The Cardiff Giant
When I was in Cooperstown, New York, a few weeks back, I
visited a terrific place, The Farmers” Museum. It was here that I
learned of George Hull and I thought of him more than once this
past week.
In 1869, cigar-maker and con-artist Hull was responsible
for one of the great scams in American history, the “Cardiff
Giant.” In upstate New York, in the little hamlet of Cardiff, Hull
convinced thousands from around the area that a 10-foot concrete
outline of a man (which he and his cronies chiseled out of a huge
slab) was really the petrified remains of a giant that once walked
the earth. For weeks, the gullible public (up to 500 a day) paid
Hull 50 cents to go into a tent and stare at this amazing find.
Finally, after about two months, the hoax was exposed.
The actual “giant” now resides at The Farmers” Museum and it is
really quite comical. You look at it and think, “How could
someone be that stupid?”
Well, when the financial history of the early years of the
Internet is written, many may say the same thing. And I also
believe that market historians will point to this last week as
being the one when the model for many of these businesses
mercifully died.
Now let me be clear. Companies like Cisco Systems will always
be there to supply the backbone and infrastructure for the myriad
of applications that make the Internet so revolutionary.
But the garbage we were fed, particularly in late 1999 / early
2000, about the viability of some of these sorry excuses for a
business was enough to fill up the Arctic National Wildlife
Refuge.
Countless analysts told us that Company X, even though it wasn”t
projected to turn a profit until 2004, should trade for $250 simply
because, well, it should!
So, like with the Cardiff Giant, we gawked and got taken for a
ride. When the truth came out, our dreams of riches beyond our
wildest imagination were dashed.
Hopefully, this isn”t hitting too close to home. On a personal
level, I have consistently questioned the viability of many Net
stocks in this space for some time now. And one day I”ll find the
time to detail my own experiences in the world of clickthroughs
and false promises. I made the decision to stay independent when
I launched StocksandNews and at least there are no investors
breathing down my neck.
Alas, that”s not the case with Priceline.com. There was founder
Jay Walker on Wednesday, having just shut down his gas and
groceries business, trying to convince the world that he still
proved his business model worked. Which I thought was kind of
funny. After all, isn”t that what our economic analysts do when
each consumer and producer price report is released…take out
food and energy to try and create a more rosy outlook?
If you watched Walker dissemble and attempt to convince us that
he really wasn”t playing three-card monte with hundreds of
millions of dollars, then it should come as no surprise that
Priceline stock, which this spring resided at the $104 level…on its
way to $175, we were assured…is now trading around $5.
Internet commerce outfits, and some of the holding companies
that envelop them under their long, flowing robes, were
decimated again this week as the realization sinks in that 90% of
them are nothing more than a slab of rock…or, to modernize the
story a bit, a loft apartment with a bunch of wires.
And while some in the investing public have suffered
tremendously, the only winners are the founders, who cashed out
early, and their investment banker partners. They”re the ones
who barked, “Come into the tent and forget what you see. Let
us, instead, tell you what will be.”
The Election
After the Cheney – Lieberman debate on Thursday, MSNBC
elicited comments from a focus group. One gentleman had
perhaps the line of the week.
“I would like to see Cheney as president and Lieberman as vice
president. Forget the other two.”
Oh, how I wish it were that easy. And we should be asking, how
did we allow ourselves to be so taken?
270 million people in this great land and look at our choice. One
man who has proved the theory that you can be married 30-years
and still be detestable to all but your immediate family; and the
other guy, one who has the greatest tutors in the land and acts as
if not one lesson has sunk in. This latter fellow reminds me of a
kid who cheated off me in high school on multiple choice tests,
and still ended up with different answers.
Cheney and Lieberman, on the other hand, are class acts. And,
unlike some of my Republican brethren, I can”t criticize Senator
Lieberman too harshly for his flip-flops on the issues since he
was selected to be Gore”s running mate. That, to me, is just
politics in this modern age. But what we don”t seem to
understand is that there is a huge difference between politics
(cutting deals in the Senate gym or a booze-soaked room) and
deceit or incompetence.
Ted Koppel was on “The Today Show” Friday morning touting
his new memoir and I couldn”t believe a comment he made
(because of the source) about President Clinton and his handling
of the Lewinsky matter.
“I”m not sure there was a moment in that entire affair that he put
the nation”s interests first.”
Our current economic prosperity is masking a lot of true
emotions. I am convinced that deep down we are all crying out
for a leader we can simply respect. And while one of the two lead
candidates is a good guy who means well, I”m not sure that is
enough. But at least he would have the perfect mentor…Uncle
Dick…oh yeah, big time.
Wall Street
Ongoing profit fears led to another bloody spell on the Street as
the Dow and Nasdaq have now racked up losses for 5
consecutive weeks, the longest such streak since April of 1997.
The Dow”s losses, though, were small, just 0.5%, as it closed at
10596. The index is now 10% from its all-time high of 11722 set
1/14.
But the Nasdaq plunged 8.5% to finish at its lowest level since
the spring tech crash. The Techdaq stands at 3361, a whopping
33% from its high of 5048 established 3/10.
The week started with the Federal Reserve holding the line on
interest rates, as expected, but it spooked the market when in its
policy statement it said demand was moderating (good) but that
risks of rising inflation still existed (not so good). Of course,
market participants were expecting this latest policy bias but,
nonetheless, in this skittish environment, they chose to sell
anyway because the real focus is earnings, both for today and
tomorrow.
And as to the current earnings picture, it got a bit depressing as
investors realized the minefield was more extensive than originally
thought. Companies like Xerox and Dell had negative news to
report while others such as AT&T suffered further downgrades.
The realization is setting in that as the economy slows, 40%
growth rates are not sustainable. And make no mistake about
it…despite the strong employment report for September, which
saw the unemployment rate fall to 3.9% (another bonus for
Gore), the economy is slowing.
I continue to be struck, however, by the complacency exhibited
by some market analysts when they discuss the earnings outlook.
Now that the warnings season is largely behind us, the story goes,
actual announced earnings are likely to be strong. O.K., I”ll kind
of buy that. But what about the future?
No, I don”t think we”re headed for recession (though the odds of
one are increasing) but if you”re telling me that the economy will
surge anew, thus warranting the existing frothy earnings forecasts
for 2001, then I”ll say that the Federal Reserve would have to
launch a new series of rate hikes and that couldn”t possibly be a
positive.
That said, the Nasdaq is one beaten dog and, as I mentioned last
week, the time is near for a decent rally. During Friday”s action
we began to see signs of a climactic washout. Maybe it was. But
after an anticipated bounce, we go right back to the earnings
picture for Q4 and 2001. And there are some disconcerting
rumblings of another kind which were heard in the distance the
latter part of the week. A potential corporate debt bomb,
particularly among the capital intensive telecommunications
sector. Stay tuned.
Oracle
One stock epitomized the volatility on the Street this week,
Oracle. Having closed 9/29 at $79, Oracle started sliding early
on. Then on Wednesday, rumors hit that the stock may fall short
on the revenue side, versus expectations, in its next earnings
release. Oracle touched $60 on Wednesday morning, a
phenomenal percentage loss for this market darling. But late that
same day, Oracle issued a statement that rumors of future
shortfalls were bunk and the stock shot up from $60 back to $70
before finishing the day at $68. The volume was 100 million
shares for that session alone; easily one of the wildest rides of a
wild year.
Street Bytes
–As many pundits have observed this week, one factor behind the
dismal market action is the tax-selling among mutual fund
portfolio managers. Having worked in the fund industry for a
number of years, I can tell you that this year, in particular, the
marketing folks are applying whatever pressure they can on the
portfolio types to reduce their capital gains exposure. The market
winners of the past few years add up to huge potential gains for
shareholders. It”s particularly tough for some investors to
swallow, especially if their fund shows only a small overall gain
(or, heaven forbid, a loss) for the year.
–Since 1950, $10,000 invested in the S&P 500 only during the
period 5/6-9/30 would amount to just $13,810. But that same
$10,000 invested during the period 10/1-5/5 results in a total
portfolio of $570,926. [Source: Ned David Research and CNBC]
–The Star-Ledger newspaper here in New Jersey had a
fascinating chart on the performance of AT&T and the 9 other
companies that you would have owned upon the breakup of Ma
Bell in 1983. An investor who owned 100 shares then of AT&T
worth $6,150 would have seen their total investment in all 10
companies grow to $44,601 (a/o 9/29), or 646% on a total return
basis. During the same period of time, again as measured by total
return, the S&P 500 has risen 804%.
–The European Central Bank unexpectedly raised interest rates a
7th time in a year. The ECB said they were attempting to increase
the value of Euro-denominated assets while also squelching
inflation. But, by this action, they risk killing off growth.
Separately, John Rossant of Business Week wrote that “The
growing disaffection with politics and politicians in Europe is a
danger signal no one should ignore.”
–Japanese business confidence rose in the latest Bank of Japan
quarterly survey.
–Glenn Simpson and Scott Thurm of the Wall Street Journal
wrote a piece on executives at Cisco Systems who “invest in or
accept stock options from customers, suppliers and partners,”
many of whom are acquisition candidates by Cisco. Of course,
this presents some real conflicts of interest as there are obviously
incentives to favor those companies. But, it”s not necessarily
illegal and, in fact, is a common practice in the high tech industry.
Nonetheless, the FBI is investigating certain instances where
improper commissions may have been obtained.
–The New York Stock Exchange has instituted new circuit
breakers. Worst case, if the Dow Jones drops 3,300 points at any
point in a session, the exchange closes for the remainder of the
day, leaving you shell shocked and staring at your dog.
International Affairs
Serbia: My gosh! On Thursday, we discovered that foreign
policy actually matters as former Scud-studs frantically booked
flights to Belgrade. Know one thing. American presidential
candidates spend 99% of their time discussing domestic issues
like education and prescription drugs and then, upon moving into
the White House, about 75% of their day is taken up with global
matters.
What happened in Belgrade this week is actually one of those few
instances where, at this moment, there is relatively little to say.
You all saw the revolt, after months of my updating you on the
situation on the ground.
But as of this writing, there is still some doubt what the final
resolution will be. So even though Milosevic has conceded, this
is still the Balkans, folks. Count Dracula wasn”t from Des
Moines. And by the way, a pretty good prediction on my part last
week, eh?
Israel / PLO: Another disastrous week and Secretary of State
Albright accomplished zippo when she mediated between Arafat
and Barak in Paris. It”s also time to face facts. As one BBC
reporter proclaimed, Madeleine Albright doesn”t have a good
reputation in the Middle East.
The film of the Palestinian father and his son was gut-wrenching
and, rightly or wrongly, made it easier to sympathize with the
Palestinian cause. At the same time, world leaders of all stripes
came down hard on Israeli opposition leader Ariel Sharon for his
trip to the Temple Mount. I disagreed with the Wall Street
Journal when they were one of the few to defend Sharon because
he had a right to be there. Of course he did. But does that mean
he should have gone?
Prime Minister Barak”s government is hanging by a thread. And
the Arab world is obviously not helping matters. Egyptian
President Mubarak is calling for the first full-scale Arab summit in
4 years. Meanwhile, Syria”s new president, Bashar Assad,
appeared on the stage for the first time and said that Arabs must
unite to end the sanctions on Iraq. Not exactly the kind of talk
Washington wants to hear.
China / Taiwan: Taiwan”s premier resigned after just a little over
4 months in office while President Chen Shui-bian”s approval
rating has now plummeted from 77% to 37%. After the initial
glow from his victory last spring, Chen is finding it virtually
impossible to reform the entrenched…and corrupt…bureaucracy.
And you just know that China is gloating.
Meanwhile, as a follow-up to my discussion of last week, China
bitterly condemned the Vatican for trying to subvert China”s
state-backed Catholic church and inciting its followers to revolt.
Yeah…so what”s the point?
North Korea / South Korea: The North sure has been a nation of
contradictions the past few months. On the one hand their
overtures to old enemies have been encouraging. On the other,
they continue to build up their war machine. Which begs the
question, which North Korea is Japan, South Korea and the U.S.
dealing with?
On the eve of a visit to Washington by Kim Jong-Il”s #2 man,
North Korea criticized the U.S. “We strongly condemn the
intention of the bellicose U.S. forces to increase the military
presence in South Korea and more desperately pursue the policy
of stifling the DPRK (the North).”
Standard rhetoric, you can say. Just strange if one is striving to
be accepted into the family of nations.
And despite North Korea”s charm offensive in dealing with its
direct neighbors, it is increasingly clear that the average man and
woman in South Korea is as worried as they were before it began.
The people are concerned that the country will let down its guard
and, also, that the South will be bled dry as it pumps billions into
the North, thus precipitating another economic crisis. The initial
euphoria would appear to have run its course.
[Friday, Japan announced they were sending 500,000 tons of rice
to the North. I”m assuming you just throw it in boiling water.]
Finally, if you caught last week”s “60 Minutes,” you can”t be
encouraged by the appraisal that North Korea has “weaponized”
smallpox…along with Russia and Iraq.
Colombia: As I have predicted in this space as well as my “Hott
Spotts” link, it would appear the war in Colombia is spreading.
Anthony Faiola reports in the Washington Post that Colombia”s
prime rebel group, FARC, has crossed into Ecuador on numerous
occasions, killing Ecuadorean merchants. The fear is that the new
“Plan Colombia,” which is supported by both the U.S. and the
European Union, could turn the war in Colombia into a true
regional conflict.
Ecuador”s army would crumble in the face of the well-armed
FARC forces. And, on the political front, Marxist mayors,
sympathetic to FARC, are being elected in Ecuador”s border
towns. Lastly, Ecuador”s main oil pipeline, their largest source of
revenues, is just a 20-minute drive from the border.
For its part, Brazil continues to beef up the border between itself
and Colombia.
Turkey: Newsweek reported that this nation could be a potential
flashpoint as the U.S. Congress may vote on a non-binding
resolution which calls on the President to recognize that the
Ottoman Turks carried out genocide against Armenians in 1915.
While this seems like a bizarre issue to be discussing, the fact is
that Congress has buried the resolution for the past ten years.
Now, because we are in an election year, House Speaker Hastert
assured an Armenian enclave in Congressman Jim Rogan”s (R-
CA) district that he would gain passage. This would be an
unmitigated disaster. Turkey”s president said it would “damage
U.S. – Turkish relations beyond repair.” And, in case you forgot,
probably our most strategic air base in the world lies in Turkey at
Incerlik.
India / Bangladesh: Every year about this time you see the same
pictures of suffering in these two countries with the arrival of the
monsoon floods. But this year, they are calling it the worst such
flooding in 100 years. Over 700,000 are homeless in Bangladesh
and 1,000 have died between the two nations. Weeks after water
inundated the coastal areas, people are still living in trees.
Now I realize there isn”t a helluva lot we can do about this, and
after awhile you become desensitized, but what got me was a
report I read that said the Bangladeshi government had handed
out $31,000 in aid to the refugees. $31,000! Geezuz. I probably
have that much in pennies in my coffee cans!
Random Musings
–Sydney: It certainly appears as though Olympic organizers did
an awesome job. As for Athens in 2004, you can be sure I”ll start
writing stories of potential disaster in, oh, about two weeks.
Athens will truly be a nightmare for those assigned to prevent
terrorist attacks. By the end of 2001, I look for the IOC to
announce that they will bring the games back to the great people
of Australia.
–John Lennon”s killer, Mark Chapman, was denied parole. Now
if he was in Texas, chances are he”d be dead already and we
wouldn”t have to deal with this.
–Firewood prices are rising…it”s not too late to send your kids
outside to chop some wood…before your neighbors get to it.
–If you smoke pot while reading this review, you should know
that as of this coming January, you can do so legally in
Switzerland.
–Sunday”s “60 Minutes” is worth catching for a piece concerning
Tina Sinatra”s claims that her father served in a liason capacity
between the Kennedy family and mobster Sam Giancana. The
main goal of the involvement was to assure a Kennedy victory in
the key states of West Virginia and Illinois. If you want to learn
more about Kennedy patriarch Joe Kennedy, you may want to
check out my “Wall Street History” archives.
–From a Washington Post editorial commenting on the latest
Clinton sleepover revelations:
“The muted reaction is a measure of how deeply the degradation
has seeped in.”
–The Philadelphia 76ers” superstar Allen Iverson is coming out
with a new rap single that contains some thoroughly disgusting
lyrics. The tamest I feel comfortable repeating here go like this:
“Man enough to pull a gun
Be man enough to squeeze it
Blink if you don”t believe it
Anything to do with millions
I”m gonna be with it…”
Newsweek”s 10/9 issue has an excellent cover story on the rap,
hip-hop culture. It”s worth a look, as disconcerting as it may be.
Hip-hop gets harsher and harsher and it”s helping to feed
stereotypes of the worst sort.
–Joe Lieberman: “If you have faith, working by the rules, there is
nothing you can”t achieve in this country.” Of course, as
exemplified by the current occupants of the White House, you can
still achieve much by breaking the rules as well.
–According to a law enforcement official, the case of the “mole”
and the Bush debate tapes is “potentially election-turning.”
Ordinarily, I wouldn”t pay much attention to this except that it
comes from reporter Michael Isikoff, perhaps the best in covering
the Monica affair.
–Al Gore keeps talking about saving the Arctic National Wildlife
Refuge because it is one of our “precious treasures.” But if only
.0001% of Americans ever get there, just how precious is it?
–I can”t say I have a lot of respect for entertainers like Cher and
Barbra Streisand, who try and impress us with their political
knowledge. But there is one man, U2”s Bono, who does deserve
to be heard. Bono”s big cause is the plight of the world”s poor
and debt relief for the Third World. I couldn”t agree more
(obviously, this needs to be coupled with real reforms) and Bono
has been able to bring conservatives like Jesse Helms on board his
team. Helms was moved to tears when he gave Bono an
audience the other day.
–Wal Mart is introducing its own wine label, Alcott Ridge, made
by E&J Gallo. That”s Ernie & Jim Bob Gallo.
Gold closed at $269. The mining stocks have been on a sickening
slide of late.
Oil, $30.88. Prices stabilized this week as inventories rose a bit.
But on the heating oil front, the tightness remains. The first cold
blast is hitting the country. We”re at the mercy of the weather
gods.
U.S. Treasury Yields
1-yr. 6.07% 2-yr. 5.96% 10-yr. 5.81% 30-yr. 5.84%
Returns for the week, 10/2-10/6
Dow Jones -0.5%
S&P 500 -1.9%
S&P MidCap -4.8%
Russell 2000 -5.8%
Nasdaq -8.5%
Returns for the period, 1/1/00-10/6/00
Dow Jones -7.8%
S&P 500 -4.1%
S&P MidCap +15.4%
Russell 2000 -2.7%
Nasdaq -17.4%
Bulls 46.7%
Bears 30.9% [Source: Investors Intelligence]
CONTEST: Reminder, all entrants for the “Pick the Dow”
contest must be in by November 1st. And remember, only one
entry per e-mail address, or they”ll all be ruled ineligible.
Brian Trumbore
