Today allegations of accounting fraud came out about Cisco. Chris Byron, who not coincidently helped break the story on the GENI fraud, wrote a detailed article about Cisco this morning that exposed its attempts to hide debt in offshore partnerships and suspect transactions in which one of the board of directors owned stock in companies that Cisco bought out. Even Chambers made a few extra bucks by buying stock in companies before Cisco bought them. This is illegal. But during the bull market no one bothered to look.
Byron concluded with the following statement:
“Sadly, financial engineering arrangements like Cisco's partnership deals are typical of what too many men at the top of American business spent their time putting together in the Great Stock Market Bubble of the 1990s. It would take 10 lifetimes to unravel the conflicts imbedded in such arrangements, and in the end there'd probably be no point. Business in America is what it has become, and in the end the lesson of Enron may be no more complicated than this: If you don't try to hide your hustles in some offshore tax haven like the Cayman Islands, you can get away - apparently quite legally - with almost anything. Call it hiding in plain sight. Ain't Wall Street grand like that? “
You can read his entire article here:
nypost.com
Bear markets have three stages to them:
1)denial – people don’t believe they are in a bear market and buy betting on a big recovery or a return to new highs. Market slowly trends down, but rallies excite people and spark greed in gullabulls who buy every rally.
2)reality sets in – people begin to realize that there is something wrong with the economy or the market. Market drop speeds up and reaches a bottom. Some sell. Most just hold and hope that it can’t get any worse.
3)panic, selling, and disinterest – in this phase the market makes a final bottom. A lot of people sell. Others hold on thinking that the slogans – “invest of the long haul” and “stocks beat bonds” will help them make their money back. After several months or years they sell after seeing their stocks go nowhere They become impatient and lose interest in the market or have been so burnt and emotionally drained that they get completely disgusted with it.
We are in phase 2. Probably the middle of it. The reason why I say the middle is that the general public is still hopeful that stocks are going to go up and think that the accounting scandals are actually buying opportunities. They know things are bad and crooked, but think that this will just blow over.
You saw that today in Cisco. After the stock gapped down 2.3% on the open people came in and bought it to make it rally into the afternoon. These fools – I don’t know what else to call someone who buys stock in a company after it has been revealed that it has been lying on its financial statements – took the bad news as a buying opportunity.
The same thing happened on Friday with IBM and NVDA. After news came out they committed accounting fraud the stocks made the top buy list on the Ameritradeindex. Ameritrade customers bought more shares of these two stocks then anything else on Friday.
As long as people keep trying to buy bad news and buy the rallies the current stage 2 of the bear market will continue. Once they stop this habit this decline will end.
People just haven’t had enough yet and still look for any reason to buy – apparently thinking that this correction is going to end any moment. What is worse they are encouraged to throw their money away by people who should know better.
This morning several analysts upgraded NVDA and IBM. Remember NVDA is under an SEC investigation and could even be haulted! Morgan Stanley analyst Mark Edelstone declared that "the accounting questions facing NVDA are relatively benign;" analysts at Thomas Weisel and Credit Suisse First Boston opined that the drop in the stock's price gave true believers a wonderful buying opportunity.
Incredibly these analysts have been upgrading stocks all the way through the market drop and have been consistently wrong, but people seem to be using their upgrades as a reason to buy. It just shows you how desperate a large segment of the market has become.
The tough reality is that when someone gets conned they often don’t want to admit it. Studies show that this is even more true with wealthy people. If a wealthy person gets conned in a pyramid scheme or other scam they rarely report it to the police because they don’t want to be embarrassed. In the same way so many people remain in denial about the magnitude of the accounting fraud and deception that has been so widespread in the financial market. And Wall Street helps them maintain that denial with analyst upgrades and bullish nonsense on the television.
There is a saying that bull markets bring out all of the fast buck artists and con artists. It is the bear markets that bring corporate honesty back and eliminate all but the strong and steady investors. The gamblers and gullabulls get parted with their money.
In the end the 1990’s bull market and bust was one of the biggest frauds in world history. Never before has so much money been transferred from honest, thrifty, and hardworking people into the hands of venture capitalists, stock manipulators, and mafia boiler room operators.
Let me quote to you a story from BusinessWeek today:
“It's 2 a.m., and Jim Tucci is staring wide-eyed at the ceiling--another sleepless night. Instead of counting sheep, he's anxiously tallying up how much he has lost in the stock market. Half of his $400,000 nest egg, he figures, has evaporated in just two years. Forget the retirement property on the Gulf Coast. Forget the long-planned trip to Italy with his wife. Tucci, a 60-year-old sales manager at a voice-recording company in Boston, admits he blew a wad on speculative tech stocks during the Internet bubble. But a year ago, he dove for safety in blue-chip stocks like IBM (IBM ), Merrill Lynch (MER ), General Motors (GM ), and Delta Air Lines (DAL ). Now, 40% of that is gone. Tucci feels suckered. "I'm paralyzed. I can't sell because I'd take such a big loss. I'm sure as heck not going to buy anything. And even if I were, who would I listen to for advice? No one seems to even give off a whiff of honesty about any of this stuff. These days, I just pray a lot."
“Some 100 million investors--about half of all adult Americans--can relate to that. They're the new Investor Class that has emerged over the past decade. Predominantly middle-class, suburban baby boomers, they bought into the idea that stocks could only make them richer. They exulted during the long bull market of the 1990s. But they've lost $5 trillion, or 30%, of their stock wealth since the spring of 2000, when the dot-com implosion launched the second-worst bear market since World War II. It wasn't Monopoly money: It was earmarked for retirement, for college tuition, for medical bills.”
This isn’t money that was lost. This is money that was transferred in a confidence game. When people bought tech stocks while they crashed they were buying them from insiders and venture capitalists who got the stocks for free or for fractions of the market price. Think about one of the greatest bubbles of them all: Priceline.Com.
PCLN at one point had a market capitalization greater than that of United Airlines, Delta, and United Airways combined. Now it is worth less than two 747’s.
PCLN was once one of the top internet stock picks of Motley Fool. People lost billions of dollars in the stock. But the guy who founded the company made several hundred million dollars dumping his stock on to the public. These were shares he created out of thin air when he founded it.
Money wasn’t lost – it was transferred from the hands of investors who thought PCLN was real and into the hands of its founder, the venture capitalists, and Wall Street underwriters whose analysts like Henry Blodgett went on TV every week and told everyone to buy it while it the company took on more and more debt and the stock dropped.
All of these people laughed all of the way to the bank.
Back in 1999 Cisco was seen as a leader of the “new economy.’ George Gilder said that it would go up year after year. But today with Byron’s story it becomes a poster boy for all of the accounting gimics that tech companies played to inflate their earnings. And with the revelations of offshore accounts and insider trading John Chambers, the CEO of Cisco, no longer looks like a great technology visionary. He just looks like another stock jobber.
People are still in denial that they were conned. In the back of their minds they know it. It’s in the news and right in front of their face, but they still hope to get their money back. Once they start openly saying that they were bamboozled the downtrend will end. Psychology must shift from desperate hope to fear and anger. This how bear markets always end. When people tell you “this time is different” on TV they are lying to you. |
