Pigs Get Slaughtered, Part Deux
"Have you seen the bigger piggies, in their starched white shirts You will find the bigger piggies, stirring up the dirt…Always have clean shirts to play around in
In their sties with all their backing They don’t care what goes on around In their eyes there’s something lacking What they need’s a darn good whacking…"
Lyrics by George Harrison, R.I.P
It is the fat pig that feels the butcher’s knife, say the Chinese.
On March 20th of 2000, few pigs were fatter than Michael Saylor. And perhaps none felt the butcher’s knife more sharply…
Of all the messianic madmen of the era, Saylor stood out – perhaps as the maddest…certainly as one of the richest. But, today, we rise to praise Saylor, not to bury him. It is one thing to bring the fat pig down; but it is against the Daily Reckoning code of honor to kick him after he has fallen. Besides, Saylor brought entertainment to millions…and helped separate countless fools from their money.
"We’re purging ignorance from the planet," Saylor had said, setting a lofty goal for himself. He was on a "crusade for intelligence," he claimed; he wanted to make information "free" and have it "run like water." He planned to write a big book on the subject, to be entitled "Intelligence."
We take some little credit for plunging the knife into Saylor, dear reader. In a contest between ignorance and stupidity on the one hand, and information and intelligence on the other, we know how to bet. Purging the planet of ignorance? Only a buffoon or mountebank would say such a dopey thing. Saylor was clearly one or the other – maybe both.
We were also suspicious of a man who didn’t waste his time on women. Wasting time and money on women is practically a moral obligation for a straight man. But Saylor saw women as "a time sink" and avoided them. In fact, Saylor didn’t drink either – at least, not back then.
We reckoned that Saylor was stark, raving mad. He made a public spectacle of himself every time he opened his mouth. "I think my software is going to become so ubiquitous, so essential, that if it stops working there will be riots," he had told New Yorker magazine. A certain level of madness is often an advantage in the business and entertainment world. But as it turned out, Saylor had less visible corruptions too…he had hidden massive indiscretions in the company’s financial statements.
On March 15, the week before Saylor had his rendezvous at the abattoir, we ridiculed Saylor’s Information Age pretensions. The following day, too, we made fun of his idea for a "Ivy League Education on the Net." Ivy League educations were already bad enough, we pointed out, even when you attend in person.
Saylor’s company, MicroStrategy, had developed software that helped businesses figure out who was buying their products.
"By using the software," explained a Washington Post story, "McDonald’s could tell if a Chicago franchise was four times more likely to sell Big Macs on a winter Friday than was a franchise in Miami (where customers disproportionately preferred filet-of-fish sandwich.)" Maybe the company would be a big success. We didn’t know.
But we knew the stock market had gone mad over companies such as MicroStrategy. Shares were offered to the public on June 11, 1998. Nearly two years later, the stock hit $333. Saylor made another $1.3 billion that day and $4.5 billion in the preceding week – bringing his personal net worth to $13.6 billion. MicroStrategy, with sales of only $200 million, and a reported profit for 1999 of $12.6 million, was worth more than Dupont. Saylor was the richest man in the Washington DC area…wealthier even than Oracle founder, Larry Ellison. At $333, the stock price was as insane as the company’s CEO. But there was no guarantee that either would get his comeuppance anytime soon. (Still, we hope at least a few Daily Reckoning readers went short).
While we were mocking MicroStrategy, its share price and its dizzy CEO, the rest of the financial press was praising him. Hardly a single report failed to find something flattering to say. The English language has thousands of negative words, but before the 20th of March, 2000, the ink-stained hacks, analysts, and TV presenters couldn’t seem to find a single one that applied to Michael Saylor.
Then, on March 20, under pressure from the SEC, MicroStrategy admitted that it had cooked its books for the previous two years. Instead of a profit of $12.6 million in 1999, the company would now should a loss of $34 million to $40 million. Revenue, too, was downsized.
That day, Michael Saylor made history. Never before had a man lost so much money in such a short time. In six hours, his net worth dropped by $6.1 billion.
From that day on, Saylor’s life was different. Instead of being praised by investors and the financial media, he was whacked hard. Investors were out $11 billion. Some of them were angry. Others were suicidal. "I never thought I could lose like this," said one investor on the Yahoo/MicroStrategy message board. He went on to announce that he was going to kill himself.
Before March 20th, Michael Saylor could do no wrong; now he could do no right. Most prominently, Fortune magazine listed him as #1 in the "Billionaire Losers Club," with total losses of $13 billion.
But a difficult failure does more good for a man than an easy success. On the evidence, Saylor is a better man today than he was a few years ago. "He began to drink," reports the Washington Post. "At least two MicroStrategy officials received calls from people who were concerned that they had seen Saylor drunk in public…"
When he’s not drinking, he’s tending to his business. The stock is still overpriced…but, at $3.36, a lot less overpriced than it used to be.
Is Saylor still a visionary? Yes, but "maybe an older, wiser visionary," he says.
Your pen-pal in Paris,
January 22, 2002 — Paris, France
The stock market was closed yesterday, but here at the Daily Reckoning headquarters, we continued to reckon.
Among the things we reckoned with was the fact that "denial is not just a river in Egypt," as they say.
Stephen Roach explains: "Our U.S. team now estimates that real personal consumption expenditures surged at around a 4.5% sequential annual rate in 4Q01 [English translation: the last quarter of 2001]. Only once in the previous six recessions – way back in 2Q60 [the second quarter of 1960] when the consumption growth rate hit 5.1% – has consumer demand expanded more rapidly. By contrast, over the 28 recession quarters since the late 1950s, annualized consumption growth averaged a mere +0.4%. The spending burst of late 2001 was literally ten times as rapid as the recession norm.
"In retrospect," continues the economist, "we know what did the trick in the period just ended – aggressive price cutting, lower energy costs, cash-outs from home mortgage refinancings, and a willingness to draw down income-based saving and take on more debt. Yet all this occurred in a climate of rising unemployment and slowing real income growth – typically a lethal combination for consumer demand. Never before have consumers stretched this far in the depths of recession. If that’s not denial, I don’t know what is."
Businesses are coming to terms with the slump. They’re taking charges, announcing losses and layoffs. Restating earnings. Capital spending has been sharply cut.
But America’s "brain-damaged" consumers and investors have not seemed to notice. They continue to borrow, spend and invest as if this were still the ’90s. The recession has not corrected bad habits nor bad attitudes. Which leads us to believe that we’ll need a lot more recession – and bear market – to get the job done.
That doesn’t necessarily mean that growth will remain negative forever. But a lot more worrying has to pile up before the stock market can climb a wall of it.
Eric Fry in New York…
– The U.S. stock market was closed Monday in honor of Martin Luther King Day. It’s probably fitting to take a breather from the stock market’s violent swings to contemplate King’s message of non-violence…You know, come to think of it, cash is a pretty peaceful investment.
– So we return to our favorite topic of the day: Enron.
– Everyone knows that in America you’re innocent until proven guilty. That’s one of the great principals of our criminal justice system. So let’s hope that no one rushes to judge the participants in the Enron scandal, like CEO Kenneth Lay, for example.
– Until proven otherwise, we should assume that he knew nothing about the off-balance-sheet partnerships that permitted his company to show strong earnings growth quarter-after-quarter. Nor should we assume that he had any idea that this bogus rapid earnings "growth" would cause Enron stock to soar, thereby enabling him to cash in millions of dollars worth of options. Nor should we infer any nefarious intent from the fact that he cashed in some of his stock at the same time that thousands of company employees were explicitly prohibited from doing the very same thing. It’s probably all just a big misunderstanding.
– Perhaps he was so busy feathering his nest that he simply did not have time to pay attention to the shenanigans going on inside his own company. Again, until proven otherwise, we should assume that no aspect of his behavior was unlawful, immoral, or downright scummy.
– However, a few thousand Enron shareholders and bondholders will be keenly interested in finding out what Mr. Lay knew and when he knew it. A few million other investors might also care.
– They’d like to know if this CEO is typical or atypical of America’s corporate chieftains. Why was he unable – or unwilling – to safeguard the interests of common shareholders? Was he greedy, or just stupid? Perhaps there’s even a perfectly benign explanation. The shareholders would love to hear it.
– Meanwhile, a growing sense of disillusionment is arising from the realization that some of America’s most prominent brokerage and accounting firms helped to construct and finance the Enron house of cards… Disillusionment is probably not bullish.
– The stock market might be able to "climb a wall of worry," but it will likely collide head-on with a wall of investor distrust.
– Enron’s collapse "has strained the trust of all investors," says SmartMoney.com’s Igor Greenwald. "[Its] implosion has already destroyed untold stores of goodwill, not the abstraction used to balance books but the real kind required to trust in the transparency of financial markets. That rare commodity has been squandered."
– The stock market’s sky-high valuations may not withstand growing investor skepticism. Additionally, says Greenwald, "looming on the horizon is that ultimate destroyer of share-price multiples – re-regulation."
– Floyd Norris of the New York Times predicts the Enron debacle will frighten corporate America into reporting lower, more realistic, profits.
– The S&P 500 earnings projections for 2002 that so many bullish analysts bandy about – $45 to $50 – generally refers to "operating earnings." Yet, under GAAP accounting, the S&P 500 will likely earn no more than $35 in 2002.
– As investors begin to understand that 22 times projected "operating" earnings is actually 37 times GAAP earnings, their enthusiasm for stocks might wane just a bit.
– Operating earnings and all other fictional permutations of honest-to-goodness GAAP earnings may start to seem as outdated as the term "New Era."
– Meanwhile, confidence continues to rise from coast to coast…and also along the shores of Lakes Michigan, Huron and Erie. The Michigan Consumer Sentiment Index improved markedly in January, rising from 88.8 to 94.2 in January. The "expectations" component also jumped from 82.3 to 91.7. But we should not be surprised to see confidence fade somewhat in the wake of the Enron scandal…and consumer spending might fade right along with it.
– "Most investors exited 2001 licking their wounds. We exited the year licking our chops!" proclaims Strategic Investment editor, Dan Denning. "2001 turned out extremely well for [our] stock picks. If you’d told me going into the year that we’d take 12 positions and 10 of them would finish in the plus column, I’d have been very pleased. (Our two "losing positions" only fell less than 1% each.) If you’d told me we’d pick 10 out of 12 winners, even while the S&P fell for the second straight year, I’d have been even happier. And if you’d told me that relative to the S&P we would average a whopping 12.8% on each position…we’re talking Havanas and Cognac for everyone. It doesn’t get much better than this."
– Don’t forget…you can catch Dan (and the rest of the gang!) this Sunday during the Power Investing Hour.
Back in Paris…
*** Joseph Birnbaum is retiring as CEO of the Mortgage Guaranty Insurance Co. after watching sales balloon from $15.2 billion in 1992 to $86.7 billion today.
*** But in his parting comments to the Milwaukee Sentinel, Mr. Birnbaum warned that mortgage lenders may be "overdoing it." Borrowers are taking out loans of more than 100% of their home value and burdening themselves with monthly payments of more than 50% of their income. Lenders are not doing these homeowners any favors, he remarked.
*** Congress mentioned the desire to help more people own their own homes when it chartered Fannie Mae and Freddie Mac. The two big lenders claim to be performing a valuable public service – making home ownership available to more people.
*** But as America’s mortgage debt has risen to just under $2 trillion – and late-payment and foreclosure rates hit new highs – the percentage of owners’ equity has fallen. Since 1952, homeowners have gone from an average of 80% equity in their own homes to just 56% in 2002. Net home ownership has fallen since Fannie and Freddie opened for business.