Hi Ike,
To: IQBAL LATIF From: Harry Scrotum Friday, Nov 27 1998 5:46PM ET
Found this article on another thread. Interesting case towards taking *protective* measures on internuts to hedge profits but this 'bear trap' scenario also implies that we may have another strong lunge towards new highs!!! <ggg>. A savvy SI poster put it best: "A TRADER DOES NOT PREDICT.. HE/SHE REACTS." or as you often say... "Let the market show me the way... (through your "levels" <g>) The Art of Trading (War), love it! Have a nice weekend Ike!
Eye to the Keyhole: Internet-Stock Bubble Is Going to Explode; Will You Get Slimed?
By Christopher Byron
Special to TheStreet.com
11/27/98 11:17 AM ET
Toward the end of almost every bull market there comes a time, typically after the first significant break in prices, when shares rebound with a vengeance.
It's as if all those who had been left standing on the platform when the train left the station have somehow been blessed with the amazing good fortune to behold the train stopping just down the tracks, putting its wheels in reverse and rolling back into the station to give everybody one last chance to squeeze aboard for that great come-and-get-it ride to the land of free money.
On Wall Street, this is known -- quite vividly, if somewhat inelegantly -- as a "sucker's rally" or, alternatively, as a "bear trap," examples of which occurred in 1960-61, 1966-68, 1970-73, 1975-76 and 1980-81. Oddly, we have not seen a classic bear trap since the market break of 1987, and that is why I, for one, am not surprised to see the jaws being pulled back on what looks to be a classic example of one now.
Put simply, we are long overdue for the sort of thunderclap shock that reminds people how the money souks of capitalism really work: When the gamblers at the craps tables start making more than the house, well, you can assume that the game is about to end. We'll examine this close up in the case of Internet stocks in a minute, but first a bit of context as to what's really going on here.
Stock markets never collapse when people expect them to. Instead, crashes tend to sneak up on us when the future looks rosiest -- or at least when we collectively refuse to see what the dark shadows of tomorrow really hide. Take, for example, those fears from back in September and October regarding some sort of looming global financial
meltdown. Said fears -- and the political rhetoric from Washington that accompanied them -- were, as I reflect upon the matter now, a proximate cause of the September slide in stock prices in the first place.
Now, in that spirit let me state that I, for one, know next to nothing of the situation in Japan or the Asian markets, or Russia, either -- or Brazil, Venezuela or any of those other places beset with financial woes that are best appreciated from a distance. To me, it's all globaloney.
Yet I must presume that President Clinton and his financial seer, Alan Greenspan, are up to speed on these issues since they are both paid handsomely from the public purse to dish out globaloney every day. And as I recall, on Oct. 7, Mr. Clinton rose before a meeting of the International Monetary Fund to declare that the troubles erupting out there in Asia (or Russia, or Brazil ... frankly, I forget which) constituted "the most serious financial crisis in half a century." More serious than the 1973 Arab oil embargo? More serious than 13.5% inflation and 11% unemployment under Jimmy Carter? Boy, we're talking serious, all right!
And what about Mr. Greenspan, who at just about that time was confessing to Congress his own growing alarm over "the deepening signs of global distress," and how much longer the U.S. could remain an "oasis of prosperity" in this rising sea of globaloney travail?
Now it's eight weeks later -- and everything's OK again? All it took was the International Monetary Fund sending $41.5 billion to Brazil and suddenly it's bye-bye to the Worst Crisis in Half a Century? We're back to hunky-dory in Japan? No more bad old times over there in Russia? We're talking string bikinis and the lambada once more in Brazil? Ay-ay-aay! Well, that's what you'd think if you looked at the stock market, where the Dow industrials have by now blown by their high of 9,338 reached back in July, hitting a new all-time high of 9,374 on Nov. 23.
I have no idea whether the Global Economic Crisis was the financial equivalent of a 55-gallon drum of industrial-strength anthrax in the hands of Osama bin Laden or just some Administration freak-out to get everyone to stop talking about cigars and oral sex. But I do suppose it had to be at least a little bit serious, or else the stock market wouldn't have sold off the way it did. Yet now we're back where we were before -- as if September and October had never happened -- with the stock market (or at least one particular sector of it) rising at a rate that is probably unprecedented in the history of the republic.
This brings me to my second point about stock-market crashes: They normally only occur when the last marginal investor is fully committed -- meaning that when people try to sell, there's no one left to buy.
There is a 100% guaranteed and infallible way to tell when markets enter what is known as the "Greater Fool" phase. It is characterized by the widespread belief that although the securities being traded are either preposterously overvalued or even have no value at all, they are still worth buying because (it is assumed) there will always be a Greater Fool available to whom they can be resold for a profit.
"This time it's different," goes the chorus of the Greater Fool, sung in euphoric rhapsody in the final stages of almost every bull market in history -- from the South Sea Company land bubble of 1720 to the Goldman Sachs Trading Corporation trust bubble of 1929 and right up to today, in the refrain of digital-age gurus like Don Tapscott, author of Paradigm Shift: The New Promise of Information Technology. As always, the underlying message is the same: The old rules no longer apply.
This happy onrush of the ignorant heralds the bull market's final phase -- the spectacular arrival of which we now may be witnessing in the bubble that has swelled up so colossally in Internet stocks. There is simply no other way to describe the surreal price increases now being racked up by two-bit junk stocks throughout the sector -- typically on the basis of no valuation benchmarks whatsoever and often in direct opposition to common sense.
Consider a stock called Inktomi (INKT:Nasdaq). The company was taken public last June with a 2.25 million-share initial public offering by Goldman Sachs at 18. The company claims to be in the search-engine business, but mostly it's in the business of losing money. In the 12 months ended Sept. 30, the company reported $20 million in revenue and $43 million in operating expenses, with a $22 million net loss. Meanwhile, the company's balance-sheet equity of $43 million is accounted for mostly by the proceeds from its June IPO.
So far, Inktomi's story is the same as countless other Internet horror tales: big ideas, no money. But here's what makes it completely -- indeed, uniquely -- baroque. By late last month, this nothing stock had been swept to 80 a share in the Internet frenzy, at which point a deluge of so-called Form 144 filings rained down on the Securities and Exchange Commission, announcing insiders' intentions to sell stock and cash in their profits. Meanwhile, on Nov. 20, the company unloaded 3 million more shares in a secondary stock offering, most of it on behalf of early insider investors.
When something like that happens to a stock -- when virtually every insider for 20 miles around announces plans to bail out and a secondary offering increases the stock's float by more than 100% -- the stock in question normally takes a long, accelerating swan dive into oblivion. Want to know what Inktomi has done? It's doubled instead and now no longer sells for 80 but, as of Nov. 24, sells for 138 3/8!
Folks, that's a $3.7 billion market cap for a money-losing, $20 million (in revenue) company with doubtful prospects. How will this outfit ever make the kind of money necessary to justify that price? Answer: Unless it gets into drug smuggling, well, forget it. This year, Inktomi has lost $1.15 per share, and losses in 1999 are predicted to improve to only 98 cents per share. In a best-case scenario, the company will report 11 cents per share of profits in the year 2000 -- meaning it is now selling for (get ready!) a two-year-out price-earnings multiple of 1,258 times projected earnings. (Microsoft (MSFT:Nasdaq) now sells for 49 times year- ahead earnings.)
Want another? Let's take a look at an outfit called Creative Computers (MALL:Nasdaq). This isn't actually even an Internet company at all; it's just a computer-retailing operation that sells wherever and however it can (catalogues, online, stores, you name it). The company went public at 17 per share back in 1995, sank eventually to 3 and bounced around down there until about a month ago, when it woke from the dead and started to grow like Godzilla. On Nov. 18, the stock nearly doubled in a single trading session and as of Nov. 24 was selling for 34 1/4. Why? Following upon the berserk success of Internet-auction site eBay (EBAY:Nasdaq), which went public in a Goldman IPO in late September at 18 and is now selling for 197, Creative Computers announced plans for a me-too IPO for its own Internet-auction site: U-Bid Inc.
There was a time when stocks like these Internet junk equities just couldn't be taken public by reputable Wall Street firms at all, no matter how many high-risk warnings were stamped on the registration statement. But that has obviously changed, and we now find one of the premier investment firms in the business -- Goldman -- pumping out these junk deals as if it were no better than a bucket shop pushing slop to the masses in the days of the old over-the-counter market.
It's just disgraceful to see a firm -- even one with the uncertain reputation of Bear Stearns (BSC:NYSE) -- crank out a deal like theglobe.com TGLO:Nasdaq) at 9 when it knows as plain as the fingers on its greedy little hands that whole armies of numbskull retail buyers are clamoring on the Internet to buy the stock at premarket-indicated prices north of 50 a share.
The fools waiting to buy in the aftermarket are, of course, the Greatest Fools in the entire Internet-stock hustle -- the ones standing there with looks of happy stupefaction, clamoring to buy for $50, $100 and even $150 a share of stock just sold via an underwriter for $9 to some momentum-fund manager who will instantly flip it to the knuckleheads on the Internet for a 1,000% profit.
This isn't investing. It isn't even speculating. It's just throwing money at anything that smells of paradigm shift and has a ".com" in the name. How long this will go on I cannot say. A day? A month? A year? All I know is that the evidence at hand says we've entered the last act in the current bull market, and that the end, when it comes, won't wrap itself up in a mere month or two like the slide that began in September.
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