The Night Of The Living Dead

Amid the party sounds there is a strange anomaly — a death rattle.

I reported the story from “Barron’s” — about how Internet companies are running out of cash. Most of these companies are in big trouble. Their treasuries are nearly exhausted. And the business models they used to raise billions of dollars in investment money are now regarded as hopelessly naive. The investment mania has moved on to The Next Big Thing…leaving these companies — like untended wounded on the battlefield — to die.

These are largely e-tailers. They are still doing business. They are still spending money. They are still acting as though everything is all right. But they are dead. They are finished. Venture capitalists are referring to them as the “living dead.” It is over for most of them.

“I always thought that the Net was a different paradigm,” writes Peter Hening at, “…that it represented a platform that could indeed change the fundamental cost structure of a business.”

Apparently not. E-tailers were regarded as the wave of the future just 12 months ago. Now they are history. As more and more companies emerged, competition became more and more intense. Profit margins — if there ever were any — shrank. Companies needed to spend a fortune to bring in customers. And then they discovered that they could not make enough money on them to repay the investment. They were victims of too much money.

Share prices have been halved, and then halved again., for example, was selling at 30 times sales last year. Now it’s at 10 times sales — still absurd, but slightly less absurd. The price of the stock has gone from $90 down to $20.

This is typical of the Internet e-tail sector. Even the biggest and most successful companies have seen big drops in their share prices.,, — name the company…it’s in trouble.

And, our favorite river of no return? “It could be the biggest living dead that the public markets have ever seen,” Hening quotes one venture capitalist.

“If B2C (business to consumer) isn’t dead,” writes Hening, “it’s definitely gasping for air.”

And no one is rushing over with oxygen. The same investors and analysts who were so sure that Internet e- tailing would be hugely profitable a year ago now believe it is passe. The limits are now more obvious. Some companies will survive — but they will struggle, just like other businesses struggle. They will have to fight for growth and profits. It will not be easy money, in other words, and easy money is what Internet investors want.

“I can tell you that people are not interested in e- tailers at all,” says Bryon Rutberg, head of Internet banking at Warburg Dillon Read. “Can you really build a brand online selling third party goods?” he asks. “The answer is no.”

Mr. Rutberg seems to have lost his enthusiasm for e-tail business models. Too bad, because the e-tailers desperately need what Mr. Rutberg and other bankers have to offer — the kind of life-extending oxygen you can use to buy a pizza.

Internet e-tailing has become unfashionable. It is yesterday’s news. “I can’t even believe some of these companies are public,” writes the Redherring’s Hening. And now, “they are in danger of disappearing from the public markets faster than most companies made it to their first round of financing.”

“At the end of the day,” adds Rutberg, “we’ll just have wreckage. And millions, and millions, and millions of dollars will be lost.”

These losses won’t be only “on paper.” They will be real losses, too — representing the real time and resources invested in projects that did not pay off.

Thus, the living dead threaten to turn the “greatest period of wealth creation in history” into the greatest period of wealth destruction in history. And the greatest party Wall Street has ever seen threatens to turn into a wake.

Best wishes,

Bill Bonner

Eckendorf, Germany March 23, 2000

*** Hey, let’s celebrate. It’s the season. Carnival Time! Spring! New Life! New Hope!

*** How else to explain the burst in the Nasdaq, which closed up 4% yesterday? The techs and Nets exploded over the last two days. Internets were up 5-10% yesterday alone. Even biotechs seemed to bounce back. BBH was up 15 points.

*** What do people do in a Carnival parade? They put on strange costumes and pretend to be something they’re not. Likewise, these Nasdaq companies are pretending to be profitable businesses with bright prospects. Why not? Have some fun.

*** The Nasdaq itself rose 152 points yesterday. The Nasdaq 100 rose 146 points — reaching a new record. This answers our oft-repeated question: has the Nasdaq topped? Not yet, apparently.

*** We also have to wonder if our view of things is right. It troubles me that the S&P hit a new high. Because it disturbs the view that the whole equity market is turning down…one sector after another…leaving only the Nasdaq as the last “hook” to keep investors buying.

*** If the S&P begins a new bull leg — well…I just don’t know what to make of it. So I’m going to consider this a fluke…an echo of the insanity in the Nasdaq rather than a major new trend…at least for now.

*** Life is getting tougher for Alan Greenspan, too. Last week it looked like Greenspan’s attempt to bring about a “soft landing” might just work. The Dow was, and still is, going down fairly gently. And it looked like the Nasdaq had finally hit its peak.

*** So, Greenspan raised rates another little quarter of a point. But instead of going home, the Nasdaq thumbed its nose at the Fed and brought out more booze and party hats.

*** What’s a poor central banker to do? The party has been getting wilder and wilder. And the tab is getting longer and longer…

*** Here’s something interesting — the Dow went down 40 points yesterday, but the A/D ratio went up. So did the number of New Highs/New Lows.

*** The “WSJ” quoted an analyst as saying that “money is leading out of the equity markets at a faster pace than I have ever seen.” He was referring to sales of stock by insiders. The headline called it a “Possible Sign of a Top.” We have not lacked for signs of the top, of course.

*** Oil slid a bit. Gold was down a couple of bucks, too.

*** I’ve been exploring the real value of more money in these letters. Everyone knows that the next dollar he earns is worth a little less than the last one. That’s what is meant by the “declining marginal utility of money.” It is an application of the Law of Diminishing Returns.

*** But at a certain point, I have wondered, doesn’t additional money turn into a negative value? Doesn’t it turn toxic?

*** “Over the years,” writes one DR reader, answering my question, “I have known two billionaires…Everywhere they went, they were surrounded by bodyguards and hangers-on. Their wealth certainly did not increase their freedom. It reduced it. Everyone felt that these people owed them something…”

*** The Germans are hard-working. This week, I’ve been giving a writing seminar. We begin with presentations at 8:30 in the morning…and in the afternoon we break into small groups to work on specific projects. These small groups have been working past midnight.

*** So I haven’t had time to keep up with the news. Besides, I can’t get an English-language newspaper. The hotel is literally in the middle of a field. Hope I haven’t missed anything. But I’m taking the train back to Paris tonight.