The Internet Mania, R.I.P.
Finally, the mania that you’ve been reading about in theseletters for so many months has made the front page of the world’s most prestigious financial newspaper – The Wall Street Journal.
“What brought on the mania?” asks the WSJ reporter. “Some answers lie in the murky realms of mob psychology, the human capacity for denial, the get-rich-quick mentality – factors in speculative frenzies since the days of the tulip. But to an unusual degree, the Internet bubble was a product of basic avarice and tactics that smack of the boiler room. From Wall Street pros to fledgling day traders, all joined hands in a giddy game of lowering standards, pushing out IPOs and trumpeting prospects, with little regard for a company’s true-longterm – that is to say, more than three months – outlook.”
The WSJ article tells the story of companies such as Theglobe.com, Career Builder and Audible, Inc. Theglobe.com, for example, was considered too tiny and unproven to take public when the idea first occurred to Credit Suisse First Boston executives. And “it wouldn’t have happened if bankers hadn’t changed their rules.”
But changing the rules is precisely what the times seemed to call for. Theglobe.com went public at $9 a share…and for one glorious moment the firm was judged to a $1 billion business, as the stock rose to $97.
Since then, the bubble burst and now you can pick up shares of Theglobe.com for less than $2. “Internet stocks as a group, valued at $1.4 trillion at their March peak,” says the WSJ, “havelost 40% of that – erasing almost as much paper wealth as the 1987 crash.”
Of course, I am not surprised that the Internets have crashed, nor should you be. It is one of the few predictions I don’t have to apologize for. But what is startling is the blithe way the investorshave carried on. The Internets, I may now need to remind you, were considered the main feature of the New Era Economy.
Now they don’t seem to matter. Everyone seems to have realized that Internet stocks developed into a bubble… and all seem to beglad that the bubble has finally burst.
“We all knew we were going to get a big kahuna correction at some point,” says a fund manager in the WSJ piece. With the bubble out of the way – fund managers and investors believethey can return to doing what they do best – making money in stocks.
Not only is the Internet bubble cleared out of the way – so is the market’s reliance on the Great Internet Delusion. The National Academy of Engineering recently surveyed its members to come up with the most important scientific innovations of the century, as published in Barrons:
4. Water supply and distribution
6. Radio and Television
7. Farm mechanization
10.Airconditioning and refrigeration
Uh…what happened to the Internet? It is down at number 13, after spacecraft.
Readers will note that these scientific advances proceed incrementally and cumulatively. Without the internal combustion engine, there would have been no automobile nor airplane…and no tractors. Without the computer and the telephone there would be no Internet.
Each advance, however great or modest, is cause for celebrationon Wall Street. The size of the party depends not so much on theeventual ranking of the innovation by engineers, but on how much the hosts have to spend. And thanks to the Japanese free money policy, Al Greenspan’s loose money policy, the LTCM and Asian currency scare…followed by the Y2K scare – not to mention thebear’s 20-year vacation – money has been no problem.
Technical knowledge accumulates. But investment knowledge, collectively and individually, seems to evaporate in the warm summersun. Technology may be cumulative. But psychology is, alas, cyclical.
Thus, when the party gets going, the rules that were learned at such cost – like the customs and traditions of the common law – are thrown over.
CSFR had, for example, a rule that they would only take acompany public after it had at least $10 million in revenues in the previous 12 months. But as investors showed themselves willing to buy companies with much less in revenues – and no hope of profits – CSFR changed its rule. Thus, CareerBuilder, which had $2.8 million in revenue for the previous quarter, wastaken public at $13. It traded as high as $20…and has since fallen back to $4.
There is even a website or two devoted to tracking the collapse of these companies:
“It’s about time…” says the website with a name that couldn’tbe reported on a family show, “I’m sure they didn’t mean for it to be this funny, but… ‘You have reached www.24-7.com. Unfortunately, we are now closed.'”
Another: “Rumor has it that online socks and pantyhose retailer Gazelle.com’s office in San Francisco is closed. The windows have been frosted over, the blinds are drawn, and there’s a big sign which says ‘NO SOLICITORS’ on the front door. They probably needed a sign that reads ‘NO CUSTOMERS’, too.”
And yet another: “Too bad, so sad. Yet again, the site says it all. ‘Thank you for coming to visit us at Homewarehouse.com. Unfortunately, our site will be unavailable for the foreseeable future.‘” And, “Another data storage site goes bye-bye…A notice on theInternet FileZone site reads, ‘IMPORTANT NOTE TO EXISTING CUSTOMERS: Internet FileZone will be discontinued August 31, 2000′ Yes, that does sound like an important notice.”
What was so recently thought to be the peak of coolness has been an object of ridicule: “Honk if you just got laid off…Rumor has it that HonkWorm.com just laid off 5 employees due to lack of sales.”
In this summer of love, even the collapse of the Internet mania iscause for laughter. We all knew it was a joke, after all.
Baltimore, Maryland July 17, 2000
*** Let the good times roll. The wholesale price data greetedWall Street on Friday. It revealed that if you ignore food and energy, inflation is not a problem. So, if you don’t eat or drive – you don’t have to worry about rising prices.
*** And don’t worry about rising housing prices either. The Bureau of Labored Statistics tells us that the cost of housing increased less than 3% in May, from the year before.
*** If you live in a trailer in the Ozarks, raise your own hogs and don’t own an automobile you have probably noticed littleinflation pressure. But if you walk down to the nearest gas station and check the prices on the pumps you will notice that they have risen from about $1.15 per gallon to $1.50 per gallon in the last 12 months.
*** And certainly beyond the Ozarks, if not in them, housingprices are on the rise. “Home Prices Jump 25% in Year”proclaimed a headline from the San Francisco Chronicle.
*** And a friend reports from Greenwich Village, NY: “These days, you practically have to get a blood test to find a new apartment and sign a lease. The going brokerage fees are about 15% of annual rent. And you have to put down the standard deposit,equivalent to a pound of flesh, at signing. HOWEVER, I’ve heard that if you’re employer is a ‘dot.com,’ New York landlords demand THREE pounds of flesh (the standard first and last month’s rent… plus a ‘dotcom’ special order of two moremonths rent on top of that).” I did not check the current market price for a pound of flesh, but I have little doubt that the BLSwill find a way to keep it in check.
*** Also from NY comes a report that a new Alain Decasserestaurant offers a $160 prix fixe menu…and it’s booked through October.
*** No wonder. Wall Street is swamped with money. The Dowrose 18 points on Friday – putting it ahead 1.6% for the week. The Nasdaq is at its highest level in 3 months after a 68 point increase on Friday…and a 5.5% boost for the week.
*** Everything was great last week. Advancing stocks led declining ones 2 to 1. And there were 3 times as many new highs as new lows. The Internets rose – with AMZN up 7 ½ points on Friday alone.
*** Even a $145 billion judgment against the tobacco companiesfailed to depress investors’ spirits.
*** Gold fell a little, but platinum keeps going up. It rose $1.30on Friday.
*** Hang on to your wallets, because this week could be evenmore exciting. A lot of data is due out – including earnings reports,which are supposed to goose up prices even higher.
*** There is an “expectation of a rosy reporting period,” said one analyst on the Reuters wire, “as the rally continues to unfold.”
*** Probably most important, and least noticed, was the factthat the Bank of Japan decided to continue giving away money. The BoJ’s zero interest rate policy is the source of a lot of thehot air in this bubble, lest we forget. The really smart moneyborrows from the BOJ at zero…converts the money to dollars…and then places it in Wall Street. Even a 6% return is fabulous – given the leverage. Five percent per week – which the Nasdaqused to deliver regularly and now provides occasionally [such as last week]– is even better. It works out beautifully… unless the dollar falls.
*** The dollar didn’t fall last week. It rose. But it is the key,I believe, to the whole thing… “Looking further ahead,” saysthe 70th Annual Report of the Bank of International Settlements, “the biggest policy challenge could be coping with a sudden reversal in the fortunes of the dollar.”
*** I am becoming alert to the “urban myths” of the Internet, ever since I ran that note in which Janet Reno allegedly confessed her true feelings about cultists. I couldn’t resist the Reno quote. In these days of mealy-mouthed gibberish from public officials, Reno’s lunatic clarity was refreshing. But even she was not dumbenough to have said what was attributed to her. My apologies.
*** A reader sent me a new definition of Democracy which I will add to my Contrarian’s Glossary:
Democracy: Three wolves and a sheep vote on what to havefor dinner.