Winter Shades Of Pale

“The fault…lies not in our stars, but in ourselves.” –Shakespeare At the beginning of the 20th century, Tom Wolfe writes in a “New Yorker” article from January, “the neo-classical academic giants Bouguereau, Meissonier and Gerome [became] joke figures in less than 25 years.”

Fashions in art shifted in favor of the modernists. But now the art world seems to be at the beginning of a new shift. “With metronomic regularity,” Wolfe writes the comment of Gregory Hedberg, director for European art at Hirschl & Adler, “the dawn of each new century has seen a collapse of one reigning taste and the establishment of another.”

Modern art, in other words, is about to be upstaged.

Modern art requires imagination. You can drape public buildings in cloth…or you can put the head of a dead animal in formaldehyde. Or like the English artist mentioned here a few days ago, you can assemble a common delivery van in an art gallery.

It takes a good sense of “what’s hot” to get paid to do this stuff. And it doesn’t hurt to be good at self- promotion.

What it doesn’t take is artistic skill. You never even have to touch the object. Unionized workmen can erect the steel, turn the bolts or splatter the paint for $17 an hour. You just have to have the idea. If the idea catches the attention of the art world…and the buzz is good…you might make it into the pantheon reserved for the greatest artistic humbugs of the modern era.

Does the dot-com world work the same way? Do dot-com hustlers need business skill? Or just a good idea and a talent for self-promotion? And is this dot-com world about to replaced by something new?

A recent column in the Motley Fool reveals how difficult it is to spot a bubble…and know when it is ready to explode. The writer, Bill Barker, points out that many people thought the Bubble exploded three years ago.

“Take the September 1996 issue of `Red Herring,'” he suggests. “In a series of articles with titles such as `Internet Mania R.I.P.’ and `The IPO Bubble,’ `Red Herring’ buried the possibility that investors could ever have been thinking straight when their irrational exuberance led them to do such patently absurd things as:

* value all public Internet companies at a total market cap of $9.5 billion

* value Excite at a split-adjusted $9 a share (it would ultimately merge with @Home (Nasdaq: ATHM) at a price of $133 a share)

* value Lycos (Nasday: LCOS) at $5 a share” Of course, back in 1996, the bubble was just beginning to inflate. “Lycos is now up 800% from its high at the time the article was written,” writes Barker, “and the total market capitalization for all Internet companies must be well over $500 billion these days.”

The party was clearly not over. And yet, for many Internet companies, sometime between July ’96 and today, the punch bowl was plainly removed.

Barker lists a few of the poopers:

Content Providers — High — Current — % Loss

———————————— — $71.25 — $6.25 — 91

iVillage — $130 — $10.81 — 92 — $45.75 — $2.69 — 94


Linux — High — Current — % Loss ————————————

Red Hat, Inc. — $151 — $31 — 79

VA Linux — $320 — $40.25 — 87

Corel Corp. — $44.50 — $8.25 — 82


Discount Brokers — High — Current — % Loss ————————————-

Siebert Fin. — $58 — $11.75 — 80

JB Oxford — $25 — $5.72 — 77

E*Trade — $72.25 — $23.44 — 67

Ameritrade — $62.75 — $18.06 — 71

Barker’s point is that bubble talk distracts investors from the serious job of making distinctions. Some dot- coms are good. Others are bad. Dr. Koop turned out to be a dot-com quack…but there’s still Amazon and eBay. Buffett can’t see the difference…but somehow Barker, and the market, can.

But how?

One reply comes from George F. Colony of Forrester Research. Colony interviewed scores of business executives, from both traditional industries and the new dot-coms.

“What grabbed me,” he wrote recently, “…was the quality of the dot-com CEOs when compared to the traditionalists.” They “lacked depth, experience and common business sense. Their commitment was short-term — 3 years on average.”

Could, as Aristotle said, character be fate? Could the dot-coms — which Colony dubs the “hollow.coms” — be doomed by their own lack of substance. Could they be like modern art — at the mercy of the winds of fashion?

If that were the case, among the doomed surely must be Michael Saylor, mentioned a few times in these letters as an example of a particularly imbecilic dot-com hustler.

Mr. Saylor presides over the wasting empire known as MicroStrategy. His character seems to reveal the components that distinguish modern art from real art…and dot-com businesses from real ones. That is, he seems to have great imagination, a talent for self- promotion, grandiose pretensions…and very little skill at actually running a profitable business.

MicroStrategy made the news a month or two ago in two very different ways. First, Saylor said he would put up $100 million to fund the first online university. He wrote about the plan in a guest editorial in the “Washington Post.” It was all part of his preposterous mission. Not content to make a profit, Saylor wanted to change the world by making “information as ubiquitous, essential and accessible as water.”

If you’re going to change the world, there’s no point in hiding your light under a bushel. For the Super Bowl, Saylor rented the Washington Redskin’s football stadium and invited 6,000 media and political people in what Ray DeVoe calls “Superhype Sunday.”

But then it came out that the master showman was also something of a magician — recognizing revenue that wouldn’t be received for years…if ever. Instead of making the 15 cents a share he claimed, MicroStrategy lost about 45 cents, after the SEC forced it to restate its income. The stock collapsed to about 15% of its prior value. But even at that, the company was thought to be worth more than $3 billion.

Saylor says he did nothing wrong. “Technology has outstripped accounting guidelines,” he says. Besides, “we signed up to change the world,” says Michael of Northern Virginia, “and never believed it was going to be easy.”

But easy is just what is has been. Money has been phenomenally easy to come by. Young entrepreneurs, like Saylor, have enjoyed an extremely flattering set of circumstances. The media is convinced that they represent the salvation of business. The venture capitalists have thought they walked on water. And the day traders and mutual fund managers seemed to believe they could multiply the loaves and the fishes without breaking a sweat.

This unique set of conditions, argues George Colony, has corrupted an entire generation of business leaders. They are jaded, short-sighted, incompetent and greedy. “These companies are not built to withstand competition,” he says, “they’re not built to deliver sustained value…”

“Hollow.coms will get trashed,” he continues, “along with a sinful amount of venture and day trader capital.”

Colony also believes that the dot-com hustlers will be unable to compete with traditional businesses which are now beginning to put the technology to work — profitably.

First, he says, there will be a mad scramble to pick up the valuable pieces among the dot-com wreckage. And then traditional companies that have the cash, the experience…and most important, the willingness to slug it out over the long haul…will beat the dot-coms at Internet commerce.

You see, there is reason for optimism: In the future, all companies will be Internet companies. The dot-coms will be history. Hard work, skill and endurance will be rewarded. And modernism in art will be hopelessly old- fashioned — a curious, defunct aberration, like the century in which it was born.

Your ever-hopeful correspondent in Euroland,

Bill Bonner

Paris, France April 27, 2000

*** Yep…sure looks like a bear market rally, not a new bull market. The Nasdaq, so full of life on Tuesday, limped along yesterday…and fell back. It ended yesterday’s trading down 81 points.

*** The Dow fell 179 points, too. Just one of those days. Nothing much happened. And stocks fell.

*** There were 1,404 stocks advancing yesterday; 1,529 retreated. Exactly the same number hit new highs as new lows — 56.

*** Increasingly, the most extreme valuations in the TNT sector are attracting second thoughts and even ridicule. Investors have learned that these stocks are vulnerable. They no longer think it’s cool to buy companies with no real hope for business success.

*** The “Wall Street Journal” reports that IPO investors generally lose money — unless they get in before the stocks go public. And “USA Today” includes a look at 14 e-tailers. Only one of them is profitable, eBay.

*** Investors, according to the media, are becoming more “realistic.” But their realism does not include the idea of a severe, extended bear market. Instead, they expect the “bad” TNT stocks to get punished while the good ones hold up the market averages and make discerning investors rich.

*** Dr. Koop’s condition, for example, may be terminal. The former Surgeon General is learning that it is not enough to put up a health site with a known personality at its head. You need a business plan and a way to make money. Koop announced he needed to work out a new deal with AOL. He can’t pay cash…so he wants to pay in Koop stock. But has become a severely depreciated currency. At its present rate of decline it will soon be completely worthless.

*** Meanwhile, Warren Buffett, the old warhorse of value investing, is back. His Berkshire Hathaway stock hit a low of 44,000 on March 10 — the same day that the Nasdaq hit its peak (a detail that may not be completely coincidental). Now it’s back up to around $60,000.

*** “Our problem,” said Buffett in his last address to shareholders, “which we can’t solve by studying up, is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.” Of course, no one else has any insights either.

*** “The poor, mundane truth,” writes Lynn Carpenter in the latest issue of “Fleet Street Letter,” “is that Ben Graham laid out 90% of what you need to know about picking stocks 51 years ago in `The Intelligent Investor’…[and] Warren Buffett gave it a real world test over the last four decades that ought to convince any sane person.”

*** The durable franchises cannot be predicted. They need time to emerge from the rough and tumble of the pioneering efforts. But they will emerge. Then they can be purchased at fair prices…based on the expected stream of income that they will produce. In the meantime, it’s just gambling. And the odds are poor.

***, my favorite “river of no return” stock, may be one of the survivors. It lost only $122 million last quarter, down from the $188 million it lost the previous quarter. Its revenue doubled from the same quarter a year ago. Its losses tripled.

*** But AMZN is making progress. Its sales/customer rose…and its gross margins are better. Who knows? One day Amazon might be a good $10 stock.

*** The St. Louis Fed reports that the monetary base and monetary reserves are falling. Cash, however, is still rising at an 8% annual rate.

*** Gold fell a little more. You can now buy an ounce for $277.

*** The euro continues to decline. It fell below 93 cents yesterday. I can now trade $1 for 7.1 French francs. The papers are quoting experts who expect the euro to go to 90 cents.

*** On the other hand, the European Central Bank is supposed to make an announcement today. Will they defend the currency?

*** This prompts me to make a forecast — which will turn out, I predict, to be either monumentally prescient…or monumentally wrongheaded. The financial/economic news is going to turn bad at some point. Stocks will fall and the economy will go into recession. Maybe worse. But, as I described yesterday, the underlying financial conditions are so bad, the Fed will not be able to sit back and ride it out. It will have to do what Greenspan has said he would do…and what the Japanese have been doing…and what almost every economist will urge him to do: lower interest rates. Rates will come down to 2%…1%…maybe zero…as the Fed fights to bail out households and businesses that are up to their necks in debt.

*** The dollar will be crucified. Bonds will be good investments. So will gold.

*** I got a message from Zimbabwe. The government has made it illegal to criticize Mugabe via Internet. If you’re caught, your e-mail account will be terminated and you will be fined up to US$25,000. Also, this interesting bit of information: most of the white-owned farms that are being seized by mobs were not stolen from black tribes in the last century. Instead, 95% of them were purchased from the government.