Wrath Of The Gods

“Those whom the gods wouldst destroy are often granted their first wish…”

Oh, if only we could forget the rules! What a good time we could have.

Wouldn’t it be great, for example, to have a fling with Juno Online Services? In the Roman pantheon, the statuesque Juno was wife to Jupiter…wouldn’t it be a thrill to cuckold the chief of the gods…and buy a stock which more than quintupled in the first two weeks of this year? Or how about making whoopee with Yahoo? Imagine grabbing some feisty Amazon…and having your way?

And why not? Everybody does it. And besides, these fun stocks are going up.

“Now is the time to buy…while stocks are low…”

This refrain seemed to echo throughout America this past week. Everywhere I went, to whomever I spoke, the sentiment was the same:

“All my friends believe the market is going back up,” said my friend Mark, who lives in South Florida. “They think I’m crazy being in municipal bonds.”

“Nasdaq hype represents an ever-deepening cultural acceptance of the permanence of an IT-led New Economy,” wrote Stephen Roach, chief economist for Morgan Stanley Dean Witter. The Nasdaq may have been cut in half last year…but it has not destroyed Americans’ faith in technology, the New Economy and the stock market.

Nasdaq stocks are generally cheaper than they were a year ago, but they are far from cheap. Unlike the African banks and telecoms – selling for single-digit multiples – the Big Techs still sell for multiples of 40 to 100. Companies – such as Amazon and TheStreet – still sell for infinite multiples, since they have never had earnings.

Investors think they can make a lot of money by ignoring the fundamental rule of investing (buy low, sell high). They think they can get away with murder.

Christopher Byron describes one investment felony-in- progress:

“A fine example of the herd instinct in action: a New York- based dot-com named Juno Online Services Inc., which has less than 83 cents of per-share book value on its balance sheet, along with negative cash flow and a tsunami of red ink washing across its income statement. Yet in spite of all that, Juno shares nonetheless soared 529 percent in the first 14 trading days of January, making it one of the hottest Nasdaq stocks this year.

“Meanwhile, on Jan. 19, Juno filed documents with the Securities and Exchange Commission to register some 12 million shares for sale to the public. Roughly 10 million of these shares belong to an investment outfit known as Kingston Ltd. Partnership, and the other 2 million are owned by two Internet companies that apparently were paid in stock instead of cash to provide services of some sort or other to Juno.

“Not a dime of the proceeds will go to Juno itself, though the resulting sales will increase the public float by 60 percent and almost certainly knock the company’s stock flat on its fanny all over again.”

Many of the stocks that got battered in the Nasdaq collapse last year are enjoying a bear market recovery. SDL, Inc., down 70% by the end of last year, has now risen more than 50%. JDS Uniphase dropped 71% by the end of 2000, but has climbed 52% since.

“Or consider Yahoo! Inc.,” suggest Byron. “Rising from a split-adjusted $1.08 a share at its April 1996 initial public offering, to a high of $237.50 in January 2000. As of late December, 90 percent of those gains had been wiped out in the dot-com collapse, with Yahoo falling all the way back to $25.63. … Since then there has been nothing but bad news coming out of Yahoo about how dreadful business is becoming. Even so, all it has taken is one implausible rumor – speculation reported Jan. 17 that Viacom Inc. will buy the company – to boost Yahoo stock to $42.88…”

Back to Juno…it looks as though Jupiter has had his revenge. Juno, says Byron, “lost $1.2 million in the fourth quarter just on its core business of running its subscription service – and this is after cutting its subscriber acquisition costs by two-thirds, or $16 million, from the July-through-September quarter. Throw in all operating costs, and Juno lost $11.6 million in the latest quarter, the bulk of which looks to have been cold, hard cash.” And the stock has fallen 30% since Jan. 19. Yahoo, meanwhile, closed at $36.

Buying Juno or Yahoo at today’s prices is risking the wrath of the gods. It violates the most basic principles of investing. There are times, of course, when breaking the rules pays off. For example, it paid off from 1995-1999 on Wall Street…and from 1985 to 1990 in Japan. “If we all cross together against the red traffic light, no harm can come to us.” At the peak of the Japanese bubble, this faith in momentum investing appeared to be justified. But in January 1990, a large truck – as if driven by Jupiter himself – plowed through the intersection. Japanese investors saw their stockholdings cut in half…and then almost in half again. Even today, a decade later, they are still down 60%!

Some of the rationalizations for buying Juno and other overpriced stocks today are as comic as the Japanese “crossing against the light” analogy. Ray DeVoe cites a report entitled “Forgive Yourself” posted on the Internet on Jan. 16 by Cecily Fraser of CBS MarketWatch.

“Essentially, the report tells investors to stop feeling sorry for themselves about last year’s losses,” says Ray, “since ‘Virtually everyone made bonehead moves last year.'”

The important thing, according to Dr. Feelgood Fraser, is to forget about it and get back in the fun: “Stop stewing over a mistake and learn to forgive yourself,” she writes. “Call it post-traumatic market disorder. It’s a mental condition that’s certain to linger as those beaten down stocks and fund shares make their way back to break-even.”

I will simply repeat Ray DeVoe’s comment: “Back to break- even???…Only a handful of those stocks will survive, in my opinion – and the idea of making it ‘back to break-even’ is ridiculous.”

At a P/E over 60, Yahoo is a hoot. The gods must be laughing.

Your servant…and correspondent, back in the City of Lights…

Bill Bonner Paris, France February 2, 2001

*** “Watch the dollar,” says Lance “Crash” Lewis on the Prudent Bear website. I am watching…the dollar index fell sharply yesterday, leaving the euro at 94.28 cents.

*** The dollar hit a high on Oct. 26, 2000, with the dollar index at 118.22. It fell to 109 yesterday.

*** When the dollar goes down, its competitors – the euro and gold – go up. Gold rose $2.70 yesterday. The HUI, an index of gold mining companies, rose 3%. Homestake and Newmont were both up.

*** Gold up, the dollar down – this is a trend that may catch on.

*** The Dow rose 90 points yesterday as investors continued to have faith in the Fed, the economy and the future. Today, Dow bulls are hoping to break 11,000. The Nasdaq was up 10 yesterday.

*** “The dip in the economy is expected to be short-lived,” said Barry Anderson, deputy director of the budget office. The big question, according to the elite economists gathered in Davos, is whether America’s recovery will be V- shaped…or U-shaped…That is, whether the recovery will be sharp or a little more gradual. There seems to be no one who believes the economy might get worse…and recovery might take a much longer time. May I suggest another letter? How about W? Or L?

*** The “napalm” index – from the National Association of Purchasing Managers – fell to 41.2, its lowest level since ’91. A reading of 42.7 or below is thought to be a sign of recession.

*** The rally continued among most stocks – with 1,719 issues advancing on the NYSE against 1,365 falling back. And 238 hit new highs; only six hit new lows.

*** Amazon fell 6% – to $16.25. The company announced on Tuesday that it is sending 1,300 employees up the river without a paddle. Charles Schwab is reducing payroll expenses by giving employees Fridays off.

*** Consumer spending rose 0.3% in December. Spending for all of last year rose 7.8%, while personal incomes rose only 6.3%. The saving rate in December was a negative 0.8%, following a rate of 0.9% in November. Taking the year as a whole, the savings rate, negative 0.l%, was the lowest since Great Depression year 1933.

*** “Junk bonds are on the rebound,” reports Bloomberg. Companies raised $14 billion via high-yield bonds in January…an amount equal to one-third of the total for all of 2000.

*** Either America is becoming a nation of financial sharpies…or desperate credit junkies. Mortgage rates dropped slightly following Greenspan’s rate cut and now average between 6.88% and 7.25%. But people are not borrowing to buy or build houses. Half the mortgage loans in January were refinancings, a form of domestic financial engineering. This number is up from 34% in December…and only 12.7% a year ago.

*** “The good news from Belize is…no news from Belize,” writes friend and publisher of International Living Kathie Peddicord. “Not much happens here,” she says of Belize. “And not much has happened in the nearly 13 years since I’ve been spending time here. Belize City is the same rundown, dilapidated, near-shanty town it was then. There are still only three highways traversing the country – one goes north, one goes south, one goes west. Out on Ambergris Caye, the same kinds of vagabonds from Texas are trying to sell little bits of the island’s shores. But, one thing has changed. The prices are five, six, maybe seven times what they were when we first wrote about this island. A good investment if you bought back then…”

*** An article in a local Baltimore paper shows how things have changed in southern Maryland since I was a boy. We used to slave away in hot fields all summer…and then sit in ice cold, musty “stripping rooms” during the winter… in order to sell tobacco for 80 cents a pound. Now I see that the state of Maryland is paying tobacco farmers $1 a pound not to grow the stuff. I’m going to put in an application. Over the last 30 years, I’ve not grown tons of it. And heck, I won’t grow it next year either.

*** But the situation is even more preposterous. For while the farmers are paid not to grow tobacco, they can also be paid to leave their land as farmland. Currently, my cousin tells me, farmers are getting as much as $5,000 per acre for agreeing to continue farming their land…plus the $1 a pound they get for agreeing not to grow tobacco.What a deal.

*** The secret of flying to Europe is to go to sleep immediately. Don’t have dinner. Don’t do anything. Just go to sleep…and don’t wake up until the plane is landing.

*** “Whoppa?” asked the clerk at the Burger King concession at Dulles. “Yes, I’d like a Whopper with cheese,” I explained for the third time, preparing myself for the flight back to Paris.

*** “Whoppa…wid heez?”

“Yes.” I pointed to the large picture on the wall and then helped find the illustrated button on the cash register.

My cab driver didn’t speak English…and didn’t know where the airport was. The person manning the metal detector refused to look at me as he ordered me to strip off my coat. At first I just thought he was rude. Then I realized that he didn’t speak English – and was both incompetent and rude. And now the clerk at Burger King didn’t seem to know what a “Whopper” is.

*** Oh well…I settled down at one of the tables to eat my Whoppa wid heez. In front of me was a huge TV screen. I have been mercifully removed from television for many years…but occasionally I get a glimpse of it.

On this occasion, I saw something truly remarkable. An episode of Survivor – or something like that – showed young people making public spectacles of themselves by eating bugs and then throwing up. It almost took away my appetite. They were squirming, wriggling, slimy, disgusting things. And the bugs weren’t much better.