Deathwatch

A few months ago, Gary North reminds us, the cover of Money Magazine told investors how to get rich:

Tech Stocks: Everyone’s Getting Rich! Here’s how to get your share.

That should have been a tip-off…when ‘everyone’s getting rich’ – it’s time to sell, not to buy.

“A week later,” Gary continues, “the Nasdaq peaked. Now the mania is faltering. One sign is the enormous volatility of stock prices. On October 25 Nortel Networks fell 28% in three hours… Why? Because it announced earnings of 18 cents per share…’ beating Wall Street estimates of 17 cents a share… But its revenue ‘fell below analysts’ expectations.'”

Investors are no longer in love with techs and dot.coms. In fact, the relationship has gone a little sour. At times, it seems that investors are just waiting for an excuse to dump them…like a man waiting for an old car to break down so he’ll have an excuse to buy a new one.

Owning techs is no longer cool. In fact, it is as likely to be a cause of embarrassment as pride.

If, a year ago, you had told someone that you were loaded up with Intel, Cisco, Nortel, Amazon, Dr. Koop and the other ‘must own’ shares of the Information Age, and you would have immediately signaled that you were forward- looking, successful…maybe even rich.

But now, the same statement will provoke looks of pity and contempt – the kind of looks that are normally given to people who forget to attach the cords to the bungee before they jump. “How could you be so stupid?” will come to the minds of your interlocutors, if not to their lips.

The collective mood that drives stock prices has changed. Several websites have sprung up specifically to mock the losses in the dot.com/tech area. Instead of marveling at the new tech and net breakthroughs of the New Economy – as did the aforementioned issue of MONEY MAGAZINE – these sites watch ‘burn rates’ and estimate when companies will run out of money. As Gary North put it, “The venture capitalists will become vulture capitalists. They will buy the bankrupt mistakes of other venture capitalists for pennies on the dollar.”

One of these sites is called Deathwatch. Dr. North quotes from the homepage of October 16:

“Most of the stocks on Deathwatch are in the tank, just like we predicted. Not that this is rocket science. All we do is look at cash flow. When you run out of money, you’re in trouble. The incredible thing is that, for a brief period in 1998 – 1999, people believed otherwise.”

“Some stock graphs on Deathwatch have flat-lined. Trading in those stocks has ceased. We’ll be seeing more of those,” says Deathwatch triumphantly.

Ray DeVoe surveyed the carnage in mid-October.

AOL – down 44%

AT&T – down 59%

Cisco – down 39%

Dell – down 61%

Hewlett Packard – down 38%

Intel – down 52%

Microsoft – down 55%

Lucent – down 76%

Oracle – down 33%

Worldcom – down 59%

Yahoo – down 73%

Ray discovered that $2 Trillion of market capitalization had been lost in just 14 of the biggest, most popular tech stocks.

Smaller companies suffered even greater damage:

Breakaway Sys. (seems to have broken down) – down 96%

MicroStrategy (now with a micro cap) – down 93%

Palm (which seems to have lost its pilot) – down 71%

Priceline – down, down, down 97%.

Gary North quotes Christopher Byron with a similar recitation of the wreckage on Oct. 23:

“Almost all advertiser supported Internet stocks have similarly collapsed,” wrote Byron. “24/7 Media, Inc., an Internet advertising shop, has dropped 89 percent so far this year, to about $7. DoubleClick Inc., the leading Internet ad agency, has fallen 90% to $12. Even Yahoo, Inc., the largest online search service and bluest of the blue-chip Internet stocks, has dropped 74 percent since Jan.1, to $55.25.”

“All business-to-consumer Internet stocks have crashed,” continues Byron, and “Almost all business-to-business stocks have tanked.”

The Financial Times today carried an article about Lastminute.com, whose shares dropped below one pound yesterday. The company made its co-founder, Martha Lane- Fox, famous as “the best-known woman in the dot.com world.” But Lastminute.com is down 80% from its peak and is now a penny share – where probably most of the surviving dot.coms will end.

“What major financial columnist or economic forecaster predicted any of this in January,” asks Dr. North.

“The U.S. stock market mania has captured the financial experts,” Dr. North continues, “as thoroughly as it has captured the investors.”

And it is far from over. The Nasdaq 100 still has a P/E ratio of 125 – with a lot more downside and many more deaths to watch before health is restored.

Lastminute.com, though now a penny share, still has 90 million pounds in cash. At their present burn rate of 4 million per month – they can survive for nearly two years. Perhaps in that time they will even discover a way to make money.

And the company still has a market capitalization of 150 million pounds. How much will the company be worth if and when if finds a profitable business model? Maybe 10 million pounds. Maybe nothing. But the deathwatch on the tech sector won’t stop until the rattles and wheezes have ended, last rites are performed, and the corpses are finally dumped in Potters field.

Hallelujah, even unto the grave.

Your cheerful, caring correspondent…

Bill Bonner

Paris, France November 9, 2000

*** Mr. Market is full of surprises. On Tuesday analysts were almost unanimous – whoever won the election… Wednesday would produce a rally.

*** Well, Wednesday came and went. Neither Mr. Bush nor Mr. Gore had won. And the market did not rally. Instead, the Nasdaq fell more than 5% – or 184 points. The Dow was down too – 45 points.

*** You have to admire Mr. Market – he always seems to have some tricks up his sleeve and always finds new ways to make fools out of us.

*** Take poor Henry Blodget – the Merrill Lynch Internet analyst who never met a dot.com he didn’t like. He was bullish when the dot.coms hit the market as IPOs. He was bullish when prices shot up into the stratosphere. And he’s still bullish – now that they’ve come back down with a thud.

*** For example, Mr. Blodget was bullish on Pets.com when it trading at $14… and then, after the stock had fallen about 90% – he downgraded his rating from “buy” to “accumulate.” If you wanted to accumulate shares you certainly could have gotten a lot of them. They were trading at only 8 cents on Tuesday when the company announced that it was putting itself to sleep.

*** Of course, the e-pet lovers did everything they could do to save the company. But, to paraphrase a NY Daily News headline from years ago: Wall Street to Dot.coms: DROP DEAD. More below…

*** Meanwhile, Priceline.com is also in the news as another key executive announced her departure. Fortune Magazine’s 2nd most powerful woman in business, Heidi Miller, said she was leaving last week, after 9 mo. in the dot.com world – and about a 90% collapse of the stock price. When Heidi joined Priceline.com things were much different. The financial media wondered how Old Economy companies would be able to keep talent in the face of competition from the stock options and glamour of the dot.com world. Now we know the answer. When the going got tough for Ms. Miller, she got going – and will probably end up right back in the Old Economy where she began.

*** “The American people have now spoken,” Bill Clinton is reported to have said to the NYTimes, “but it’s going to take a little while to determine exactly what they said.”

*** With the election still in doubt, analysts described Wall Street yesterday morning as a “wait and see situation.” But investors could not wait to dump tech shares. Cisco had let the cat out of the bag: inventories were piling up – look for weak sales ahead. Cisco fell more than $4 yesterday. Broadcom sold off by $24.

*** The whole sparkling spectrum of the tech rainbow clouded over yesterday. And a few companies, such as Priceline.com, mentioned above, plunged into darkness. Priceline.com – the name-your-own-price auction site – fell $3.25.

*** 1301 stocks advanced on the NYSE yesterday. 1477 declined. There were 86 new highs; 38 new lows.

*** The dollar rose – with the Dec. Dollar Index up to 118. The euro, of course, fell – but it still above its previous lows.

*** “Today, Europe’s central banks sit on a huge dollar hoard of $222 billion,” writes Dr. Richebacher. “One of the arguments against selling dollars is that it would come at a heavy cost to the ECB’s exchange reserves. But what is it that makes these reserves so precious? … Nothing but foolish thinking.”

*** In fact, Richebacher wonders, “what would happen to the euro-dollar exchange rate if the ECB declared its dollar reserves ‘excessive’, and decided to unload about $50 billion? To be sure, the mirage of dollar strength would vanish within minutes. It would cause panic. Under a system of floating exchange rates, such a decision appears rational.”

*** Oil fell slightly. Gold rose 70 cents.

*** The election is still in doubt. But whoever wins may turn out to be the big loser – perhaps the Herbert Hoover of the 21st century. William Fleckenstein explains:

“When millions of Americans realize that not only are they not going to be rich soon, but they may also have problems keeping their jobs and retiring at all, whoever is in power will be blamed.

“[I]t is almost preordained …given the size of the bubble that has been created and the number of participants that have become involved. The stock market is the economy. It is on shaky ground and bad things are going to happen. In my opinion, it is not debatable and the die has been cast.”

*** “Those whom the gods wouldst destroy are granted their first wish.” That warning from ancient Greece may apply to presidential contenders as well as American consumers looking for something for nothing. American conservatives, voting for George W. Bush, could find their worst nightmares realized – as predicted by William Rees-Mogg more than 9 months ago. Lord Rees-Mogg guessed that Republicans would win the White House – but that they would be destroyed by the inevitable collapse of the great financial boom.

*** Then, the nation, troubled and bitter, would turn to the junior senator from New York for presidential leadership in the 2004 election: Senator Hillary Clinton.

*** But we will have to wait and see.

*** One DR reader was disturbed by the logic of democracy. His idea, stripped of its puerile slogans, is that people who resent taxes are selfish and uncaring. And yet, if this same reader were confronted by a group of thugs in a bad neighborhood, he would probably be offended if they took it upon themselves to redistribute his wealth. Isn’t it amazing how collective thinking transforms grand larceny into a virtue? Even more remarkable is that the voter, like the thug, gets to express his own virtue collectively, with other peoples’ money …and thus relieves them of the need to actually be kind to the poor fellow next door.