Flaunting It In London

Entering the fashionable Italian restaurant across from Brown’s Hotel in Picadilly, I had no idea that it was going be a topless joint. Neither did the management.

The dark-haired woman at the next table looked Italian. Beautiful, a little like a thinner version of Sophia Loren, I thought. But, for a European, she stared a little too aggressively when we came into the restaurant. Not at me, of course, but at my companion.

Maybe she was just drunk.

“I think they just scored a major deal in the City [London’s financial district],” suggested Mr. G at my table. For the woman and her companions were in particularly high spirits, like kids locked overnight in a candy store who had just discovered they had spare stomachs.

Maybe they were venture capitalists. And maybe they had just earned millions in stock options on a dot.com deal. Now they were the masters of the universe — young, beautiful, and rich.

In London, only slightly less than America, everyone seems to be getting stock options. And these options have made many of them very rich. CEOs of America’s largest companies, for example, made 42 times the average factory worker in 1980. Today, they make 419 times as much. The difference has not come in the form of salary increases — but options. And they have not been confined to only the top executives.

Apple gave away 18% of the equity of the business to its employees — in 1998 alone. And almost every start-up firm in the Internet or high tech area rewards employees with options.

Also, the options are used to pay off all the investors along the way — the “angels” who provide the seed capital… and the venture capital firms who midwife the firm into the public market. Even the lenders… and suppliers might get in on the action.

We were offered stock options for advertising on a website. And now comes word in today’s “Financial Times” that a small company has developed a program that allows start up companies to pay their rent with stock options. What’s next? Will you be able to use options to get into see a movie? Or pay a cab driver?

The rise of stock options in dubious businesses as a replacement for real money is an example of Gresham’s Law in action. Gresham noted that “bad money drives out good.” Options are extremely cheap. Since the eventual valuation of an incipient company is infinite… so is the amount of stock option paper it can issue. And since the options are a lot cheaper to the company than real cash — guess which one it will use to pay its bills?

“Good God,” said Mr. G, who is a major stockholder in a publishing business in London. “At these levels, it is crazy not to sell stock.”

His own stock trades at a healthy multiple of nearly 20 times profit. But that’s nothing like the mania multiples that attract our attention. And so, he, like every other sentient businessman capable of breathing without tubes, is trying to figure out how to turn his business into a dot.com. “If they want to give away money,” he said in his refined, public school accent, “it would be inconsiderate not to take it.”

The consequences of giving away bad money — in the form of stock options — have not been considered. I have mentioned, for example, how businesses delude themselves and investors by failing to properly account for the options as a cost of labor.

Management buybacks — much of it destined for stock giveaways — cost US companies $220 billion in 1999. That’s more than 10 times the amount they spent on buybacks in ’91 — and it’s more than the entire amount of net inflows into mutual funds during the year.

The cost of this is not deducted from operating revenue. Instead, it is merely footnoted. But even with feet as big as Godzilla, the light-headed brigade would take no notice.

I have reported on the Microsoft case previously… but I’ll repeat it, because I think I may have had the numbers wrong. MSFT says it made $4.5 billion in 1998. Yet, deducting the cost of options… the profit would have turned into a loss — of $18 billion.

These options have another perverse effect — they distort the economy as well as the financial markets. People look at their total financial situation when they make decisions, not just their salary. As long as they think they are getting rich through options, they spend accordingly. That is why the US trade deficit soars — even while incomes and savings do not.

The recipients of stock options take them as income. But they are not. They are speculations. When the mania ends, as it must, the “income” that they thought they had already earned will disappear. Then, the credit card debt, the mortgage debt, and the other obligations they’ve incurred will turn out to be a heavy burden. Too heavy, in many cases, to carry.

This is another aspect of the convergence between Wall Street and Main Street that you should expect this year. They have to intersect somewhere. Probably in a pretty rough neighborhood.

The people at the next table weren’t worrying. They were living it up. But in a very peculiar way. Every now and then the dark haired woman would turn around and stare. She was not very subtle about it.

All of a sudden, I looked over in her direction and noticed that she had pulled up her sweater. She was showing off her breasts to the others at her table, who smiled appreciatively. And then she smiled when she realized I had noticed.

She had reason to be proud. God or medical science had been good to her. If you’ve got it… flaunt it. Maybe that’s what they do in trendy restaurants in Milan or Naples. But it is strange behavior for central London. Even in a mania.

It’s been a long week.

Regards,

Bill Bonner

On The Eurostar January 21, 2000

P.S. I’m planning a trip to Italy in February.

*** The market was back to a familiar pattern yesterday. Dow down 138 points. S&P down. Transports down substantially — they don’t like the high price of oil.

*** There were 50% more declining stocks than advancing ones. 95 new highs, against 125 new lows.

*** But the risk takers were still taking risks. The Nasdaq was up 38 points. The Internets were up too.

*** Oil is at a 10 year high. And the CRB commodity index is at an 18 month high.

*** What’s more, the US trade deficit hit another record of $26.5 billion in November. It’s projected to be a record $270 billion for the year. This is “the most ominous indicator in an otherwise rosy picture,” says the Financial Times.

*** Gold is comatose once again.

*** The London TIMES reports that Bill Clinton is lonely. He can be found “walking the corridors [of the White House] in the dead of night and playing golf alone,” says the paper.

*** “How are we going to pay for this thing,” asks the president of France in Le Monde. He was referring to the costs of the 35-hour workweek, much of it funded by the government. Inquiring minds want to know.

*** The feminization of politics continues. Le Monde reports that 40% of the members of parliament in Scandinavian countries are women. Though the percentage is growing everywhere, Le Monde worries that women are “still under-represented.”

*** Part of the reason for the rise of women in politics is that the most ambitious and aggressive men are looking elsewhere — the markets have become more attractive to them. Of course, not all women have a “feminine” approach to politics. And not all men have a masculine one. The terms refer to an aspect of the human character, not to the sex of the individuals involved.

*** The London TIMES, meanwhile, reports that a hamster, believed dead and buried in the back yard, came back to life and clawed his way to the surface.

*** And a new web site, The confessor.com, allows you to confess yours sins via the Internet. Your confession is then posted for the amusement and moral education of the entire world.

*** Russia has “lost” a leading general in Grozny. He is missing, presumed captured or dead.

*** The number of websites looking for ad revenue has increased by 150% since ’97. TheStreet.com abandoned paid-for services in favor of an ad-supported main site. This is going to be a hard row to hoe. Ad rates are, naturally, falling.

*** The Post Office should play this game too. Instead of wasting valuable space and mindshare with pictures of dead people on its stamps, it should turn the stamps into banner ads… sell them to advertisers… and lower postage rates.

*** I’m on my way back to Paris… and glad to be going

home.