldOnline, the big Dutch Internet play, has flopped.
Softbank and Hikari Tsushin, in Japan, are down so much
their executives are considering a one-way visit to the
train station...perhaps to reflect on what happened...
But, writes Faber, "it is conceivable that the present
bubble will mutate once again..."
"I can only add," he concludes, "that no bear market
beginning was ever perceived as such, but always as a
correction that would be followed by new highs."
So stay tuned...as the greatest, gaudiest, most
extravagant and absurd story of our time...continues to
And if you are a teenager at "Terminale..." or have a
teenaged heart...go for it. Throw the eggs. Swing the
hips. Soon you'll have to study for the "bac"...or in
America, pay your college loans. Soon the infinity of
your future will be the reality of your life. And your
infinitely rich Internet stocks will be no further cause
Your still-adolescent scribbler,
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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Street Letter -- If you'd like practical advice about
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Last modified: April 02, 2001
Published By Tulips and Bears