Traffic Accidents

“Skepticism, like chastity, should not be relinquished too readily.”

George Santayana

A website offers us an opportunity to “Vote for the Dumbest e-Business Moment.”

The first contender is the “summer of 1970” in which “Kajsa Leander is born in Lund, Sweden…several months later, Ernst Malmsten is born, also in Lund. Together, they go on to found an ill-fated multinational high-fashion e-tailer called Boo.com.”

The site lists a number of bizarre and amusing events in the life of the dot.com bubble – confirming both my faith in man’s ability to delude himself with visions of grandeur…and my new Theory of Ignorance.

Noted, of course, is Dec. 16, 1998, when Henry Blodget predicted that Amazon.com would go to $400 a share. He was not joking – it did. But shares in Amazon.com can now be purchased for just a little over $10. And don’t be surprised if they are eventually free.

And there is that day in June 1999, when Mark Beier, CEO of Beyond.com, appeared on CNBC’s Squawkbox dressed only in his boxer shorts. The gag was designed to underline the fact that you could buy everything you needed over the Internet – dressed only in your underwear. Of course, it might have been taken as a forecast of what would happen to Beyond.com’s shareholders. They have lost their shirts…and maybe even their pants…as the stock has dropped to 28 cents. This week’s issue of Barron’s has it listed as one of the companies scheduled to run out of operating cash this month.

“One of every three publicly traded ‘Net outfits’ stands to run out of cash within the next 12 months,” says Barron’s. “And that does not count those that already burned out.

“The remaining 214 companies,” continues the report, “had negative earnings before interest, taxes, depreciation, and amortization of $2.29 billion, substantially higher than the negative $1.37 billion EBITDA in the previous quarter.”

What a sad end to such a magnificent delusion: The Internet Age. The dot.coms have lost a total of about $1 trillion in value since early 2000.

But there is something magical about big, dumb ideas. In any specific application, they may be demonstrably absurd.

The boocrew, for example, as the 450 employees at Boo.com were known, spent money as if, well, it was not their own. Expensive offices in London, New York, Paris, Munich, Stockholm…$5,000 a day to fashion consultants just to perfect the look of “Miss Boo” on the website.

This was a company with almost no sales…whose managers were burning through $135 million, with almost nothing to show for it.

Who in the rag trade would spend his own money that way? No one. The actual experience of doing business and having one would weed out such incompetents…to teach them.

But it was a New Era…and people believed in the Big Ideas behind it. Even when they didn’t work in practice, people still had faith in the theory.

That is why the War on Drugs continues too. Hundreds of thousands of people are sent to jail. Billions are spent on ‘law enforcement.’ Otherwise harmless drug users are driven into a world of crime and sordid company. No, I don’t mean politics, I mean street crime.

You can make something illegal, but you can’t make it unpopular. In the movie “Traffic,” the daughter of America’s drug czar begins using illegal drugs while her father is away in Washington waging war against them.

The perverse irony of the film is sure to appeal to Daily Reckoning readers. Nothing quite works out as it is supposed to. And in the end, the nation’s drug czar realizes that his problem is at home, not in some distant command post, directing a phony war.

The Theory of Ignorance maintains that people know a whole lot less than they think they know. But as someone has observed, it’s not what they don’t know that gets them into trouble, but what they think they know that ain’t so.

When a man drives down the road, he makes thousands of decisions every minute – any one of which could be fatal. But he knows what will happen if he turns the steering wheel in the wrong direction and usually ends up where he intended to go.

But his ignorance of cause and effect increases as the subject of his decisions gets farther and farther away from his immediate, personal experience. In fact, like the intensity of heat, it diminishes by the square of the distance from the source.

At a far enough remove from his own experience, the same man who drives himself down the street without accident, sees no road signs, no white lines, no on- coming traffic. He drives his tractor trailer straight into a concrete wall…and seems genuinely surprised when the results are fatal.

Thus do investors buy shares in companies that do things they would never do in their own businesses and support big dumb ideas – population control and the War on Drugs, for example – which offer no identifiable benefits to anyone.

Also on Barron’s list of dot.coms running out of cash is Theglobe.com. It is trading at 20 cents and scheduled to run out of money in August or September. But every dog has its day, and Theglobe.com enjoyed one brief day of imbecility, when investors paid $97 for the stock – a price equal to 350 times the revenues per share booked in the entire life of the business. Was there a single person in the entire world with business experience to justify such a price? No, of course not. It only made sense within the context of the New Era theory.

Finally, in May 2000, the deadly duo from Lund called it quits…”It’s easy to say that we spent $135 million on Concordes and Champagne,” Malmsten tells the NY TIMES, defending himself, “but we only drink vodka.”

Raise a glass to the dotcommers. We’ll miss them.

Your writer on the road,

Bill Bonner
London, England
April 13, 2001

*** What a relief! Earlier this week, it looked like the Big Rally might be stalled…and the financial press was chock-a-block with gloomy news. But yesterday, Alan Greenspan made another attempt to find the perfect fed funds rate – that is, the rate that turns the economy around and puts Wall Street back in bull mode.

*** Is 4.5% the magic number? Will the inventory that couldn’t be sold last week now suddenly fly off the shelves? Will consumers, groaning under the weight of the debt they’ve accumulated in the last five years, now want to borrow more? Will investors now find Juniper Networks a bargain at 50 times earnings…and bid it up even higher?

*** We only have an answer to that last question, and it is “yes!” The news from the Fed, along with Intel’s announcement that it expected a better 2nd half, was all it took to move the Dow up 399 points and the Nasdaq 159 points.

*** Intel reported its “worst quarter in years,” informs the Wall Street Journal. Net income fell 82% on a 16% drop in sales. The stock rose $5.24 yesterday. Go figure.

*** Oh, happy day. The bottom is in for sure. GE rose 5%. Retailers were hot, with the index up 6%. Just about everything did well.

*** And the dollar held its ground. Neither gold nor the euro made much headway – despite the Fed’s announcement.

*** “The dollar is the last bubble still intact from the excesses that the U.S. economy accrued during the late ’90s,” says Stephen Roach, chief financial strategist at Morgan Stanley Dean Witter. “Some day, it’s going to burst.”

*** Yes, some day. I’ve been expecting it for more than a year. But then, I waited a year for the Nasdaq bubble to pop too.

*** Which only proves that trying to time the market is rarely a winning proposition. Instead, stick with the essentials: buy investments that represent good values. When will you find stocks at good values? At the Big Bottom, of course. Is this really the Big Bottom? If so, it is the toppiest bottom ever.

*** Jeff Chou may have slept a little better last night. The former Cisco Systems engineer, fortunate enough to reap a $6.5 million (fully taxable) windfall by exercising Cisco options, but in so doing was unfortunate enough to generate a $2.5 million tax bill that he is now incapable of paying, recently whined to the Associated Press, “I can’t eat. I can’t sleep. I am completely ruined.” But that was before the Federal Reserve reached out and lent a hand.

*** It’s only money, Jeff, don’t take it so seriously. Besides, ruination is relative. Mr. Chou still holds 100,000 shares of Cisco, up $1.27 yesterday.

*** What kind of market is this? Intel, a beloved tech company, reports disappointing earnings and the stock soars. Freeport McMoran, a reviled gold company, reports surprisingly strong earnings, and its stock manages no better than a 24 cent loss on the day. An investor could probably do worse than to take the other side of both those trades – i.e. Sell INTC, buy FCX.

*** But what a rally! NASDAQ 100 Index shares up
10.4 percent.

Sun Microsystems up 15.8 percent

JDS Uniphase up 14.7 percent

Internet Index shares up 9.7 percent

Merrill Lynch up 9.3 percent

*** To the eternal question, “What next?” we provide the eternal answer: Who knows? But if I were Mr. Bear, this is just the sort of rally I would like to see: enough to allow the campers to relax…and get careless.

*** And if this rally doesn’t continue, Mr. Greenspan still has 450 more basis points on the downside he can try.

*** Philips, the largest electronics company in Europe, (founded by Karl Marx’s uncle…if I recall correctly) said that its business was slowing down too. It is laying off 7,000 workers.

*** Barton Biggs, skeptical chief investment strategist at Morgan Stanley, tells CNBC viewers after the rate cut, “I do want to throw ‘cold water’ on the rally. But this is a move to sell into and it’s about 80 percent over.”

*** And here’s an interesting note from a DR reader on Wall Street: “The DRG pharmaceutical index declined 1.6 percent yesterday. I find it fascinating that the so-called safe haven drug stocks fell, even as the rest of the market put on a monster rally. While proving nothing for certain, this divergence suggests two things: 1) a large part of the rally was due to short covering; 2) investors who were actually buying stocks exhibited a greater appetite for risk, that is, scorning companies with secure earnings to chase after higher risk fare.”

*** I came up to London last night for a meeting of our London venture capital group, the “Supper Club.” I was especially interested in one company that has perfected a wind turbine power generator that is tough enough to survive in very rough conditions. It is suitable for lighthouses and remote military installations. Another company makes TV programs – such as “The Story of Sports” – which it licenses all over the world.

*** Talking to one of the investors, I found that he installs Internet communications systems. “Is it true that there is a lot of used equipment coming on the market at a fraction of the list price?” I asked. “Yes,” he replied. “But this stuff has a short shelf life. I put in a system for $1 million…and then I may go back a year later and rip it out. The equipment becomes obsolete very fast.”

*** “And what about foot and mouth disease?” I asked my dairy-farming expert. He said, “Well, it seems to have died down. It probably got into sheep, you know. Sheep stay out in the fields. They could have had it for months before anyone noticed…And by then, it had been spread all over Britain.”