*** 50% level fails to hold...Greenspan's trap
*** Has the dollar finally topped out? Has gold bottomed?
*** People are traveling more.
*** Can the Dow hold above the critical 50% retracement
level? No. The Dow fell 79 points yesterday, bringing it
back down below 10,759. If it cannot climb back above that
level, and stay there, it suggests (at least to Dow
theorists) more falling prices ahead.
*** Of course, more falling prices is what we expect
anyway. Lacking any better explanation, we should assume we
are working our way down from a very great financial
height...with lots of dangerous cliffs, rock slides, and
snowfields to cross. One way or another, we'll end up in
the valley below. You just want to try to avoid losing your
life savings in the descent.
*** Every major bull market sector and indicator has topped
out. The latest is the dollar itself, which seems to be
falling against every major currency...as well as its non-
paper competitor, gold. The greenback, recently at over 7
francs, bought 6.9 francs on Monday...and only 6.87
*** The Nasdaq fell back yesterday, too - 65 points. The
decline is being blamed on remarks by two separate Fed
officials - Robert Parry in San Francisco, and Laurence
Meyer speaking to the Boston Economic Club in Boston. Both
officials warned that the Fed - after 6 hikes, and a total
of 1.75% in increases - may not be finished.
*** I remembered Lord Rees-Mogg's comment in London last
month. He said that the Fed was "locked in" to a course of
action it could not alter. Greenspan considers dangerous
inflation to be a level of price increases sufficient to
change peoples' behavior. Though he says he's not targeting
stock prices, it is precisely the bullish sentiments of
investors - the persistent dreams and stubborn optimism
that I have described in these letters - that cause them to
be so carefree with their money.
*** If you can borrow money at 8%...and make 15% (minimum)
in stocks - what is the rational thing to do? Borrow.
Spend. Invest in stocks. The Fed cannot reverse this
bullish bias until it has crushed investors' exaggerated
*** Meanwhile, bad news is good news. Every hint of a
slowing economy...weaker sales...rising
unemployment...lower prices...is cause for hope that the
Fed may not need to tighten any further.
*** Gold rose $3.60. But just as stock investors are
stubbornly optimistic, gold investors are obstinately
pessimistic. The gold producers barely move.
*** Despite lower indexes, 1521 stocks advanced yesterday,
compared to only 1391 declining. 48 stocks hit new highs;
only 30 hit new lows.
*** So, it was another crazy, mixed up day.
*** "Despite far more sluggish economic growth and near-
zero interest rates in Japan," says Dr. Kurt Richebacher
"the yen has rocketed back in the currency markets, even
against the super-strong dollar." Foreign investors believe
that Japan, ten years after the bubble burst, must surely
be on the mend. Au contraire, Richebacher says...
*** Kathleen Peddicord, Editor of International Living, is
visiting. So she, Addison and I went out to the Brasserie
Lipp on Blvd. St. Germain for dinner. The place - made
famous by Hemingway - was full of Americans. They seem to
be filling up every restaurant and caf� on the Left Bank.
*** "People are traveling more," said Kathie. Why? Weren't
electronic communications supposed to make travel less
necessary? "The Internet has the funny effect," said its
co-founder recently, "of increasing the amount of travel."
*** The funny effect results from the need people have not
merely to write to one another - but to communicate.
Written expression is only a very narrow, limited part of
communication. People need to see each other, to hear them
speak, to see how they react, how they dress and how they
sweat and stutter. They need to talk casually - and
spontaneously. In the give and take of a real conversation,
you learn things that you would have never thought to ask.
*** What else is worth reporting? Well, today is the
anniversary of the crowning of Louis 14th, The Sun King of
France, in 1654. More important, Anna Kournikova, the
Aphrodite of the tennis courts, the Princess of
Pulchritude, turns 19.
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Analysts and investors have speculated about Amazon for
years. The stock was thought to be worth $113 last
December. Yesterday, investors seemed to think it was worth
less than half that amount, down almost $4 from the
The value of a stock is determined, ultimately, by the
stream of earnings it will produce. Even Internet stocks.
"Valuing dot.coms," says a recent report by consultants at
McKinsey & Co, "...the best way...is to return to economic
fundamentals with the [discounted cash flow] approach."
But Amazon, the great big river of Internet reverie,
produces no stream of profits. Not even a trickle. It is
hard to discount a flow of cash that doesn't exist.
And yet, it was the non-existence of cashflow that made
AMZN and so many other Internet companies so attractive.
Lacking facts, investors were left to use their
imaginations. Cashflow could be anything you wanted it to
be. This week, Barron's described how one analyst, Jamie
Kiggen, with Donaldson, Lufkin & Jenrette, used his
imagination to come up with a 'target price' for Amazon of
$140 a share. Yet, as we will see, Jamie was not merely
imagining - he must have been hallucinating.
I have written about Jeff Bezos' creation, Amazon.com,
often. The company has moved through the entire landscape
of InternetLand mania, like a man selling replacement
windows through a poor neighborhood. From the glacial melt
source...high in the Andes of technological innovation and
speculative imagination...to the murky depths of the
Gildered Age and the absurd pretentions of the Cluetrain
Manifesto...to the bug-infested jungle of competition and
creative destruction...to the frauds of the first mover
advantage and hedonic price measures...to the myths of the
New Man, New Economy, New Metrics and New Era...right down
to the delta of washed out dreams, where all these hyped-up
humbugs eventually settle in the mud...
The great big, river of no returns, Amazon.com runs through
And never, during this entire spell of absurdity, inanity
and chicanery, could anyone say with any assurance what the
company was worth. In the place of a bottomline, which
might be multiplied to produce a meaningful price
comparison, AMZN had only a sinkhole.
"In the first three months of the year," writes Alan
Abelson, "on sales of $574 million, it had a net loss of
$308 million and an operating loss of $198 million." So, on
a not-quite doubling of sales in this year's first quarter
compared with last year's comparable span, Amazon's
operating loss came close to quadrupling. We can understand
why that disqualifies the company as a 'momentum story,'
but we're a little puzzled how it qualifies it as a 'growth
Abelson points out that AMZN has $1 billion in cash and
securities. But against that, it has $2 billion in debt, an
accumulated deficit of over $1 billion and only $25.6
million in stockholders' equity. By the end of this month,
that equity should have disappeared altogether.
Lacking the fulcrum of profits upon which to lever a
reasonable price, a number of approaches have been used
over the years to come up with an unreasonable one.
Remember 'eyeballs'? The visual portals were once
considered a means of establishing the value of an
Internet stock. So was 'stickiness' - the amount of time
the eyeballs stayed glued to the site. There was also the
convention of merely multiplying the rate of sales growth.
But, finally, the confederacy of dunces that passes itself
off as stock analysts is coming back to fundamentals. They
are beginning to value Internet companies the same way
publishers value a subscriber - in terms of lifetime value.
Both publishing companies and Internet companies operate
on the same basic premise: they spend money to bring in
customers. Then, they expect a stream of income (sales,
renewals, advertising) from each customer. The value of a
company can be determined simply (or not so simply)
calculating the net value of each customer over the
lifetime of the relationship and multiplying by the number
Amazon has about 15 million customers. But how much is each
one worth? Last February, Jamie Kiggen dreamt his way to a
figure of $1,905. Hmmm...that sounds a little high...in an
industry noted for aggressive competition and razor-thin
margins...so thin, in fact, that Amazon's margin is
negative, minus 39%; it loses money on each sale. How could
it possibly make nearly $2,000 per customer? It couldn't.
The idea is preposterous.
Interestingly, Kiggen subscribed to the idea of lifetime
value analysis. The value of a company, he wrote in 1998,
"is its ability to attract, retain and profitably service a
set of customers." He even built a model to quantify these
things. But, for whatever reason, probably because it
showed how worthless Amazon really is, Kiggen seems to have
abandoned his model.
Fortunately, Barron's found another analyst, Eric Von der
Porten, of Leeward Investments, a California hedge fund,
with less of an attachment to the big river. Von der Porten
used Kiggen's own model, and figured the lifetime value of
each customer at just $26. Multiply that by the number of
customers and you get a capital value for the company of
about $440 million - or a stock price of about $1.25.
Then, Von der Porten made the same calculation but using
his own model. This time, he came to a value of $35 per
customer - putting a price target for the shares at about
$1.60. Either way, it's a long way from Kiggen's target of
$140, or even today's $50 price. A long way down, that is.
Jeff Bezos would argue that the models are wrong. He would
say that it is too early to try to put a value on Amazon.
Because he is not even trying to make a profit. As he
explained to Playboy, "we are a customer store."
He does not mean that AMZN sells customers. He means that
rather than focus on making a profit or even making a
product, AMZN focuses on the customer. This, then, must be
the final conceit of the Internet Age - that these
companies put the customer on a higher plane, and perhaps
on that basis alone, they deserve to be judged in a
"I placed an order [from Amazon] for one book," writes my
friend John Forde, "...two jazz cds (Coltrane and Davis),
and one CD featuring Bossa Nova guitarist Joam Gilberto
accompanied by Stan Getz. The Gilberto CD is apparently
hard to find. Instead of telling me that, they held my
whole order... for over a month now. When I wrote to ask
them what the hold up was, I got an e-mail back from a
customer service rep that very nearly blamed the
mishap on me for ordering something obscure. Since then,
they've agreed to send me the balance of the order and hold
the charges on the undelivered CD until it comes in. That
was last Wed. It still hasn't arrived."
Your correspondent in Paris,
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Last modified: April 02, 2001
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