Sore Losers

Whining, kvetching, recriminations and blame. The same investors who complimented themselves for being the architects of their own good fortune, now look for someone to blame when their fortunes get wrecked.

They blame stockbrokers, the Bush Administration, Alan Greenspan, or the companies they bought – anybody but themselves.

“In more recent months,” reports the Washington Post, “as the economy has stalled and the stock market has tumbled, letters have poured in to the Fed from individuals complaining bitterly that the central bank’s actions over the past two years have ruined their retirements.”

What happened to the New Man…homo digitalis? You remember him. He was the guy who “got it.” Who bought Amazon when Henry Blodget said it was going to $400…and stayed fully invested because Abby Cohen said the market was going higher this year. He knew that stocks would go up and down, but he was “in it for the long run.” He would never have to take a loss – because he would never sell!

The New Man was thought to be an improvement on the older model – he understood the transforming grace of the Information Era… and he was supposed to be willing to put aside his own selfish ambitions in favor of the limitless potential of new technology. He put his money at the service of companies such as Amazon, CMGI, and Cisco – not because he expected a decent return on investment (which was as unlikely as a tort lawyer in heaven)…but because he knew that these companies were building a better world and that somehow it would pay off – if not in this life, perhaps in the next…

Remember the New Man, James Cramer? The self-proclaimed market sage wrote in a January 28, 2000 column, “It drives me crazy…The professionals got it wrong, not the amateurs. Any methodology that systematically excludes the Qualcomms and the Yahoo!s while embracing the Goodyears and the Washington Mutuals is a failed methodology…It doesn’t work.”

“Since James Cramer wrote that scathing critique of traditional valuation analysis,” observed James Stack’s Investech, “the stock of Goodyear is unchanged and Washington Mutual is up over 100%, while Qualcomm and Yahoo are down 52% and 89% respectively.”

Stack also pokes a little fun at SmartMoney for its March 2000 “Ultimate Tech Portfolio.” As one might expect the results have not been pretty. Names like Ariba, JDS Uniphase and Lucent Technologies adorned the promising list of tech darlings that have produced sickeningly severe losses – many greater than 80%.

Do the ex-New Men and New Women take their losses with dignity and grace? No, they sue!

Who would have thought one year ago that the quintessential tech-stock icon, Cisco Systems, would become a defendant in a class-action shareholder lawsuit?

Alas believers in the perfectibility of man must contend with recent evidence. “When the markets go south, litigation goes up,” said Frank Penski, a partner at the law firm of Nixon Peabody.

The evidence will show, dear reader, that the Post- New Era man is not much different from the homo sapiens with which we were so familiar before the Bubble – that is, grasping, self-centered and foolish. These words describe not only the perpetrators of fraud and chicanery – but the victims and their lawyers, too.

“There’s no question that as the market falls there are more lawsuits,” continued Mr. Penski. Why? “Unhappy stockholders don’t instigate many of these lawsuits at all,” explains an article on “Law firms themselves keep track of technology companies, watching public filings for discrepancies between positive ‘forward-looking’ and bad stock performance. And when they find the examples, attorneys close in.”

“They make the claim on behalf of shareholders and then they go out and find them,” Mr. Penski added. “These claims are really more generated by the lawyers themselves.”

Lawyers have little trouble finding targets. For example, a class-action suit was filed after a 23- year-old sent out a false press release regarding Emulex’s financial condition. The young man made almost $250,000 trading the stock as a result. Attorneys sued Bloomberg and Internet Wire for passing along the bogus information.

Razorfish, Inc. was the subject of a class action lawsuit two days after it announced it would miss 4th quarter estimates. The lawyers filing the suit claimed that company officials made “false and misleading statements” about the company’s performance.

The same charge was leveled against MarchFirst – whose share price is down 95% from its high of $81.13.

Meanwhile, enterprising lawyers for the government are getting into the act too. The U.S. Attorney’s Office in Silicon Valley has become “very aggressive” in finding people to charge with securities fraud. They are “trying to make a name for themselves,” explains a local lawyer.

One case involves a couple of Cisco employees who found a way to transfer shares in the company to their personal Merrill Lynch accounts. But Merrill Lynch tipped off Cisco and the two were found out.

In another case, a pair of executives is “accused of figuring out how many more sales were necessary to meet the company’s quarterly projections and then simply making them up,” says a report in the International Herald Tribune.

But the mother of all ambulance chasers, Peter Angelos, has launched a different sort of attack – not against the tech companies directly, but against their products. He is taking on the telecom industry as he once did the silicon breast implanters. He made so much money on those bogus cases that he was able to buy the Baltimore Orioles and now hopes for a similar outcome.

The case against the cell phone makers is so puerile and opportunistic that even the Washington Post is outraged:

“Here is a case in which a trial lawyer goes after an industry that produces gadgets people love and that is central to the high-tech future. He goes after it claiming not that the industry definitely has caused harm but that it may do so…The lawyer seeks to punish the industry by assembling millions of unconsulted consumers into a vast ‘class’ and demanding a remedy that makes no sense.”

No proof has ever been offered that cell phones cause health problems. In fact, a Danish study involving 420,000 users over a 13 year period found no higher rates of cancer than in the rest of the population. And the remedy proposed by Angelos – in addition to billions in attorneys’ fees – is to force consumers to buy headsets along with their phones.

What a disappointment the New Man turned out to be. Stripped of his Gildered Age rhetoric and his Bubble profits, he is just like all the rest of us – a greedy parvenu…and a sore loser.

Your editor,

Bill Bonner
Paris, France
April 24, 2001

*** Yesterday, stocks gave back some of last week’s gains. The Dow was off 47 points…the Nasdaq 104.

*** Will we get a rerun of what happened in January – when, after the Fed’s last surprise rate cut, the market soared for few days…and then fell further? Or is this just a pause in a major rally…or even a new bull market?

*** The cover of the Economist has a picture of a lifeguard with the head of Alan Greenspan. “Greenspan to the Rescue” declares the headline. Faith in the fed chairman, in stocks, and the benevolence of the universe still dominates the market.

*** “For those of you worrying that the Fed is pushing on a string,” writes economist Ed Yardeni, “repeat the following mantra: ‘There are still 450 basis points between the fed funds rate and zero.'”

*** “Pushing on a string” is a metaphor used by economists to describe what happens when a central bank lowers rates, but people still fail to borrow. Japan’s central bank, for example, has been ‘pushing on a string’ for years. In fact, it’s pushed the string all the way to zero interest rates – and still people do not borrow in Japan.

*** Will Americans also fail to borrow? I don’t know. But the existence of 450 basis points between the fed funds rate and zero is not likely to make much of a difference. People have already borrowed too much. Debt is their problem, not the absence of credit.

*** provides an insight into why the nation’s banking cartel decided to cut rates last week: “The fourth rate cut in as many months will certainly help lenders in one critical area: managing the rising tide of bad loans on their balance sheets. Lower rates not only encourage people to borrow – they also reduce the rates at which banks borrow money. Naturally, bankers don’t pass the entire savings on to their customers. Instead, they keep some of the difference to cushion against future loan losses and thus bolster earnings. And if lower interest rates spur more business activity, they should help prop up some shaky commercial borrowers, too – making it less likely that they’ll default on their bank loans in the first place. That adds up to an improving profit picture and, perhaps, higher prices for bank stocks down the road.

“And not a moment too soon. A sharp rise in commercial-loan defaults is the main reason first- quarter profits for many of the nation’s biggest banks were down anywhere from 8% to 20% on a year- over-year basis.”

This article included a chart showing that non- performing loans at Bank of America increased 69% in the first quarter of this year, compared to the same quarter last year. For Bank One the figure was 129%.

*** Among the shaky credits held by big banks is a slug of telecom debt. The telecom industry borrowed $255 billion in ’98…another $326 billion in ’99…and a whopping $655 billion last year. As mentioned yesterday, the industry has been so over- built that it uses only 2.5% of its capacity.

*** Lipper reports that $15.4 billion was taken out of stock funds in March. This was the 2nd month in a row of net withdrawals, something that has not happened since the 1990 Gulf War.

*** But looking at the first quarter as a whole, investors put more money into equity funds than they took out. January was a very good month for the funds. And the most recent 2 weeks of April have also been positive – investors put $5.2 billion more into stock funds than they took out.

*** Amazon doubled in the last 2 weeks. It rose again yesterday after an analyst upgraded his recommendation for the company. He set a target price of $20.

*** Oracle, on the other hand, was downgraded by a Lehman analyst, from “strong buy” to “buy,” and fell 10%. “Investors are beginning to think about fundamentals such as price-to-earnings multiples,” explained article.

*** Better late than never. The fundamentals should have scared investors away from the techs two years ago. But even after a 70% decline, the tech fundamentals are still pretty scary. The hundred companies in Merrill Lynch’s Tech Index, for example, are priced at 166 times trailing earnings.

*** The only thing that could make sense of such high prices would be spectacular growth rates – which is precisely the thing for which the Techs are famous. But Gretchen Morgenson, in the NY TIMES, reports the results of a 20-year study of 1800 tech companies. Only half were able to maintain even 30% annual compound growth in revenue for any 3 of the 20 year period. Only 28% were able to keep it up for 5 years. And only 7% could do so for 10 years. New technology is rarely new enough for long enough to justify 100 + P/E ratios.

*** Tech investors, of course, are looking beyond the current valley of economic decline to the lush pastures of the future. They might consider this: General Motors was the hottest new tech company of 1929. But when sales collapsed following the crash they did not recover for the next 20 years.

*** “US Gas Prices Soar Higher” says an AP headline. Prices have risen 13 cents per gallon in the last two weeks – the largest increase in 50 years.

*** King Coal has been a merry old soul. “The Dow Jones Coal Index is up an amazing 279% from a year ago,” Barron’s reports. Arch Coal has risen sevenfold from its low of last May. But Arch is now selling at 60 times 2001 earnings estimates. It is time to sell.

*** “Now that Microsoft’s stock has fallen to about half its peak,” writes the New York Times, “Seattle is abuzz with other stories, those of Microsoft employees deep in debt and filing for bankruptcy. Mike Fitzgerald, the trustee overseeing Chapter 13 bankruptcy filings by individuals in the western district of Washington, estimated that he had recently seen 25 cases filed by Microsoft workers related to options.”

*** “International investors seem incapable of ending their love affair with the dollar,” the Economist reports. “America’s economy has slowed sharply this year, yet its currency has risen to a 15-year high in trade-weighted terms.”

*** The fashion ads in Paris have gotten so racy that even the French find them shocking. One ad shows a woman – naked except for a pair of underpants – on all fours next to a sheep. “I think I need a sweater” she says. Another shows a woman, completely nude, in the throes of some sort of ecstasy…an ad for a perfume. With this sort of advertising and the dollar at a near-record high – it is a great time to visit.

The Daily Reckoning