Businessmen, CEOs and Other Desperadoes

Jean-Marie Messier arrived at the pearly gates. “This is heaven?” he asked. “Yes, Mr. Messier, enter,” came the response. Behind the doors, Messier saw flames shooting up and desolation everywhere. “Wait a minute…I thought this was heaven,” he protested. “Ah, no one told you… Heaven and Hell have merged.”

Joke, thought by some to be funny, reported in the Liberation

Poor J2M.

“The ex-master of the world negotiates his surrender,” reads the headline in today’s Liberation. The story might have concerned Kozlowski or Ebbers or any one of dozens of business execs under house arrest. Instead, it introduced an article about France’s own wunder- capitalist, merger-king Jean-Marie Messier, CEO – until very recently – of Vivendi Universal, the world’s second largest communications company.

On December 5th, 2000, when all things seemed possible, you could have bought a share in the newly-merged Vivendi, Seagram, Canal+ group for 70 euros. Two years later, “J2M”, as he is known in the French press, announced some bad news. Vivendi Universal lost $13 billion in the year 2001 and had accumulated $34 billion in debt. By April of this year, the stock had lost half its value. By last week, it was down 2/3rds and yesterday, according to the Liberation article, J2M picked up the phone, called his staff in America and announced his departure…

J2M would be happy to walk away…take a vacation…get some sun, maybe. Or perhaps write a book. But, there is a little problem. Like Ebbers, Gilder and so many others, J2M was a believer. He borrowed $25 million to buy Vivendi Universal shares back when the stock was trading at 50 euros (more the twice the current price). Now, say people close to him, the poor man is close to bankruptcy.

Every revolution needs its intellectuals, its fools, its martyrs and its executioners. The revolution of the Information Age was no different. J2M…welcome to the guillotine.

Of course, $25 million is barely pocket change to many American CEOs. Under normal circumstances, passing the hat at any reasonable social gathering in Boca Raton or East Hampton ought to bail out the hapless frog. But now, CEOs of publicly-traded companies are all slinking off into hiding, fearing for their lives. Every time one of their breed gets his name in the paper, the others all breathe a sigh of relief…and look the other way as the poor man is trundled off to the scaffold. None come to his aid. Heck, they all claim they never met the man. And no way did they do what he did…uh uh…

At this point in today’s letter, it is probably appropriate to declare an interest. Your editor has been the CEO of a communications company for the last 20 years. You wouldn’t know it, of course. From his reckless demeanor, his Land’s End wardrobe, and his low- rent headquarters in Paris’s homosexual quarter, your editor is more likely to be mistaken for a hack journalist with a drinking problem than a hard-charging superstar CEO.

Not so J2M; he went to all the best schools, including France’s elite ENA (where your editor is hoping to send Henry – so French taxpayers can pay the tuition). He took over one of the country’s most important companies – Generale des Eaux – at age 40. Quick witted and ambitious, he soon became a media favorite and was rumored to be having an affair with Sophie Marceau, a beautiful actress.

No one suspects your editor of having an affair with a French film star. Alas. He has the imagination for it: what he lacks is the opportunity and the ambition. Whatever his virtues, your editor is too dull for life in the fast lane.

Still, he can’t help but feel a little sympathy and solidarity with corporate CEOs who were lured into a life of high-living and low crime in the late ’90s and now find themselves spat upon by every crackpot, politician and hack in Christendom. What’s more, out of pure contrariness if nothing else, we feel we should stand up for our class.

We know quite a few CEOs. Whether they run filling stations or multi-nationals, they are decent fellows who do the best they can. They get to the office early and stay late. They know their businesses, and pay attention to the things they know. Few can afford to waste time gabbing about the Information Revolution, the WAT, or the federal deficit; they’re too busy lusting after spiff in the conventional way – by working for it. Few get their pictures on the magazine covers or gain the favors of Hollywood starlets. Instead, they make do with their wives and their businesses…or failing that, find new ones.

Nor does anyone really care if they misstate their income or overestimate their earnings. Most – and your editor is no exception – actually live on what their businesses make. Business earnings are not some mythical figures made up by accountants and CFO sorcerers, but real money that is used to pay the kids’ tuition and the family grocery bill. The CEOs we know don’t run the risk of indictment for getting the numbers wrong; just the risk of humiliation when their checks bounce. No banks come banging on their doors to lend them money. No investors come up to them after church services eager to buy their shares.

You’re not likely to hear these CEOs raving about the wonders of the New Era…but neither will you be stuck with their shares at 6 cents on the dollar.

Messier, on the other hand, might have contented himself with treating waste water at Generale des Eaux. But would that have given joy to the shareholders…or the tabloid journalists…or Sophie Marceau, for that matter? No…Messier had to jump beyond gray water into really deep doo doo. He bought Seagram for $30 billion and then USA Network for $10 billion. Then, he launched an internet portal called Vizzavi, which was – as you might imagine – a total flop. Finally, with the company facing debt payments it cannot make…and the stock trading at only $22 yesterday…J2M had to leave.

We will miss him.

Your editor, never once mistaken for Bernie Ebbers or Jack Welch,

Bill Bonner
July 2, 2002

P.S. A friend sends me this news item:

Band of Roving Chief Executives Spotted Miles from Mexican Border

San Antonio, Texas.

Unwilling to wait for their eventual indictments, the 10,000 remaining CEOs of public U.S. companies made a break for it yesterday, heading for the Mexican border, plundering towns and villages along the way, and writing the entire rampage off as a marketing expense.

‘They came into my home, made me pay for my own TV, then double-booked the revenues,’ said Rachel Sanchez of Las Cruces, just north of El Paso. ‘Right in front of my daughters.’

Calling themselves the CEOnistas, the chief executives were first spotted last night along the Rio Grande River near Quemado…”

More at

For six weeks in a row, stocks have fallen. They have to stop falling someday. But yesterday was not the day.

Surely a rally is on the way, we imagine. But so is a panic. Which will happen first, we don’t know.

Despite the grinding bear market action, stocks are still expensive – as Eric points out below. What justifies such high prices? Investors look to analysts’ estimates for earnings and take comfort. On average, analysts expect earnings to rise by nearly 50% in the second half of the year.

But David Dreman studied analysts’ earnings projections between ’82 and ’97. During this period, he says, analysts tended to overestimate earnings by 200%. But what do you expect…that’s what they earn their big paychecks for. Right, Eric?


Eric Fry, reporting from the capital of corporate sin…that Gomorrah on the Hudson, New York City:

– Yikes!…The stock market seems to have a problem – too many eager sellers and not enough eager buyers. The results aren’t pretty. Yesterday, the Nasdaq tumbled 4% to 1,403.76 – its lowest closing price in more than five years! The Dow faded 133 points to 9,109.79.

– The stock market simply refuses to get well…no matter how many times Wall Street strategists predict a recovery. The sickly greenback, likewise, looks “greener behind the gills” every day…although it managed to hold steady yesterday.

– Gold rebounded from an early morning retreat to finish the trading session up 50 cents at $314.40 per ounce. Stocks are collapsing under the weight of dashed expectations, disillusionment and disgust. “The credibility of US businesses is being challenged as never before,” says Morgan Stanley’s Stephen Roach. “Each time there is a major revelation, overwrought investors want to conclude that it’s the last…Maybe this is as bad as it gets, but it’s hard to accept those odds at this point.” Roach suspects, as do we, that the corporate corruption story is far from over…It is an epic novel, not a limerick.

– “Signs abound that the current stock market downturn is no typical slump,” writes Jonathan Laing in this week’s Barron’s. “The Nasdaq sits more than 70% below its March 2000 high of 5,048, while the Standard & Poor’s 500 Index has sunk some 36% below its record close of 1527.”

– “Nor does history offer any comfort to today’s stock investors,” Laing continues. “The last three stock market manias that ended in 1901, 1929 and 1966-68 were followed by 15 to 20 years of horrible average annual returns, ranging between…zero [and] a negative 1.8% after adjusting for inflation.”

– Two decades of losses must feel like a very long time. Most investors aren’t prepared for twenty days of losses, much less twenty years. Could such a dire scenario actually come to pass? We don’t know, of course, but we do understand the math that suggests it is possible.

– “If P/E ratios fall,” says Laing, “the stock market will cave [a verb…ed.] in the years ahead even if profits exhibit sprightly growth. In the Seventies, for example, the stock market was largely a range-bound flatliner despite a tripling in corporate profits because P/E multiples collapsed during the decade.”

– At the moment, the S&P 500 is selling for about 40 times the last 12 month’s earnings. Let’s assume that accounting gimmickry is flattering earnings by about 15% on average. And let’s assume further that deducting the cost of executive-option grants would trim earnings by another 20% (as several Wall Street firms estimate). That would mean that honest-to-goodness earnings are about 35% less than what is being reported! And that would mean that the S&P 500’s PE ratio is not 40 times earnings, but more like 60 times earnings!

– Let’s be charitable, then, and apply the same calculations to EXPECTED earnings for the S&P 500. Based on expected profits for the next 12 months, the S&P is selling for about 26 times earnings. However, if we trim earnings by the same 35% described above, the S&P is actually selling for about 40 times honest-to-goodness EXPECTED earnings.

– That is expensive, folks – no ifs, ands or buts. The stock market would have to fall a whopping 65% from its current levels to reach its historical average PE ratio of 14 times earnings. Mathematical exercises like these illustrate why it is easy to be bearish – or at least, to be chicken.

– Certainly, stocks can, and will, rally from time to time. But the valuation headwind is substantial.

– That’s why Dan Denning, editor of Strategic Investment, continues to scour foreign markets – as well as our own – to find attractive investment opportunities. Despite the falling US stock market and a challenging global investment climate, all five of the international securities Dan has recommended over the last year or so have gained ground.

– “Investors are discovering when it comes to Wall Street, excesses in one direction will eventually lead to excesses in the other direction,” observes Pierre Belec of Reuters. “The cheerleaders on Wall Street are finally realizing they’ve flown their clients into the eye of a huge storm. Fair to ask is whether the 1990s may turn out to have been the most incredible period of wealth destruction in history.”

– In other words, the unfolding bust will likely rival the size and duration of the preceding boom…

– We don’t make the rules, dear reader; we just try to play by them.


Back in Paris…

*** “Don’t blame Newt for Worldcom,” says today’s counterpoint, providing the obvious rebuttal. But someone must be to blame…more below…

*** “It’s too long,” said a friend. He was speaking of the Daily Reckoning…which, he tells me, has become a cross to bear for thousands of Americans. “Why don’t you make it a little shorter?”

Okay. We can take constructive criticism. And we’ll trim back the DR commentary – as soon as we get time.

*** Comedy gives way to farce, at least in this Sodom by the Seine. Saturday, I set off from the office with Henry, 11, to the movies. But, arriving at Place Odeon, we were greeted by a huge political demonstration. The square was so crowded with the sweaty masses we couldn’t get through. What brought the protestors out? Was this the Trotskyite wing of the Red Workers Alliance demanding a work week of only 7 and a half hours…or the Bourbon Restorationists seeking to dust off some decrepit heir and set him up in the Elysee Palace? Not at all. Instead, thousands of young gay men writhed and bopped to the sounds of awful music, while banners demanded an end to “Trans-phobia” and other sins of the modern age. Flat bed trucks carried groups of them, each with its own gripe. The Lesbians were out in force. Some looked very pretty, which seemed a shame. There were also the cross-dressers, drag queens, and in-your-face poofters…along with the rest of the flotsam and jetsam of weekend perverts. One young black man walked along on stilts, wearing a top hat and cut-away tails. He might have been in the circus, except that the back of his pants were also cut-away, revealing his naked derriere as he walked along. Henry and I abandoned our movie, and went home; we felt we had had enough entertainment for the day.