Backlash Against Wall Street

In the early stages of the Internet bubble, we all had many chances to get rich.

One of them came to me in the form that was both especially absurd and especially promising.

“You gotta get in on this,” said a friend of mine, a partner in a major investment bank. “This can’t miss.” My friend is no fool. He was not suggesting a buy and hold investment…but a buy and dump speculation.

But, alas, I decided to stick to my value investing, stick- in-the-mud principles.

At that stage of the blossoming mania, the most promising business plan buds were those of websites that would attract the largest number of eyeballs and sell the greatest amount of advertising. And thus did some shrewd hustler notice that a little more than half the eyeballs of this world belonged to a group of people theretofore relatively ignored by the techno geeks and slightly addled sci-fi prophets.

Women!

Of course! The concept was almost irresistibly preposterous. Soon, women would spend hours on womens’ sites – kvetching about the men in their lives…exchanging recipes…retelling sad stories of their diets and skin tightening…their relationships…their bosses and co- workers. And all the while, they would be buying things…directly from the site….cosmetics, vacations, clothes, insurance…you name it.

If ever there was a winning concept in the dot.com mania world, this was it. And if ever there was a winning concept in the business world, this was not it.

For the only thing that would supposedly attract women to this site – rather than to any of the thousands of others that might provide more specialized attention – was that they were not men. The winning concept in business is to be able to identify a particular group and provide them with goods and services better than anyone else. The losing concept in business is to try to sell everything to everybody – with no competitive advantage in any niche. And the Internet was supposed to amplify the need for specialization – making it possible to segment the market in smaller and more particular ways.

Women are not `everyone.’ But they are every other one. And yet, here was a proposal whose business premise was nothing more than the idea that the distaff half of the human race would be happy to do their inter-networking on a condescending site which identified them purely on the basis of their fair sex.

“You’ve got to be kidding,” I replied to my friend. “There is no way that will ever work.”

Until about two years ago, it was customary for venture capitalists to fund start-up enterprises until they proved themselves. A company was expected to have at least three years’ of profits and growth before it went public. Until that time, the VC investors took big risks – but they watched their investments closely and stood to earn huge profits if they succeeded.

But as the Internet mania flowered, the investment banks discovered that they could take companies public even without proof that the business models worked. Morgan Stanley collected $2.6 million in fees for laying Women.com shares on their clients at $10 a share near the end of 1999. Goldman Sachs did even better selling Candace Carpenter’s Ivillage shares at $24 apiece in the first offer… and then a secondary offering at $28 each.

A few months after Women.com went public, the $50,000 in seed capital I might have invested in the project was worth about $5 million. In this case, as in so many others, I missed my chance to get rich.

But now, yet another 9 months have gone by, and Bloomberg columnist Christopher Byron updates us on what happened:

“In the last year, the financial underpinnings of these two companies – propped up with IPO money from the latter stages of Wall Street’s great dot-com investment bubble of the 1990s – have all but collapsed, with both concerns now looking, for all the world, to be in a flat-out race to extinction. Coming down the home stretch, it is almost certain to become a photo finish.”

Women.com was worth almost $1 billion a year ago. Since then, the company has lost 98% of its value. Ivillage stock has sunk 97%. It too was worth nearly a billion dollars at the peak of the Internet mania. Now, it has a market value of $22.3 million.

Neither company has much to show for all the money they’ve spent and all the hype they’ve generated. Each has some cash left, but that is about all. Byron calculates that Ivillage should have a book value – based on the cash in the till – of no ore than about $1.50 a share. Women.com has less than half that amount. They are each burning cash at the rate of $10 million per quarter…and both are expected to run out of money before the end of 2001.

The business model turned out to be as comic as it first appeared. Women.com’s revenues are falling – with only $8.9 million in the most recent quarter. “At that rate,” says Byron, “Women.com will, for all practical purposes, be generating almost no revenue at all by June. Meanwhile, its losses keep widening, from $15.5 million in the three-month period ended in March, to $30 million in the September quarter.”

Ivillage is not doing much better, when you look behind the numbers, says Byron. The company “is now drowning in charges and write-offs. In 1999, the company bought a bunch of women’s issues-type Web sites for $156 million in mostly IVillage stock, then wrote off roughly $25 million of it as goodwill. Now, it has written off almost all the rest – some $98.1 million in all – as being basically worthless.”

But Candy Carpenter may have gotten another opportunity to make some money on the Ivillage concept. According to Byron, British supermarket chain Tesco has given her $20 million to start up an Ivillage site in England.

Bully for Ms. Carpenter! But soon, investors may be asking Goldman Sachs and Morgan Stanley how come they sold shares in companies that were obviously hopeless.

Your correspondent,

Bill Bonner Ouzilly, France December 28, 2000

*** The Santa rally continued yesterday. The Dow rose 111 points. The Nasdaq climbed 43.

*** The Dow looks pretty good. Twice as many stocks rose as fell – 2048 to 908 – on the NYSE. And it is widely believed that a rate cut by Mr. Greenspan in January will put stocks back in growth mode.

*** So, it is possible that the index will continue to go up, for a while at least. My guess is that the Dow will be undermined by a sinking dollar, falling earnings, bankruptcies and recession. Greenspan will cut rates… too little, and too late… But all of this is in the future.

*** Speaking of which, it is almost time for our Daily Reckoning Predictions for 2001. Stay tuned…

*** One of the predictions offered by Mark Gilbert, a Bloomberg columnist, is that there will be a “backlash against analysts.” People will want to know why Henry Blodget, for example, maintained a “buy” on Amazon.com as the stock fell 85%…and then switched it to a “near term accumulate.” They’ll also be curious as to why Mary Meeker gives eBay an “outperform” rating, when the stock is clearly in a dead heat with AMZN and others for the title of one of the most dreadful disasters of the year. Is it because they really believe their own hype? Or because their corporate finance departments would nail their hides to the wall if they told the truth?

*** One of the best-performing stocks on the Dow this year has been Phillip Morris, which rose to $45.25 yesterday. I am happy to point this out because I suggested the tobacco company to you early last year – when people were sinking every available penny into the big techs and MO was considered hopeless.

*** While most stocks did well yesterday, the Internets continued their decline. TheStreet.com Internet index fell another 4%. Network Associates, a company specializing in software protection, fell 61% after announcing a loss for the 4th quarter of $130 to $140 million.

*** Yahoo! and Amazon also lost ground. AOL dropped to its lowest level since Feb. ’99…and Cisco – at $40 – has given up more than a year of stock gains.

*** The Index of Leading Economic Indicators fell 0.2% in November, after a 0.3% decline in October. It has fallen in 6 of the past 11 months.

*** “Heating Fuels Soar as Frigid Weather Blankets Northern U.S.” a Bloomberg headline reports. The cold weather has turned natural gas stocks hot. Is it time to sell them? Maybe.

*** And this cheerful item from the San Jose Mercury News: “Nasdaq reflects road to ’29 crash analysts warn.” The article compares the Nasdaq of the last 5 years to the Dow of the five years running up to ’29 and remarks on other similarities.

*** Nasdaq losses have already taken $3 trillion out of the economy. Bringing the index back to a more comfortable P/E of 40 (or about twice the Dow P/E) would mean a drop of about 60% from current levels – or about another $2 trillion of nominal wealth.

*** Could the Nasdaq collapse on its own – while the Dow remains relatively untouched? Not likely. The stock market IS the economy. $5 trillion in losses cannot be ignored. That amount equals about $50,000 per family. People cannot take that kind of loss without changing their spending habits. They will buy fewer, cheaper goods and services – and postpone major outlays until things begin to look better. When will that be? Hmmmmm…

*** Here’s a hint from the dark side of the planet – “Japanese Gloom Deepens.” After 11 years of a bear market/deflation/recession, earlier this year economists had begun to think Japan was on the road to recovery. Alas, consumer prices have fallen about 1% in 2000. The Tokyo stock market is very near its 1998 low…and yesterday, it was announced that industrial output fell 0.8% in the month of November.

*** What’s wrong with the Japanese? Have they no central bank? Have they no knobs to turn, no pedals to push, no levers to switch? Maybe the principles of economic management don’t work east of the Urals…or West of Honolulu? Or maybe an economy is not quite as simple a machine as most economists and investors seem to think.

*** The dollar bounced very slightly yesterday. Remember, the 10- to 15- year cycle that has favored dollar- denominated assets has come to an end. It is time to switch to anti-dollar investments.

*** The poor yield curve! It is “inverted.” Should it get out….make some friends…have some fun? Nope. What this means is that short-term loans are cheaper than long-term ones. This is an anomalous situation – which has been a good indicator of coming recession. Normally, and reasonably, people want a higher interest rate on longer-term lending. The longer the term, the more that can go wrong. So, lenders expect to earn a higher rate of interest on longer-term loans to make up for the additional risk. When short term rates go higher than long ones, it means that credit is getting tight…with lenders unwilling or unable to make loans. They may be happy to lend the U.S. Treasury money for 30 years at 6% – because they can be reasonably sure the treasury is good for the money. But they’re not so sure about corporate 30-day notes.

*** My friend John Mauldin reports that the yield curve has never been more inverted than it is now. “There should be no denying,” adds Doug Noland of the Prudent Bear recently, “that we are in the midst of an historic and systemic collapse in credit quality.”

*** The season, here in France, has been very mild. But this morning, we awoke to a dusting of hoarfrost. And Mr. Deshais tells us that it is expected to snow tomorrow. The kids are excited.