Internet Implosion By Alan Abelson Dot.comical. Which is why we're deep-down sorry to see the Internet hysteria peak. It has
been just such great fun. A real stitch!
The buzz-powered parabolic moves.
The fantasy projections.
The carney-barker analysts making their wild, improbable spiels with an eye
on snaring the next IPO.
The great weirdo, with-it, shocker names, conjuring up images of corporate
rock bands.
The hyperventilating claptrap about a new big-bang technology creating a new
ever-expanding economy, raising productivity to Himalayan heights, sparking
an Information Revolution that is alchemically transforming our humdrum
existences into a new Golden Age and, most rapturous of all, making come
true the consumer's eternal dream of buying anything and everything at a
whopping discount.
We're truly sad to have to say goodbye to all that, goodbye to all the hilarious
hokum and bunkum with which Wall Street freighted the Internet. And we
can't help but utter a modest moan of regret that we won't see its like soon or
maybe ever again.
Although it has been evident for months that the mania had reached fever
pitch and was breaking, we knew for sure last week that, except for the
keening and weeping and gnashing of teeth, it was over, finis.
When exactly did we know it?
It wasn't, as you might suspect, when the stocks went into free fall. And it
certainly wasn't when, after the sector was down 40%, the logorrheic
proprietor of an online financial rag turned bearish on Web shares (perhaps
not coincidentally, his own stock, off from over 71 to 18 and change, acts like
one sick kitty, so bedraggled it could barely participate in the group's
dead-cat bounce).
Nor was it the fact that not one, not two, not three, but count 'em, four
Internet IPOs wound up their first day of trading below the offering price.
Before last week, by contrast, in the vast gurgling, bubbling flow of 'Net
offerings, a mere three had suffered that ignominy.
And it wasn't the revelation that Goldman Sachs' proposed Internet mutual
fund will studiously avoid buying the Internet stocks underwritten by Goldman
Sachs. Although that did affirm our esteem for the distinguished firm's good
sense and sound judgment.
No, what cemented our conviction that we'd seen the high in the insanity index
was a piece in Tuesday's Journal describing the virtually indescribable: online
companies (or somethings) going public by giving their stock away. Right, for
free!
The story cites, by way of example, Web Equity Capital, a shell empty of just
about everything but a prayerful promoter, which plans to issue 10 billion
shares of free stock. The notion, seemingly, is to stir interest in the wannabe
company's Website so that someday it'll be able to sell some stock for ...
money.
Unlike other recent Internet giveaways, this one may pass muster at the SEC
because it has filed a registration statement, and it seems to contain accurate
information -- namely, that the company's pretty much a laughable excuse for
a company, and the stock is worthless and may retain that status in perpetuity.
But that Internet outfits are giving away free stock persuaded us beyond
doubt that not only will value out, but online IPOs had finally reached the
point of reductio ad absurdum. It was great while it lasted, but the game most
definitely is over.
None of this is to be construed as declaring, asserting, hinting or otherwise
implying that the Internet itself won't continue to grow in ways too various to
conceive and at breathtaking speed. While we consider something between
ludicrous and loony the more extravagant claims for its powers or its impact
(it won't cure the common cold and it won't make dummies smart), there's no
argument it'll influence in a big, big way consumers and the people who sell to
them.
In a nutshell, the Internet, by displaying prices of everything under the sun
simultaneously, is proving an unprecedented boon to shoppers and an
unprecedented bane to the profit margins of the vendors who supply them.
And both boon and bane will grow exponentially as the masses increasingly
go online.
Put another way, the Internet is shaping
up as the great and enduring instrument
of profitless prosperity for the diverse
commercial hordes feverishly gathering
to exploit it. It has introduced a new
dimension to competition that promises
or threatens, depending on your
preference, to tilt the transactional
equation heavily in favor of the buyer.
That has all kinds of implications for
both the economy and the proliferating
population of online companies. Consumers are also -- or perhaps firstly --
employees, small-business folks, teachers, preachers, etc., and what affects
the economy and their livelihoods most evidently affects them. As for the
swelling ranks of Internet enterprises, profits will continue to be conspicuous
by their absence.
In fact, we can't see anybody making real money out of the Internet -- except
by selling stock. And off the most recent evidence, that's going to be tougher
and tougher to do. The best of times for online IPOs has come and gone,
alas. And those phantasmagoric mergers between vaporish entities with
multibillion-dollar market caps will shrink drastically in number, since the deals
were invariably for stock, a currency undergoing alarming devaluation with
each passing day.
Hail and farewell then. Farewell to the Internet explosion. We'll miss it. Hail to
the Internet implosion. It, too, promises to have its moments.
The only real surprise in last Friday's employment report that so roiled the
financial markets was that anyone was surprised.
We don't mean, of course, that the professional clairvoyants should
necessarily have hit the actual number of payroll additions -- 310,000 -- right
on the head. But to lowball by a full 50% strikes us as reason enough for them
to send their crystal balls back to the shop for repairs.
And to so woefully underestimate the rise in average hourly wages (which
came at six cents versus the anticipated three cents) raises suspicions that said
forecasters have been spending more quality time with their lively dates than
their dull data.
That the labor market is tight as a drum is not, after all, one of life's unearthed
secrets. Just stroll past the nearest supermarket and you come face to face
with a huge sign imploring would-be job seekers to seek no further. But then,
Wall Street economists probably send their butlers to do their shopping.
Still, along with the by-now infamous latest reading of the employment-cost
index, there have been other statistical indications of a red-hot job market and
building pressure on payrolls. Among them: a very subdued level of new
claims for unemployment insurance, a soaring index that measures how easy it
is to get a job (July set an all-time high) and, relatedly, the continued
willingness of working stiffs to voluntarily leave their jobs.
Sherry Cooper, Nesbitt Burns' chief economist, boasts a keen eye and a neat
track record to go with it (maybe because Canadian economists do their own
shopping). As it happens, she isn't notably reassuring in what the employment
numbers portend.
For one thing, she observes, "Wage pressures are unlikely to ebb with the
jobless rate holding close to a 30-year low of 4.3%." For another, the jump in
wages points to an extension of the solid upswing in personal income. And
with more to spend, consumers are likely to spend more.
The combo of a tightening labor market and rip-roaring spending growth, she
proclaims, means that a Fed rate boost later this month "is in the bag."
Jaye Scholl, Barron's illustrious West Coast editor, has, among her many
chores, the interesting but unenviable task of keeping tabs on those
purposefully elusive hedge-fund types. Some of our best friends are
hedge-fund managers, but we're not sure we'd recommend your daughter
marry one (or, not to be sexist, your son if the manager is of the female
persuasion).
Some of Jaye's periodic chronicling of the species can be found elsewhere in
this issue. But she graciously passed along to us a piece of intelligence
concerning our old friend Julian Robertson's Tiger Fund. Despite a rough
patch the past year, in which the fund has been a decided laggard, Julian has a
great long-term record and is that rare combination of a terrific investor and
nice guy.
Forgive us the digression. It's just that some of our fellow practitioners of this
dismal trade of financial scribbling tend to try to score off their betters by
aiming their popguns and letting fly indiscriminately. Julian has been the target
of these silly and sometimes even scurrilous attacks. So we thought we'd step
out of character long enough to say a few kind words (and also to see if we
remembered how).
In any case, the rumors were flying last week that Tiger was in extremis
because of humongous losses in that den of thieves formally known as the
international interest-rate swap market. Jaye, no slouch when it comes to
tracking down a lead, turned to her trusty Rolodex and tapped in to some
knowledgeable sources.
And what she discovered was that the only thing right about the rumor was
that Julian had done a trade last week, selling off a big position in a European
stock. No interest-rate swap. And far from a staggering loss, that trade
yielded a profit.
Apparently, Jaye says, traders in London transmuted Tiger's stock sale into
the phony story of a losing swap.
Which proves only, we suppose, that traders are the same the world over.
And when it comes to traders, we can eliminate even a scintilla of
equivocation -- definitely, do not, under any circumstances, let your daughter
(or son) marry one.
Paul Volcker is quoted some where as saying that the fate of the world
depends on 50 stocks, only half of which have any earnings. The real worry,
although Mr. Volcker neglected to say so, centers on the 25 that have
earnings.
Now comes the eminent pooh-bahs of the IMF to second Mr. Volcker's
sentiments, with, of course, much less panache. More specifically, the
executive directors of that august body asserted that although the performance
of the U.S. economy has been "remarkable," they couldn't help noticing that
"the strength of demand, including corporate investment as well as household
consumption, had been underpinned by the high level of stock prices -- a level
difficult to explain."
What they can't explain plainly makes them nervous, and they go on to worry
out loud that a "sharp market decline could have significant effects on both
domestic and foreign economies."
We might inform the IMF folks that Alan Greenspan, a name they're probably
familiar with, supplied them with the answer to the puzzle: The high level of
stock prices is explained by irrational exuberance (in the three years since he
uttered that phrase, both the exuberance and the irrationality have grown
greatly).
The IMF thinks it's time for the Fed to tighten further, lest it wait too long to
contain inflationary pressures and be forced to "raise rates more sharply,"
something that would boost the odds of a stock-market selloff and a "hard
landing."
We can't quarrel too much with the analysis. But the fact that it comes from
the IMF frankly tempts us to reexamine our bearish bias." |
