Das Kapital Intellektuell

There is a spectre haunting the world’s markets. It is the ghost of the Big Techs…the Internets…and the speculative excesses of the last years of the last millennium.

“The market may be right about a lot of these companies,” said a bullish friend recently, “but certainly not all of them. Many will turn out to be good companies. The market can destroy their financial capital…but not their intellectual capital.”

This recalled a high school teacher who would point to his wrinkled brow and say, “They can take away what you have in your bank account…but never what you have up here.” This little gem of wisdom lost a little of it luster as we students wondered if he had much in either location.

But the notion of indestructible capital – whether it is in the form of gold bars…or brain cells…is attractive enough to be hazardous, like an unexploded hand grenade in a playground. Leaving the yellow metal out of this discussion in order to maintain a dignified tone, we can’t help but wonder what became of the intellectual capital behind, say, PSInet.

The stock, $50 a year ago, is now a penny share. You can buy all you want for just 78 cents a share. Did the intellectual capital walk off the job? Did it disappear? Is it hiding somewhere?

‘PSInet’ scrawled in flowing blue neon on the side of the new Ravens’ stadium, greets visitors to Baltimore each time they drive in from the airport. Last I heard, the Ravens still had a chance of bringing the super-bowl to Baltimore. But it won’t be the same super-bowl it was last year, when companies expended their financial capital on ads at the rate of $2.2 million for 30 seconds of ad time.

That is what happens to dead presidents in the hands of what Congressman Paul Kanjorski called “high flying dude billionaires.” It is spent. Wasted. Gone forever. If you had gone to the bathroom during the ads – you would have missed millions of dollar worth of it. Don’t worry about it disturbing your sleep. Except for chemical traces…such as the blue neon on the Ravens’ stadium…not even a ghost of it remains.

But what about the intellectual capital? Is there no way to destroy it? Buried by the market, is it destined to wander among mortals, giving them a vampire’s kiss and spooking them to acts of wanton absurdity – like buying a Picasso painting for $55 million, as someone did recently? The blue period painting was once owned by Gertrude Stein, whose famous comment, ‘there’s no there there,’ might apply to the idea of intellectual capital better than to bourgeois society.

Could it be, dear reader, that ‘intellectual capital’ is really nothing more than ‘intellectuals’ capital’ – another big, dumb multi-syllabic idea used as a tool by hustlers to construct a world that is both preposterous and dangerous?

Feeling the wind of a major credit inflation in their hair, investors were susceptible to what John Kenneth Galbraith called, “the bezzle.” When times are good, he said, people are “relaxed, trusting, and money is plentiful… Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.”

‘Intellectual capital’ is a kind of bezzle – used by stock promoters, analysts, and management to separate capitalists from their money.

Grant’s Interest Rate Observer Robert Tracey, who recently gazed upon Oracle’s income statement with the romantic eye of an IRS auditor, discovered a bezzle…or at least a new twist, so to speak, in the history of capitalism. Lenin had predicted that capitalists would sell the rope with which they were to be hanged. But, capitalists who gave their money to Larry Ellison’s Oracle went one step further – they bought the rope themselves!

Like so many other companies rich in intellectual capital, Oracle is generous with employee stock options. Though a form of employee compensation – and often the principle form – the cost of these options do not appear on the income statement as a business expense. Instead, they show up as a capital transaction. In effect, the firm’s cash is used to reward those who provide the intellectual capital at the expense of those who provide capital in its more traditional form.

“In the three latest fiscal years (ended May)” says the Grant’s’ report, “a total of $3.3 billion in real cash left the company for the purpose of managing the dilution from employee options, stock warrants and the stock-repurchase plan. This expense never registered on the income statement.”

“$2.7 billion was laid out,” continues Tracy “…to suppress the dilutive effects of the employee compensations plans. …Last fiscal year, it amounted to 43.2% of net income. In the fiscal quarter ended August, expenditures to manage share dilution probably represented more than 200% of net income.”

But intellectual capital can have a sweet side, too – like a kiss – utterly useless in the abstract…but powerful when put to good service.

“One of the shortcomings of GAAP accounting,” observed Tracy “is its inability to reflect the true value of intangible assets…[especially an asset as gaseous as intellectual capital]… Nevertheless, one would expect that the value of these ‘intangible’ assets would some day be transformed into a more tangible asset, like cash.”

Of course, when this happens – capitalists appreciate it. Companies with high earnings compared to book value have no trouble gaining respect. They have no reason to call attention to the intellectual capital hidden in the balance sheet – it is obvious on the income statement. They have felt the warm, moist smooch of profits.

Hoping you too, dear reader, have enjoyed the kiss of profits, or at least a bit of the other kind…

Bill Bonner Paris, France January 11, 2001

*** What’s this? Cisco’s CEO took the microphone yesterday and admitted that the last quarter was “more challenging” than expected. He also quoted a customer who had described the sudden slowdown in sales as “like they turned off a light switch.”

*** But that didn’t stop tech investors – who labor in constant darkness anyway. The Internets were once again the top performers in yesterday’s market. The INX rose 6%. TheStreet.com’s index shot up 9%. Even Amazon.com rose in price as investors rushed back into the most speculative parts of the market.

*** “Part of what appeared to spark the rally late in the day was yet another rumor that the Fed was going to cut,” says William Fleckenstien. “It seems pretty silly to believe on a day when the market is screaming, and oil is at $30, that the Fed would come in again, but it just goes to show that bubbleonians think that Easy Al, The Put- Writers’ Pal, is going to jump in to save the day any time they get in trouble.”

*** You may recall my quotations of Michael Murphy during the last year. As techs fell, Murphy urged his readers to buy the ‘must own’ tech stocks on dips, thus providing a foil for my bearish comments. How well did Murphy’s subscribers do? Well, Forbes and my old friend Mark Hulbert report that Michael Murphy’s Technology Investing letter lost 32% last year.

*** But now…just when the tech show seemed over…the curtain opens and they’re back! Another act? A grand finale? Or are they just going to hold hands, bow, get a round of applause and retreat backstage? We will see.

*** But let’s look at what else is going on in the Greatest Show on Earth: The main averages are holding up – the Dow rose 31 points yesterday; the Nasdaq rose 82. Just like old times.

*** And the market’s breadth was, once again, surprisingly strong. There were 1862 stocks advancing while only 1058 were going the other way on the NYSE. 169 hit new highs and only 20 hit new lows.

*** So far this week, the Dow is down 1%. But the Russell 2000 (a small cap index) is up 3%.

*** The dollar seems to have stopped falling. Yesterday, the euro dropped back a little – to 94 cents. The dollar has actually gained ground – though modestly – this week…up about 1% against the European currency.

*** And the junk bond market seems to have come back to life, too. $7 billion of new debt came into the market yesterday.

*** And what’s this? Contrary to what I told you to expect, people are still borrowing money…and spending it. We’ll know more tomorrow, but it looks as though sales are not as bad as you would expect. And mortgage applications – for both refinancing and new mortgages – are increasing.

*** “We are in the midst of a major refinancing boom,” reports the Prudent Bear’s mid-week analysis. “The refinancing index is 257% above year ago levels.”

*** Could it be that I am wrong? Stock prices are holding up, speculation is increasing, there seems to be a new boom in debt…could Greenspan’s effort to pump up the credit bubble succeed? The answer to both questions, dear reader, is, well, yes. I could be wrong. And there could be another credit bubble inflating now. The chief problem with market soothsayers is that they are unreliable. Just when you come to think they are always right…or always wrong…they surprise you.

*** The St. Louis Fed reports that MZM – cash – is still increasing at more than twice the rate of the GDP. Liquidity, like water on a flat roof, has to leak somewhere. But where? How? No sign of gold going up – in fact, it fell nearly $3 yesterday.

*** But what’s this? A chart of mortgage applications shows a big spike in the last 2 weeks of December – before the rate cut. Why would that be? Why would people refinance before rates went down?

*** Maybe it is ‘adverse selection.’ Maybe they had to. Goldman Sachs Economics estimated that household net worth fell $875 billion in the last quarter. The Goldman report noted that the last 3 quarters saw the “sharpest reduction in the ratio of net worth to disposable income on record (since 1952)…” Hmmm…there are about 100 million families in America. Each one lost an average of $8,750 in the 4th quarter alone. Goldman economists expect tomorrow’s sales figures for the 4th quarter of 2000 will show “significant decline.”

*** An Associated Press poll found that only a third of respondents thought their finances would be in better shape a year from now – down from 50% who thought so last spring. Less than a half thought the stock market would be a good place to put money, with women more risk-averse than men. “No way,” said one woman when asked if she would put an extra $1,000 into stocks, “things are too shaky.”

*** “If we don’t cut production,” said OPEC’s secretary general Wednesday, “there will be an uncontrollable plunge in prices.” Oil rose $2.

*** “Jeremy Siegel, professor at the Wharton School of Business and author of “Stocks for the Long Run,” reports the Oxford Club Wire, “wrote a column for the Wall Street Journal on which we commented last March. It was titled ‘Big Cap Tech Stocks are a Sucker Bet.’ He specifically pointed out companies like JDS Uniphase, Yahoo, Qualcomm and their ilk that were outrageously overpriced. Why? Because no big-cap stock company in the entire history of the stock market has been able to sustain a P/E ratio of over 100. Not one big-cap stock – ever. Plenty have reached that plateau, from Polaroid, to Xerox, to IBM. Every one of them crashed and burned before beginning a sustained rise again.”

*** Excerpt from a letter sent to CA Gov. Gray Davis by Pacific Gas & Electric: “Without the gas supplies currently under contract, gas available to serve high-priority customers will be depleted within several weeks, and possibly sooner if temperatures fall below normal. At that point, home gas furnaces, stoves and water heaters would go off.”

*** Addison and I retired to Le Paradis bar after work yesterday – joined by two of my children, Maria and Will. Maria, who turns 15 on Monday, brought us up to date on her career:

“Mommy and I went to the Madison Agency, on Avenue Hoche…you know, it’s the agency that represents Laetitia Casta…very posh…well, I was supposed to get some photos taken to see if I would be a good model, but we walked in and the woman said, “There’s no need for a photo shoot…I can just look at your face. I love your face! It’s perfect!”

After the gushing stopped the woman told Maria that she might get a couple of gigs…but that she should not consider working seriously until she was at least 16.

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