S.A.D.

“Bears and cynics should enjoy it while they can,” says a Forbes columnist, because it won’t last long.

The invitation is accepted. We will enjoy it with the same enthusiasm with which we would attend a tort lawyer’s funeral.

In today’s letter I yield to temptation, and give myself over to the few pleasures a bear market affords: recrimination, gloating, I-told-you-so’s and schadenfreude.

There are two ways to look at the recent manic episode in the stock market. Depending on what mood you are in, you could see it as merely a case of “irrational exuberance” or it could be looked at more darkly – as almost criminally slick.

“Someone is out of a lot of money,” remarks the Washington Post. “And that someone is the retail investor. The insiders – entrepreneurs, venture capital firms, investment banks, and large institutional investors – pulled out their capital long before the fall, leaving mom and pop investors holding the bag.

“Instead of the greatest legal creation of wealth,” says the Post, “the high tech financial bubble represented the greatest ever legal transfer of wealth – from retail investors to insiders.”

Whether it was a just a Big Bubble, or a Big Con, the effect is the same – money is lost. But at least the latter interpretation leaves the victim with a grievance to fill the vacancy left by the departure of his fortune. Nursing it carefully, it could even grow into a promising lawsuit.

Thus, for example, did shareholders in Dr.Koop.com take their case to the courts for redress. In the spirit of mischief, I offer the following details to aid the plaintiff’s cause:

The facts were reported by our own Ned Harper in “The Great Dr. Koop Swindle,” of August 2000. “On February 15th, 2000,” Ned wrote, “auditors came to [Dr.Koop’s] Austin, Texas headquarters to have a look at the books. The accountants saw big trouble. They issued a ‘going concern’ warning on drkoop.com.”

You might think that news of this gravity might be the sort of thing the SEC would like to see passed along to investors. But the Dr. Koop crew apparently decided to keep it to themselves.

“I went to the web site,” Ned reports, and “had a look at the press release issued the day of the warning…

“Titled ‘Dr. Koop Grows Revenue 75%,'” CEO Donald Hackett made it sound like everything was coming up tulips. “The successful execution of our business strategy has firmly positioned the company for growth,” he continued. Even in the information age, or so it seems, some information is not worth passing along. No mention is made of the “going concern” warning.

Investors, alleging fraud, say that Dr. C. Everett Koop sold off $915,000 of his stock a week and a half after the warning. “In fact,” Ned elaborates, “between February 15th and 18th, other panicky officers and directors sold off their shares for a profit of over $7 million…including Nancy Snyderman (the ABC News health reporter)…”

The stock traded as high as $45. But, according to “Deathwatch” website, the company ran out of money on March 4, but today you can still buy a share for $.16.

Attitudes change with the seasons of the market, dear reader. When the sun is shining, everything seems possible. Who would blame Dr. Koop when his shares were rising?

But when the days grow short and the weather turns bad, investors get a form of Seasonal Affective Disorder (S.A.D.). They grow grumpy, sullen, surly – and litigious.

Another target that might interest plaintiffs’ attorneys is a company called Ariba Inc. “Consider the numbers,” suggested Eric Fry on the Daily Reckoning website last October. “Since Ariba became a public company on June 23, 1999, insiders have filed to unload about 13.2 million shares of stock, to realize about $1.8 billion.”

The unloaders are living proof that some people made a lot of money from the Great Tech Bubble. “Not a bad haul for officers and associated muckety-mucks of a profitless company…” Eric continued. But “profitless” doesn’t do justice to Ariba. If Dr.Koop was a case of irrational exuberance, Ariba was exuberance run stark, raving mad.

The company was worth a colossal $36 billion at its peak, despite having only $200 million in total revenues from its inception in 1996 until Eric’s piece appeared. And profits? Profits? Forget it. Ariba lost $463 million in the 12 months leading up to Eric’s report.

Neverthless, “the reigning ‘Queen of the Internet,’ Mary Meeker and her Morgan Stanley Dean Witter colleague Charles E. Phillips lavished eloquent praise on Ariba in July 1999,” Eric recalls, “just as the company began its public life – a life sired, incidentally, by the bankers on the other side of the Chinese Wall at [Morgan Stanley].”

Apparently, just about everyone – except, of course, the ordinary retail investor – was in on the joke. “Although Credit Suisse First Boston analyst Brent Thill initiated coverage of Ariba on Sept. 24, 1999, with a buy rating, and followed up with 13 reiterations of his rating over the past 12 months, Credit Suisse Asset Management was not completely persuaded. It sold nearly 80,000 shares, or 43% of its original stake, in the quarter ended June 30. The names of the company’s lead underwriter, its venture-capital backers and many of its initial investor-clients can be found on the list of selling insiders, as well.”

One of the biggest insiders was CEO Keith Krach. In a radio interview on April 12, Krach said he and his group “were building a great company in the 21st century and we are focused on the long run.”

Focusing on the long term did not prevent Krach from seeing his short-term interests clearly. Eric reports: “Krach has filed to sell 2.2 million shares (split adjusted) over the last 12 months, netting $179 million…even as the red ink mounted to almost a half-billion dollars last year, top management pocketed more than $1 billion from stock sales.”

“Little investors never stood a chance,” concludes the Post. “Because they simply don’t have the access – both to key information and to early deals, as big investors.”

But at least they have access to lawyers. A class action lawsuit against Ariba was filed last Thursday as the stock slumped to $9.12 after once trading at $173. Readers who would like to join the suit are invited to follow the sirens to the law firm’s website at www.bernlieb.com.

Your reporter, on his way back from the Trevi fountain, the Spanish steps, the coliseum…and other wonders.

Bill Bonner Rome, Italy March 27, 2001

*** “Can the world escape recession?” asks a headline in the Economist. The accompanying article points out that the damage has not been confined to the United States. $10 trillion has been lost worldwide, as equity values fell. That amount is equal to 30% of world GDP.

*** “Never has so much been lost in such a short time,” continues the Economist. And it could get worse – 46% of world GDP comes from just two economies, the U.S. and Japan. Both are on the verge of recession.

*** “We would say the odds…of a synchronous global slowdown…are pretty high at 1 in 4,” estimates Allen Sinai, chief economist at Decision Economics.

*** “How bad can it get?” asks another headline, this one in the Financial Times. The article points out that debt is at record levels – but not when compared to assets. Trouble is, the assets – property and shares – are subject to huge discount without notice. Debt is not.

*** World GDP has not fallen since the 1930s. Could it fall in the next year or two? Maybe. But the Economist still believes it is ‘up to us.’ “Policymakers must be ready to support economies if necessary, by cutting interest rates or taxes. They must not send globalization into reverse.”

*** What can policy makers do? They can cut taxes! George W. Bush, for example, is proposing a tax cut of $1.2 trillion over the next ten years. Will that offset a bear market that wipes out $4 trillion in 12 months?

*** What else can policy makers do? They can try to inflate the currency. But as pointed out here many times – lowering the fed funds rate doesn’t necessarily make people want to borrow. And if they don’t borrow – the credit bubble doesn’t get reflated.

*** “Banks Tighten up on Business Loans as Economy Softens,” notes the LA TIMES. “The banks have become more cautious,” said an investment banker who had put out feelers for a loan for one of his clients. A Fed survey from January showed 60% of banks had tightened their standards.

*** Just as Henry Blodget was surprised to discover that investors would want stocks in companies that could turn a profit, no doubt The Economist will be surprised to discover that banks don’t want to lend their money to people who may not be able to pay them back.

*** (As long forecast here, )the Dallas Morning News reports that “Consumers [are] no longer feeling rich.” The paper quotes an economist from Standard & Poors: “The wealth effect…is going into reverse.”

*** And an ABCNews/Money poll found that 59% of respondents thought this was a “poor” or “not good” time to buy things. Only 3% said it was an “excellent” time to make a purchase.

*** Alas, the world is a funny place…with a lot of funny people in it. Reuters reports that “13 top Wall Street strategists” surveyed expect the S&P to rise 40% by the end of the year. The Dow is expected to rise 33%. And the Nasdaq – 89%!

*** We are a long way from a bottom, dear reader. You will know when the bottom is reached – it will be when the strategists expect the market to go down, not up. And no one will care what they expect anyway.

*** The Dow rose 182 points. Mr. Bear is taking a rest – giving investors a chance to recover their courage and forget about him.

*** Dan Denning: “‘Don’t fight the Fed,’ is still a rallying cry for investors. It offers comfort. But if you believe the underlying logic of ‘Don’t fight the Fed,’ you believe bureaucratic monetary policy makers can control the business cycle. It also means you believe the market is efficient. And that estimates of slower growth, bad earnings, more layoffs, weaker consumer spending, and continued high-energy prices are already priced into stocks. And worst of all, you believe that today is an excellent buying opportunity. This is your chance to buy the ‘Big Bottom’.”

*** The Nasdaq fell 10 points.

*** “Investors sometimes act like spoiled brats, selling stocks when the Fed declines to satisfy their every whim…” writes “Dow 36,000” author James Glassman in Monday’s International Herald Tribune. “The Fed does make mistakes,” he says. But, “with the exception of the Great Depression, slowdowns in the U.S. economy have been brief. And in every case, the economy – and the market – has quickly recovered to the higher level.” Yes, sort of. But no one would have thought so in 1940. Or 1980. And even though the market goes up and down…stocks, all of them, eventually go down and never get up again.

*** The Washington Post, for example, tells us that 3 local telecom companies have “thrown in the towel” in the last 10 years. The three include E- spire, Metrocall, and our own friend PSINet, Inc.

*** Gold barely moved yesterday.

*** “The idea of the Fed Chairman, the Treasury Secretary and a roomful of bankers sitting down at a table to collude wouldn’t even make a good movie, because it’s so incredible. At least to me…” says Doug Casey, commenting on the GATA lawsuit alleging collusion in the gold market. “Still, is somebody manipulating gold? Well, it’s clearly in the interest of all governments and central banks for the price to stay low just because it gives the appearance that all’s right with the financial and economic worlds. It’s one thing for the stock market to be weak. But if gold takes off at the same time, that could cause people to push the panic button for real.”

*** “The city was like one big party, but only the chosen few could get in,” the NY Times reported about San Francisco at the height of the dot- economy. The rental vacancy rate last year was effectively zero, with 50 applicants for every available unit. Today, in the South of Market neighborhood, where many of the start-ups were housed, the vacancy rate has skyrocketed to 18%… and it is now over 8% city wide. “Defeated entrepreneurs have been sent packing,” says the Times.

*** As you may have noticed, I am in Rome. What a city! An American tourist overlooking the coliseum was heard to remark: “Nice stadium, but it needs some work.”

*** Looking out over the exposed ruins of ancient Rome, you can’t help but wonder: what happened? Over a period of about 800 years – from about 700 B.C. to the reign of Emperor Trajan, which ended in 117 – Rome came to dominate the entire Mediterranean and much of Europe, North Africa and Asia Minor. It did so, we are told, in the same way that Jack Welch built GE – by aggressive management and superior administration. The roads, the government, the builders, the army – everything worked well in Ceasar’s Rome.

*** But all excesses get corrected. Over the next 800 years, Rome declined. First the barbarians were on the edges of the empire – then at the gates of Rome itself. In the 6th century, Rome was sacked. By the middle of the 20th century the Italian army was often a liability on the battlefield, and Roman administration was oxymoronic. And by the 21st century, the barbarians were paying guests in Roman hotels.