Getting Personal With the Techs

“If everyone swept his own doorway…what a clean world it would be.”

Goethe

I had dinner last night in our neighborhood restaurant, Le Mozart, with my daughter, Sophia. Sophia is a nice girl with many fine qualities. But she is weak in one area: academics. And academics happens to be the only thing that America’s colleges and universities care about.

“You know, Sophia,” I tell her, “getting into a top school is not everything in life. Later on, it won’t really matter to you. What really matters is working hard, being dependable, doing the right thing…”

“Dad,” she replied, cutting off my drift into Essentialism, “I’m not even trying to get into the top schools. I’m getting rejected by second-rate places. I’ve had it…I just don’t care if I get in or not…”

What do you say? Sophia is being judged on her grades and test scores. What else does she have to show? You and I know that there is a lot more to life. But Sophia, at 18, feels like a failure. I would like to help her…but how?

Life’s most important battles, dear reader, are fought at home. Alone.

So desperate is the fighting…so futile…and so dangerous…that most people will do practically anything to avoid it. No ‘big idea’ is too absurd if it helps keep us from having to come to terms with a little one. No lie is too preposterous if it shields us from the truth.

Napoleon, unable to conquer the heart of his Josephine, launched an assault on Russia. The odds were better and the stakes were lower. In war, unlike battles at home, the worst that can happen is that you will die.

Hitler and Stalin, neither of whom had any home life to speak of, pointed the finger at enemies everywhere, attacked everyone who got in their way and attempted to restructure the lives of millions of people. Why not? They had nothing more important to do. With no business of their own to mind, they minded other people’s business.

But today’s letter is neither about politics nor the tribulations of raising teenagers. Instead, I merely use this feeble bridge to cross over to the subject of most interest to us both: money.

Investors are as quick as anyone to lay the blame for their losses on someone else. Nor do they hesitate to embrace big ideas…in order to avoid having to do the hard work of studying the balance sheets and operating budgets of their own businesses.

Rather than look carefully at the big tech companies they actually owned, for example, investors were happy to buy into the myth of the “New Era” and the “Information Age.” And they flattered themselves by believing that they were among the few, the New Men, who “got it.”

Today, even after suffering huge losses, they still think in big terms and hollow slogans. “Tech will come back.” “Tech is cheap.” “Invest for the long- term.” “Wait for the second half recovery.”

Just as it is easier to have an opinion on law enforcement in Colombia than it is to keep your own children away from drugs…it is still much easier to talk about the ‘next phase of the information revolution’ than it is to figure out how to make a buck on a website. Or, as the Washington Post put it, “it’s easier to zap huge amounts of data around the world than it is to find ways to make it profitable.”

Will Ebay come back? It’s selling for only half what it was at the end of 1999. But at $34, it’s still at 136 times 2001 earnings. The company says it will grow more than 50% per year for the next 4 years. How likely is that?

“Ebay is a solid company,” wrote J.T.Farley of Upside.com, “but I wouldn’t bid more than $30 a share for it…even if they threw in a Beanie Baby.”

Likewise, Cisco projects earnings growth of 28% per year. EMC says it will grow at 30%. And Sun Microsystems tells investors to expect 22% growth. How likely are any of these numbers? I don’t know, but you have to take the company home and get personal with it to find out.

As mentioned yesterday, David Dreman did a study of some of the biggest and best of the techs (in Forbes). He extrapolated growth and earnings – using “‘the most optimistic of analysts’ late-1999 estimates.” That is, he took their own projections from the very moment when they were most confident.

These earnings and growth projections seem ridiculous now. Back in 1999, Yahoo forecast earnings growth of 100% a year. But this year, it will suffer an earnings decline – of 84%.

Nevertheless, Dreman used the earnings projections from ’99 and then discounted the future income stream to arrive at a “present value of discounted earnings.” What he found was that even at today’s “bargain” prices, most of the companies were still too expensive.

Ebay, for example, would be worth only $4.75, according to this model. Yahoo should be priced at only $10, not its current $15. Double Click should be about half of what it is today.

Ray DeVoe looked at another group of former high- fliers – what he calls his “Klinker Index.” These are companies that have fallen by at least 98% and now find themselves priced in the single digits. You can buy, for example, CMGI – once a $163 stock – for just $1.75. Akamai Technology, formerly selling for $345, is now available for $5.50. Razor Fish, Inc., the subject of the lawsuit mentioned yesterday, is yours for just 31 cents a share.

Is it time to buy these “bargains?”

Alas, “Single Digits are Often the Kiss of Death,” declares a headline in the NY Times. The article describes a study of klinkers going back to 1985. “Of those publicly traded companies (since 1985) in the technology sector whose stocks had fallen to single digits, only 3.4% rebounded to $15 or higher within the next year. Worse, most of those that didn’t bounce back in the first year never did.”

One of my favorites on the klinker list is MicroStrategy. Three-hundred and thirty-three dollars would have been needed to buy a share of the stock at its peak.

The company’s founder and CEO, Michael Saylor, was prominently vocal in his support for the Big Idea behind the Information Age. You didn’t have to look very carefully at the companies’ numbers, he would have you believe, you just had to “get it” – to understand that it was a New Era in which information would flow “like water,” creating a tide of liquidity that would make us all rich.

But when a sourpuss accountant did caste a cold eye at MicroStrategy’s books, he found evidence of a master chef at work. The books were cooked. The SEC forced MicroStrategy to redo its numbers and a shareholder suit followed. Today, you can buy the stock for just $4.10.

And now MicroStrategy is once again, back in the news – and once again, the company seeks to shift attention from the homefront to matters and malefactors elsewhere.

“MicroStrategy spent 70% of its letter to shareholders explaining how stockholders can subvert the evil short sellers,” reports The Prudent Bear’s Rob Peebles. “MicroStrategy remember, was not only a bubble company, but a creative one with the books. The letter comes on the heels of the settlement of a class action suit that gives investors no up-front money, but an I.O.U. These are investors who bought the stock before the company admitted overstating earnings and revenues. According to the company’s annual report, the deal ‘may result in substantial dilution’ of investors’ holdings and ‘may result in downward pressure on the price’ of the stock. Don’t tell that to the short sellers.”

I won’t say a word. It’s none of my business.

Your reporter, minding his own business…

Bill Bonner
Paris, France
April 26, 2001

*** “The Fed has cut its overnight Fed Funds rate four times this year,” reports the Washington Post, “reducing it from 6.5 percent to 4.5 percent. Another cut is expected when the Federal Open Market Committee meets May 15. The aim seems to go beyond reducing consumers’ and businesses’ debt burdens or even stimulating new borrowing. The greater purpose seems to be to provide reassurance – to sustain the faith that the economy has not started a downward spiral and, thereby, encourage the consumer spending that may prevent it from happening.

*** “The Fed is playing for time, hoping that consumer spending and confidence – already somewhat shaken – remain resilient until the worst of the investment cutbacks have passed. As a monetary maneuver, this has a high degree of difficulty: somewhere between daunting and impossible.”

*** Daunting? Why? Consumer confidence – as measured by the Conference Board Index – fell fell to 109.2 in April, a 4 year low. This was the 6th decline in 7 months. “Consumers are becoming more realistic,” said an economist at Merrill Lynch.

*** Consumers are getting squeezed. The Fed is trying to help them, by lowering interest rates. At first, the lower fed funds’ rates helped reduce mortgage interest rates. Consumers rushed to refinance and managed to save a little on their monthly mortgage payments. But now mortgage rates are back up to 7.14% – higher than they were at the end of last year. If long term rates refuse to bend to the Fed’s desire – it is powerless to help consumers.

*** Layoffs are beginning to be noticed too. When the pink slips first began to appear, the economy still had enough momentum to vacuum up laid-off employees quickly. But now the number of people looking for work has increased to the point where they are beginning to compete with each other for jobs.

*** The price of gasoline rose 15% in the last month. AAA predicts $2-a-gal. prices this summer.

*** Still, it can take a long time for people to realize that their personal situations are at least as persuasive as public myths they hear in the media. Economists talk about a “second half recovery.” Abby Cohen says stocks will be higher at year end. Brokerage houses urge their clients to “hold for the long-term.”

*** A UBS Paine Weber study found that investors have reduced their expectations. In March, they said they believed that stocks would gain only 8.7% in the next 12 months – a record low expectation for this cycle. And yet, 8.7% is nearly twice the average gain from stocks over the last 50 years.

*** Most major magazines have carried pictures of the bear on their covers…people discuss the damage done to the Nasdaq, and the wreck of the dot.coms everywhere. But almost no one actually believes that stock market investors can lose money over a very long period of time.

*** The Dow rose 170 points yesterday…and the Nasdaq rose 43.

*** The dollar was down a tad. But gold was down more than a tad – $2.10. Bonds also fell, effectively increasing long-term borrowing costs.

*** “New York is a reincarnation of ancient Rome at its peak,” the NY Observer quotes a ‘Swaggering Relic of the Boom,’ an obnoxious stock broker named Lee Munson. “Not at its peak – at its decline! When Nero was …watching Rome burn…That’s what we’re going through right now, and God Bless it! I want to be a citizen of Rome, and to do that, you have to be a broker.”

*** “The New York experience is everything I ever dreamed of,” continued the former St. John’s College student and would-be master of the universe. “Just being able to be like a rock star, have the financial power to bully – not people – but bully the city around…”

*** But the International Herald Tribune reports that life is getting tougher for people like Munson. Hotel occupancy rates are down. “High-end breast implant” salesmen (thank God they don’t try to implant the things on the other end) say revenues are off 50%. There is a “fireside sale on Gulfstream and Lear private jets.” Plastic surgeons say they are seeing fewer tummies that need to be tucked and fewer tushes from which to suction the lipo. “The party’s over,” declared Charles Brecher of the Citizen’s Budget Committee.

*** Both of my daughters were in tears yesterday. First, Sophia, got another rejection notice. She is applying to colleges and other programs – and so far has gotten only negative responses. Then, Maria got an unexpected boost – an invitation to be in a TV commercial for Chanel perfume. This exciting news caused her to wind herself up so tightly that something was bound spring loose. It did. And the day ended badly. Bad news or good…it doesn’t seem to make any difference. Both end in tears. More below.