Yep,
>NEW YORK, May 26 (Reuters) - Another bug is biting Wall Street. The ``I HATE TECHS'' virus is wreaking havoc with technology stocks, clocking up big losses for investors, particularly the Internet crazies. There's a lot of fear about the ability of some e-tailers to stay in business.
The latest problem this week for the Street was the belated realisation that Federal Reserve Chairman Alan Greenspan's fast-track monetary tightening would actually hurt the New Economy. A scenario of higher interest rates has historically flagged down a bull market.
The investors' lost infatuation with technology slammed the Nasdaq composite index, which shot up an incredible 86 percent last year.
This week, the Nasdaq hit its low for the year, flirting with 3,000-point level after a bone-jarring fall from its March 10 high of 5,048.62. It is down 22 percent for the year and in solid bear market territory.
The headlines talked about a ``Tech Wreck'' putting the blame on the Fed plugging away with higher interest rates on top of this month's big half-percentage-point jump. The central bank wants to slow the economy and head off the risk of inflation.
Rising interest rates can be negative for corporate profits. They boost the cost of doing business, which can bite into earnings and prompt Wall Street to cut stock prices relative to the companies' weakened bottom lines.
But something else was dogging the tech groupies. After all, the rising interest-rate story had been around for nearly 12 months, with the Fed having raised interest rates six times since June 1999.
Hit the rewind button. Just a week earlier, news tickers reported the bankruptcy of Europe's first major Internet retailer, Boo.com.
Boo's demise came after the online seller of flashy designer-label clothes burned through $135 million of investors' cash and its lenders slammed the door shut on the company.
The failure was blamed on Boo's marketing and advertising splash, which swallowed much of its cash. Creditors, mostly advertising firms, are owed $25 million.
For many investors who were up to their eyeballs in Internet stocks, Boo's flop was a reminder that the fairy tale may be over.
There have been warnings that the Internet bull market, particularly among consumer-oriented dot-com stocks, was too good to be true. For many e-tailers, the boom in stocks was the life line that kept them on their feet, thanks to extraordinarily high stock prices.
The popping of the speculative bubble in tech stocks, however, has pulled cash out of these companies, effectively putting them on a life-threatening cash diet.
To make matters worse, PricewaterhouseCoopers warned recently that seven of Britain's 28 publicly traded Internet companies could run out of cash within six months. The professional services firm said it based its conclusion on a ``burn rate'' formula that measured the companies' supply of cash, gross profits and cash expenses.
It also said that less than half of the Internet retailers had enough money to see them through the next 15 months.
``What you're seeing is a transition from two years ago when there were piles of money that needed to participate in rising Internet ventures and, yet, there was almost no experience, especially within the venture capital ranks, about how to discriminate between Internet companies that would work and those that would not,'' said William Valentine, investment manager for Valentine Ventures LLC.
Time was when venture capitalists threw money at an entrepreneurs' neat idea and hauled in buckets of money when the company's stock went public. Now that tech stocks are no longer a sure thing, the venture capitalists need to work for their money and be selective. At the very least, they have to kick the tires and bone up on the operating manual before driving off with the latest model idea.
``The problem was that these New Economy companies had no history and the venture capitalists took a shotgun approach to investing -- giving a little bit to a lot of companies,'' said Valentine. ``The typical idea of venture capitalist people is that although many of the firms won't work out, the ones that do will hit home runs.''
Experts say that in the rush to figure out the New Economy, investors have substituted guts for brains. Instead of focusing on earnings, Wall Street has turned a sympathetic ear to the Internet's growth prospects years down the road.
They reason that this is a revolutionary sector and the companies' earnings will come later. No doubt about it!
But things just aren't the same anymore.
``What has changed after two years is that people have gotten long enough of a history of what works to know where money is well spent and where it isn't,'' Valentine said.
Years ago, a company would not dare think about selling its stock on Wall Street until it cranked out profits for at least a year. It needed to prove to investors that it had the right stuff.
But the New Economy people tore up that script, saying it no longer applied in this Internet world. Investors have been drawn to companies with no past history but with the potential for a great future or hypothetical profits.
And, the crystal ball readers on Wall Street have used statistical numbers to project the companies' earnings outlook, often setting unachievable goals.
Even the biggest shopping site, Amazon.com (AMZN.O), has yet to earn a dime. In the first quarter, Amazon's revenues stood at $574 million, an impressive 95 percent leap year-over-year, but it lost $99 million -- vs. a loss of $31 million a year earlier.
Safe to say that if the granddaddy of Internet retailers can't turn a profit, it's not likely that a start-up could have the creativity to pull it off.
Experts agree that Internet retailing is a revolutionary development. But e-tailing has not matured to the point where it is a necessity for the world's shoppers. Until it becomes a formidable industry it will need to be fed a mountain of cash to stay alive.
The online retailers also have been slammed by mainstream retailers, which have finally seen the value of the Web. The betting is that the brick-and-mortar companies may turn out to be the truly successful dot-com retailers.
``Amazon was in the online book-selling business before Barnes & Noble, and a lot of other e-commerce ventures were also early squatters, trying to be the first to sell a product on line and to aggregate the traffic,'' Valentine said. ``While these squatters had the opportunity, the real push will come from the deep pockets of the traditional retailers that will bring formidable competition.''
Amazon was a trail blazer in the industry and has gone on to sell more than books.
``Now it's a lot harder to be squatters and start selling things like furniture online and to carve out a turf that nobody else has already done,'' Valentine said.
``The early squatters' place is virtually guaranteed, albeit there is now a wave of consolidation where the No. 1, No. 2 and the No. 3 companies in a particular retail channel will combine in the interest of maintaining an economy of scale,'' he said.
For sure, there's a war on in the online retailing field.
Among the U.S. casualties, Internet retailer Toysmart.com, majority owned by Walt Disney (DIS.N), went out of business this week after burning through most of its cash.
Early this month another online toy store, RedRocket.com, owned by Viacom Inc. (VIA.N), closed its doors. Also on the ropes were Value America (VUSA.O), a diversified online retailer, CDNow Inc. (CNDW.O), an online music retailer, and Peapod.com (PPOD.O), an online grocer.
Raymond DeVoe Jr., chief investment strategist for Legg Mason Walker, says that Internet retailers are the most hazardous for investors and it is that sector that will suffer the nastiest breakdown.
The veteran strategist suggests that people should not believe everything they've heard or read about Amazon, which claims to be the future Wal-Mart.
``When e-retailers boast that they have eliminated the middlemen, they do not consider that they ARE the middlemen,'' he said.
``In my view, the Internet is very bearish for most retailers, both for the online and brick and mortar, because essentially it is a price discounting mechanism,'' DeVoe said.
``It provides a listing of prices for buyers interested in acquiring interchangeable products at the lowest possible price.''
DeVoe's advice for Internet start-ups: Stick to books.
For the week, the Dow Jones industrial average fell 327.61
points at 10,299.24. The Nasdaq composite index was off 185.29
at 3,205.11 and the Standard & Poor's 500 index was down 28.93 at 1,378.02.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com).
16:31 05-26-00 |
