The Destruction Of Technology

The Big Techs are being destroyed…like Napoleon’s soldiers in their retreat from Moscow. One by one…and sometimes by the hundreds…they are dropping. Never to rise again.

Half the companies listed on the Nasdaq are down 50%. Some of them are down far more – so far down in some cases that only the tops of their campaign hats still protrude up out of the freezing mud.

What began as a march to glory is now in full retreat… with some sectors already routed. Rag tag bands of survivors huddle here and there…overlooked by investors. And a few groups still sit tall in the saddle, flags flying and their shiny brass buttons and tunics still un-bloodied.

But it is probably over for technology.

Alan Greenspan still shills for the tech sector. Diehard tech buffs still believe that piling up digits will improve the lot of mankind. Na?ve investors still buy the dips. But the stocks have lost the magic. They are no longer invincible to the weather, the economy, interest rates, earnings, competition, or any of the other forces of financial nature that normally bring booms to an end.

Without knowing anything about technology itself…or the miracles of modern science that will happen next week or next month – I can tell you that the end has come for Technology as an investment phenomenon.

Why? Because the voice of crowd thinking – the financial press – has turned against it.

For example, accounting irregularities are, for the first time, getting press coverage. Cisco, so recently the mustest of the “must own’ companies of the New Economy, has fallen dramatically in price. Investors and the financial media are beginning to understand the financial game the Cisco Kids have been playing.

Over the last 6 years, Cisco bought companies more often than you or I bought beer. Using its own, sensational “Cisco scrip” – that is, its own stock – as currency, Cisco bought another company nearly once a week.

As Doug Casey put it, “any company that has made some 240 acquisitions in the last six years can’t possibly digest them or manage them properly.”

“In fact,” Doug continues, “that rate of acquisition is reminiscent of the conglomerates which were temporarily popular back in the 60s. A major object of the acquisitions back in those days was to hype the stock, making it easier to make the next acquisition, hopefully ad infinitum. By the time the bear market of 1969-70 bottomed conglomerates were a synonym for bankruptcy.”

Cisco’s popularity has been much greater and has lasted longer than expected. Surely, its products are marvels. But the company’s spectacular success on the stock market has little to do with the engineers in the design department…and a lot to do with the engineers in the accounting department. Cisco, in other words, is not so much a triumph of technology as it is of folderology.

As I reported to you, the magicians in Cisco’s accounting office – perhaps recruited from the Bureau of Labor Statistics – reduced the acquisition cost to a fraction of the actual price, thus bringing in revenue streams and huge increases in assets to Cisco itself.

And sometimes, the acquired company is also a customer – perhaps even a customer having a hard time paying its bills.

“[I]t’s whispered,” writes Grant’s Eric Fry softly, “that Sweden’s Bredbandbolaget is getting financing to buy more goods from its oh-so-generous benefactor.” The story develops:

“Swedish Internet company Bredbandbolaget (no relation to Henry Blodget) postponed its $400 million IPO scheduled for October 9 due to ‘unfavorable market conditions.’ The postponement by B2 (as the company is known) would hardly warrant a headline were it not for what happened next.”

“‘Cisco has come to the aid of Bredbandbolaget,” Sweden’s Svenska Dabladet newspaper reported on October 11. “The U.S. equipment supplier will guarantee Bredbandbolaget’s continued operations for the next two years…”

“Why did Cisco ride to the rescue?” asks Fry.

“If the rumor mill is to be believed,” he continues, answering his own question, “Cisco financed a sizable Bredbandbolaget purchase of Cisco products. If so, that raises a few questions: Is B2 emblematic of other credits on the Cisco ledger? Might other B2-like accounts receivable lurk in Cisco’s accounting department? Will Cisco lend financial support to them all, like some sort of techno-IMF? Michel Camdessus, please forward your resume to:

Cisco Systems Human Resources

170 West Tasman Drive

San Jose, CA 95134 …”

Doug Casey likes to compare the Tech Stock Boom to the periodic booms in junior mining companies. He reminds us that almost every boom in the junior mining stocks was capped with the discovery of a huge fraud.

“Net stocks,” he says “lend themselves to this activity quite as well as mining stocks.” Mark Twain described a gold mine as a hole in the ground with a liar standing next to it. Investors have no way of knowing what’s in the hole. Nor do they have any way of knowing whether a new tech company is an Iridium or a Microsoft. So, fraud flourishes like worms in a manure pile.

“So what will be the Bre-X look-a-like of this tech market,” Doug asked in August, referring to the fraud that brought down the most recent boom in the junior mining sector.

“Well,” he whispering softly, “I have something that you won’t hear anywhere else. Over 15 years ago, a very well- connected source told me that Ronald Reagan had early stage Alzheimer’s. When I reported that outrageous data…at least one subscriber cancelled, incensed that I’d spread such a seemingly malicious rumor about his hero. Of course, it turned out to be accurate… This same source assures me that the FBI is quietly investigating Cisco and several of its top executives for various types of crime.”

“The story goes that the purpose behind many of Cisco’s acquisitions to date wasn’t so much to grow the company as to hype the stock and enrich some top execs. The way it supposedly works is when Cisco eyes a company, the executives are given options or cheap stock in it, to insure the deal goes through…when the deal is done, the stock soars.”

My guess is that the above passage…written only a few weeks ago, should now be put into the past tense.

Technology, whatever it is, will continue developing in its own quirky and unpredictable fashion. But the Technology boom in stocks seems to be over.

But what surprises me is that the retreat of the techs and nets did not cause a general collapse in equity prices. Just as Napoleon beat a fast retreat back to the West side of the Rhine, investors seem to think they will be safe if they get out of tech and into Old Economy stocks. But Napoleon’s magic was gone after the Moscow campaign. The end was already in sight.

And so, the question I pose in tomorrow’s letter: when will investors meet their Waterloo?

Bill Bonner Ouzilly, France October 31, 2000

P.S. Enjoy Halloween. Boo!

At the beginning of the decade, the tech stocks of the day… radio… automobiles…electric utilities… airplanes… were driving the market up wildly. It truly was a New Era… If you had invested $10,000 in General Motors in 1919, it would have been worth $1.5 million in the summer of ’29.

But by 1933 unemployment had reached nearly 24%… What happened? Is it happening again?

Yes. Says a respected Austrian economists – and you’d better be prepared. Falling technology shares are only the beginning.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * *

*** I love this market. Hardly a day goes by that I don’t get to report that the Big Techs, and what’s left of the Internets, are falling in price.

*** It’s not that I like to see people lose money. It’s just that it’s good to see these stocks get what is coming to them. God is in his heaven, the queen is on her throne…and the hypesters and humbugs of the New Era are getting put in their place too.

*** The Dow enjoyed another big day yesterday. The old economy index rose 245 points, or more than 2%.

*** 1836 stocks advanced on the NYSE yesterday; 1044 declined. 101 hit new highs; 63 hit new lows.

*** Warren Buffett had a good day yesterday – Berkshire shares rose $2,525. Jeff Bezos, though, had a bad one.

*** Nasdaq, home of the Techs and Nets, fell again – down 86 points, almost 3%. The Nasdaq 100, measuring the progress of the Biggest of Big Techs, fell almost 4%.

*** It was an especially bad day for the Cisco Kids. A Lehman Bros. Analyst decided that $90 might not be a good target price for a stock trading around $50 and apparently headed in the wrong direction. So he revised his target to $60-$65.

*** When even the analysts give up on a stock, investors really get spooked. Analysts, for those who were not aware, are like the Italian general who remarked: “there go my men…I must follow them, for I am their leader.”

*** Cisco is, of course, a great company – like Amazon. With a great product too. I love Cisco’s routers and switches, don’t you? They’re cute little things. They will make good landfill when the Information Age is finally superceded by the post-Information Age, next year or so. The Cisco Kid’s accounting methods are cute too…about which more below…

*** Cisco stock ended down about $2.50, after being down almost 10% earlier in the day. Nortel, which almost single-handedly collapsed the Toronto stock market, fell another $2.50 too. JDS Uniphase dropped about $6. Juniper lost more than 8%.

*** And, what a surprise, Amazon lost about $2.75 yesterday, ending a hopeless rally. Analysts, said the Reuters report, “took a closer look” at the net company’s latest quarterly report. I suspect that what they really did was read the article in Barron’s that questioned Amazon’s operating income. Then, they probably worried about seeming out of step by being too bullish on the River of No Returns stock.

*** Meanwhile, Amazon admits that the SEC is looking at its books. And the company filed a report with the SEC on Monday saying that it “may sell additional debt or equity to obtain credit.” Hmmm… maybe the company is closer to running out of cash than we think.

*** But cheerleader, I mean analyst, Henry Blodget says he is “comfortable with the company’s calculation” of its cashflow.” The “3rd quarter is likely to be an inflection point for the company and stock.” Henry thinks he sees a bottom.

*** On the other hand, “you can conclude this bull market has lost its nerve,” writes the Fleet Street Letter’s Dan Denning. “In October, disappointing earnings growth in technology stocks signal, for us, that the bullish psychology has finally been broken.” Fourteen technology stocks – the likes of which include Cisco, Microsoft, Dell, Hewlett Packard, Lucent, Motorola, Intel, Oracle, Texas Instruments, WorldCom – can account for $2,041.8 billion in market cap losses.

*** In any case, The Destruction of Technology is entertaining and long overdue…but what about the rest of the stock market? I expected the entire market to retreat along with technology. Instead, the Old Economy seems to be roaring back to life. What gives? More tomorrow…

*** Money leaving the Nasdaq seems to have gone conspicuously to the financials – brokerages and banks. Investors are seeking the safety of companies with earnings. And they are anticipating a pop in the financials when Greenspan loosens credit after the election. In the imagination of the lumpeninvestoriat the ‘soft landing’ is not just dream…it’s a fact. And the Fed will address the slowdown with lower interest rates.

*** And yet, reports from the economic front are mixed. Incomes rose 1.1% last month. Spending rose 0.8%. Plus, the gap between 10 year Treasuries and 10-year TIPS, the inflation-adjusted bonds, is widening. It is still a very modest 1.89%…but headed in the wrong direction for an interest rate cut. The widening gap is telling us that investors are becoming more wary of inflation.

*** Besides, the slowdown in the U.S. economy is not a consequence of too little credit, but too much. Credit quality has deteriorated, while the quantity has expanded. Ordinary families and major financial corporations alike are up to their derrieres in debt. Much of the debt, like much of the equity, must sooner or later be marked down – as it represents investments and purchases that never should have been made.

*** But “fears of the economy falling off the cliff are overdone,” said Bill Meehan, with the unlikely Cantor Fitzgerald company. Who knows? Maybe not.

*** German Finance Minister, Hans Eichel, noticed the same thing we did: Europe may be growing faster than America.

*** But you’d think the euro was like a mushroom with red spots – “Don’t touch them,” Francois advised me, “they’re poison.”

*** “Euro Bears Gloat as another Bounce Goes Begging” reports Reuters, trying to work as many metaphors into a single headline as possible. Later in the article, subheads such as “Flighty Euro, Steadfast Dollar,” and “Americans put Faith in America” tell the story. “No one is more downbeat on the eurozone and more upbeat about the U.S. economy than the Americans,” continues the report.

*** What actually happened in the markets yesterday was that the euro rose to 85 cents and then slipped back to 84 cents. Where it goes from here is still anyone’s guess.

*** Not much change in oil or gold markets.

*** An Internet message entitled “INFORMATION OVERLOAD” found its way to me: “A survey of thousands of workers in Britain, Canada and the USA, conducted by both the Institute for the Future in California and the Pitney Bowes office equipment company, found that the average office worker is overwhelmed by 169 telephone, e- mail, voice mail and regular mail messages per day. The study found that this message overload results in workers spending an undue amount of time and energy trying to respond to the message bombardment. The survey further found that about one third of executives also felt overwhelmed by the quantity of messages they received on a daily basis.”

*** “I can’t help but question,” wrote Doug Casey recently, “whether the whole email/Internet phenomenon really makes people that much more productive…how do you account for the huge amount of time you spend reading and answering emails? …I know in my case, it’s a burden and the Delete button is getting more of a workout as time goes on.”

*** My friend Brian says that I am the source of most of the email glut in his mailbox. But wait, Brian, I’m saving you the trouble of having to read all those other messages about the economy, the stock market and the meaning of life. Please don’t delete me, dear reader…

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