January 18, 1999
Loose Lips
Free speech is no threat to the markets
By Thomas G. Donlan
Article: Saving Grace
It's been a tough season for blabbermouths. In the unending battle between "free" and "fair," the winds are blowing in the direction of those who would use the power of government to make markets fair. Since the world now revolves around television and the Internet, let us review the case of James Cramer, a money manager who has become one of the most innovative and opinionated players in the electronic marketplace. At the beginning of December, while making an appearance as an unpaid guest analyst on the CNBC cable news channel, Cramer denounced "fraud-u-net" stocks, by which he meant Internet stocks that have shot the moon with no visible means of propulsion. This was hardly a major discovery, although one that has injured a lot of the speculators who have acted on it by selling such stocks short, and Cramer sought to explain why such stocks remain so far overvalued.
Cramer told the audience "I called my stock-loan department and I said, 'Listen, I want to short 25,000 [shares of] WavePhore because I think this thing is a big speculative bubble.' My broker told me 'not on your life -- it can't be borrowed.' " Later in his commentary, Cramer said he was not actually trying to short the stock, but to determine if it could be borrowed. He went on to explain how a scarcity of stock to borrow can produce a short squeeze, in which people who have already sold the shares short can be forced to cover their position at almost any price.
WavePhore was not a random target -- the stock had bounced up 60% the day before and a short squeeze was the most likely explanation. Also, Cramer's segment introduced an interview with WavePhore's CEO David Deeds. In that interview, Cramer and CNBC staff reporters asked tough questions and some investors apparently were not satisfied with the answers, for the stock fell by more than a third after the program.
Hell hath no fury like a speculative stock scorned in public. WavePhore denounced Cramer and demanded that the Nasdaq Stock Market and the Securities and Exchange Commission investigate him.
CNBC suspended Cramer from the practice of pontification, but he missed only one appearance before the network brought him back. CNBC also published rules intended to prevent employees and unpaid guests alike from creating any appearance of conflict of interest.
Enthusiastic Marketing
WavePhore may or may not deserve Cramer's acid "fraud-u-net" label. It's probably an honest but optimistic company swept up in a wave of exuberance for Internet stocks. It's certainly a stock that swung wildly between $3 and $17 a share earlier last year without help or hindrance from James Cramer. It's certainly a company that has made more "partnership" announcements than sales since its founding in 1990 or its initial public offering in 1994.
And it's a company that attracts skeptics like old meat attracts flies. WavePhore uses the television vertical blanking interval -- the electronic space separating frames of the TV picture -- to broadcast Internet-style content to PCs equipped with TV tuners.
The drawback is simple: Few PCs are so equipped and most access the Internet directly or by phone. Also, WavePhore picks the partners and advertisers to push to the PC user, when the user might just as easily choose for himself and avoid a lot of ads.
WavePhore has been promoting itself as the wave of the future for most of the 'Nineties. As far back as 1994 Deeds was claiming that the company's technology would transmit 384,000 bits of data per second, and promising a rate of 1.5 million bits per second "next year." The actual service offered this year, however, delivers Website content from the online services of various media and other businesses totaling about 140 megabits per day, or about 2,000 bits per second. The company also likes to say that its retail service, dubbed WaveTop, "reaches 99% of American households," but the statement means only that its partners' television signals can be received in 99% of American households. Most households neither know nor care. To view WaveTop you need free software from WavePhore and a TV tuner card for your personal computer that costs upwards of $75.
WavePhore's public filings don't disclose the number of customers it has, but they show that the company had a mere $17 million of revenues from its business and residential data delivery services in the nine months ended last September 30. Costs, however, were a mere $35 million, for a net loss in the period of about $18 million.
Maybe nothing in this company deserves the label fraud-u-net, but we suggest "hot-air-u-net."
Wrong Arm of the Law
When a company like WavePhore complains that commentators, in electronic media or print, are in league with the nasty old short-sellers, experienced speculators should not bother to turn away from their computer screens for more than a second. More than a century of such complaints should have taught us all -- even the SEC -- that the executives sounding such alerts are too much concerned with their stock prices and too little concerned with their companies.
WavePhore's charges would deserve more respect if the company had also complained to the SEC and the Nasdaq Stock Market about the wild rise in its stock price the day before. That would require, however, that WavePhore whine about its own statements in the marketplace. On November 30, the day before its 60% jump, WavePhore announced a new shopping channel and a new means of offering pay-per-use programming.
Suppose Cramer really had sold WavePhore short and then bad-mouthed the stock on a cable channel? He would have made money. So? The ultimate test of his comments will still be made in the market, using the coin of truth. If an analyst is right about WavePhore or any other stock he comments on, his reputation should rise, regardless of whether or not he profits from his analysis. One of the more distressing aspects of the Cramer case is that the SEC took it seriously and permitted WavePhore to use the commission's name in its counterattack.
Media companies, of course, are entitled to make their own rules. The First Amendment applies to Congress, not to private employers.
If CNBC does not want people using its facilities to make money for their personal accounts, that's its privilege. Neither Cramer nor anyone else has a god-given right to be on CNBC. Barron's publisher, Dow Jones (which also provides news and commentators to CNBC), has rules similar to those CNBC published after the Cramer incident, and so do most responsible news organizations. Their credibility is at stake in the market for readers and viewers and they cannot allow their employees to damage the product.
But the SEC has no proper role in leashing Cramer or unleashing him. What he says, and whether or not anyone else profits from what he says, is a matter for himself, his employers and his audience to decide.
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