Freak Show

Bloomberg reported recently on a very small Internet company called That the company is small is perhaps an overstatement. As the SEC report puts it, “the company is not engaged in any substantial business activity and has no plans to engage in any such activity in the foreseeable future.”

This may be the perfect Internet business. It escapes the tedious measures that nag its brethren: Price to sales: not applicable. Price to growth: forget it. Price to earnings: ha-ha.

Even in today’s great tech and Net bubble, stands out. It is an Internet play in the purest sense — a triumph of imagination over tangibility. Its future is not clouded by doubts about its business plan, worries about current management nor the fear of competition. On every point, the skies are clear for doesn’t have to worry about re- inventing itself with each passing fashion or technological innovation. It never invented itself in the first place. It has nothing — except a market cap of $22 million.

Ray DeVoe reported on a company called North American Natural Co. It was in the business of producing educational study aids. Then it changed its name to Pink, and the stock rose from $1 to $17. But another company, Charter Investor Relations of North America, did even better. The stock was trading between 5 and 10 cents and threatening to disappear all together. In a couple of stages, the company re-invented itself as a dot-com publisher known as The price hit $27 and the company was worth $300 million. Not bad for a company that had no sales, no operations and nothing more than an intention to publish an Internet magazine. Subsequently, Pink Monkey fell 90% and the seems to have taken his money and left. Ray could find no further information on the company.

A trio of professors from Perdue examined the name- change phenomenon. Earlier studies had shown that name changes produced only transitory and marginal results. After all, a name change is purely cosmetic. And one could imagine that the easy flow of information would have made markets even more efficient, more “perfect,” than they were before.

Yet, perhaps here, too, the flood of available information in the new Information Age seems to have fogged investors’ glasses. The all-knowing, all-seeing market seems to have lost some of its former perspicacity.

“We find,” say the professors, “that companies which change their name to a dot-com name earn significant abnormal returns on the order of 125% for the 10 days around the announcement date.”

Easy come, easy go? Nope. “The effect is not transitory; there is no post-event negative drift.”

“In addition, there is a strong relation between the daily number of shares traded and the daily abnormal returns in the post-announcement period…this is consistent with the popular press notion of an Internet day trader driving up prices of these Internet stocks…

“Our evidence in this paper lends more support to the investor mania hypothesis than to the rational pricing hypothesis. In this sense, this paper adds to a growing body of evidence documenting irrational investor behavior, both at the aggregate and at the individual level.” Others have commented that Wall Street has come to resemble a circus. I see it more like the “Personals” section of a big city newspaper — full of freaks, abnormalities and perversions. That is what manias produce — irrational, unstable and unhealthy behavior. So if you feel the need to take part — please use protection.

We saw yesterday how the Greatest Period of Wealth Creation in History has impoverished value investors. Not just financially. The rules, knowledge, habits and wisdom of a whole generation of serious investors — including the most serious of them all, Warren Buffett — have been devalued. Their insights and experience are worse than useless in this market — they have been of negative value.

But the Information Age has not only made wrinkled investors dumber. It has contributed to the stupidity of the whole society. Gary North notes how the attitudes and traditions of the public have changed.

“Public optimism is high today,” he writes. “Savings in the United States are now negative. Those people who normally provide savings are looking at their stock market portfolios and saying to themselves, `I don’t need to save. The stock market is doing it for me. My net worth increase 20% per year. All I have to do is to sit back and get rich.’ This is the problem with rising expectations. These expectations persuade people to alter the practices that have produced wealth.”

Real wealth is not produced by a rising stock market. It is produced by actually increasing the stock of goods and services available to people. And that requires foregoing consumption, saving money and investing it to build more and better capacity. But the Wall Street mania creates the illusion of increasing wealth. And it is easy wealth.

Here is the formula for “How to be a millionaire,” as revealed on an Internet post and recorded by William Fleckenstein of

1. Borrow $25,000 from home equity 2. Put the money in an E-Trade account. Use margin to buy $50,000 worth of the Nasdaq 100 proxy, QQQ 3. Hold it for 3.7 years — if stocks keep going up as they did last year, you will be a millionaire

The conclusion of the advice was the question: “Why worry about inflation when the majority of investors will be millionaires in 4 years?”

This sort of logic is nearly irresistible. The home mortgage industry reports that borrowers are refinancing in order to walk away with cash — rather than lower monthly mortgage payments, as was the case a few years ago. The Federal Home Loan system’s total debt rose twice as fast as GDP last year.

Worry about inflation? Why worry about anything! Spend, spend, spend…borrow, borrow, borrow…buy, buy, buy. Alan Greenspan won’t let anything bad happen.

Even the federal government’s “surplus” rests upon consumer debt, according to Charles Biderman of Liquidity Trim Tabs ( Last quarter’s $40 billion budget surplus was caused by greater-than-expected tax receipts which were the product of, mainly, capital gains. During the same period, there was a $60 billion increase in margin debt…without which there would have been no boom on Wall Street, few capital gains and no surplus.

Private debt in America has risen to a record 132% of GDP. That puts total debt at about $13 trillion. There are 100 million households, roughly, in the United States. Unless my math is wrong — that is an average of $130,000 of debt for each one.

The nation as a whole has abandoned the habits of wealth creation — saving and prudent investment — in favor of the illusion of wealth and the freak habits of a mania. How long will the Barnum and Bailey show last? Your correspondent,

Bill Bonner

Paris, France March 2, 2000

*** Not much to say about the Dow and the S&P today. The rallies of the last two sessions seem to have run out of steam. Both indexes were up — but only marginally.

*** The A/D ratio continued to improve — slightly. But there were still more stocks hitting new lows, 153, than reaching new highs, 121.

*** But the Nasdaq is making this silly season sillier by the day. It’s up above 4,700. In fact, it rose 1.9% yesterday alone. It doesn’t take much imagination to figure out how to make money in this market. All you have to do is buy the Nasdaq and sell everything else. Detailed instructions on how to become a millionaire, below.

*** Micron rose again, more than $10. MSFT rose $4. The Internets were mixed.

*** Bonds were down; gold was down a bit, too — as were platinum and palladium.

*** Builders were down despite continued strong home sales. And automakers were down again…even though auto sales headed for the second best month ever. Consumers are doing their part. But who wants those has-been companies when you can make 4% per week in the Nasdaq?

*** Abby Cohen thinks the S&P is about 5% undervalued. The average P/E is around 30.

*** Meanwhile, oil rose $1.34. Gasoline is selling for an average of $1.47 a gallon — its highest level since the Gulf War, reports the Lundberg Survey. Alan Greenspan told the Senate that there were “no signs of inflation.” But as one DR reader suggested, “maybe Alan hasn’t been to the grocery store lately.”

*** The National Association of Purchasing Managers says that prices are rising in 17 out of 20 industries surveyed. And consumer housing prices jumped 16% last year, too.

*** Robert Czeschin, who used to be in our employ, maintained that the wars of the 20th century were determined by oil. Oil is the lifeblood of the industrial age. In both WWI and WWII the Germans were at a crucial disadvantage because they were cut off from Texas crude and its high octane derivatives. The wehrmacht simply ran out of gas. And many of the most costly decisions made during the wars were the consequence of either the lack of fuel or…in the case of the campaign in Southern Russia…the need for it. The Japanese live on an oil-free island. When the United States cut off their oil supplies prior to Pearl Harbor, it was either come to terms with America or attack it. “Japan,” as I recall Bob writing, “chose the bolder course of action.”

*** I mention this because in this New Era, oil is thought to be incidental. Yet, as William Rees-Mogg concludes in “Strategic Investment” (, both the war against the Chechens and the war in Kosovo can be seen as oil wars – – fighting for control over crucial pipeline routes. Make no mistake — oil is still vitally important to modern economies.

*** Currency boards seem to set in motion huge financial booms. At least, that is what I concluded from the evidence that Justin Ford presented yesterday. Justin reports that a new opportunity is on the horizon. Ecuador is, most likely, going to do something better than set up a currency board. It’s going to dollarize its economy. If so, stocks should rise sharply.

*** There’s no country fund covering Ecuador. But Steve Sjuggerud found a conglomerate which he believes will be a major beneficiary of the new currency system. Steve is the investment director of the Oxford Club.

*** “I made $200 in 10 minutes,” reported a DR reader. He had taken yesterday’s “Hot Tip” and acted on it. He did not say whether he sold or bought.

*** Addison von Lunz, my trusty researcher, did a little poking around and found out more about the company. Turns out ePlus [the guys on the train didn’t even have the name right] is a real company located in Herndon, VA. It’s been around since ’91, had sales of $191 million in the last 9 months. And made profits of 3%. It announced a new Internet product last fall and the stock soared 456%. Since, Jan. 3, however, it has lost 37%. The stock closed at $42 yesterday.

*** Pain is relative. I reported the views of an Anglican clergyman who said the pain of being pursued by attention-starved women was “excruciating.” I couldn’t help but remember the early Christian martyrs such as the poor patron Saint of Toulouse, who was tied to a bull and dragged until the skin was torn from his bones. Or the poor communist officials who were caught in a peasant revolt in Russia during the Civil War and “sawed in half while still alive.” At least the communists, arguably, had it coming. More on that tomorrow.

*** Actually, the attentions of female parishioners must be one of the few attractions of the ministry. Salaries are modest. And there is no hope of stock options or an IPO. But there are compensations: as Mencken once put it, “only crazy women ever fall in love with young insurance solicitors, but every young clergyman, if he is so inclined, may have a whole seraglio.”