It's a scam and it's under heavy pressure to collapse: "Net mania will burn down the Street Momentum investing in Internet stocks has some shady goings on, but market authorities are just dumbfounded.
OPINION By Christopher Byron MSNBC CONTRIBUTOR
Dec. 29 — There are not many things in this life that an investor in the stock market can be sure about, but this is one of them: a riot has broken out in Internet stocks, and it's spreading. I'll get to the particulars of what happened Monday in a minute, but first some thoughts on the wild, free-for-all buying panic that has taken over the sector.
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I, AMONG OTHERS, have been writing about the developing speculation
in Internet stocks for well over a year now, and in that time we have seen
this speculation swell into a bubble and now into a full-bore stampede. It
is a riot that neither the Securities & Exchange Commission nor the
National Association of Securities Dealers has any idea whatsoever how
to quell -- and with every day of inaction the riot gets worse.
Stocks that used to take a month to double in price now double in a
week, a day, even mere minutes. There are so many examples they
hardly need citing anymore. Nor do we need bother listening any longer
to strained "new paradigm" rationales for why price-earnings ratios don't
matter. We don't even hear anymore talk about "price-revenues"
multiples, and similar nonsense. Now all that one needs to do in order to
make a stock take off is to put out a press release announcing plans for
a Web site. You don't even need the actual site -- just the "plan" for one
will do well enough.
The criminal underworld is now spreading like oil on a mud puddle
throughout this whole mess. It is impossible to escape the feeling that
crimes like front-running -- in which a broker trades for his own account
before submitting a customer's order that he knows will move the market
price of a stock -- are now rampant. Yet the scale on which they are
taking place is so vast that the cops just seem to stand by
dumbfounded.
Examples abound. Every day I talk to market veterans who tell me
stories of Wall Street figures who take secret positions in stocks via
Canadian and European brokerage accounts, then tout the shares to
their acolytes on the Web. Some foreign exchanges seem to have
sprung up expressly to court this sort of activity. But no one in a position
of authority is doing anything to stop any of it.
In fact, there may well be nothing anyone can do, since the combined
buying power of retail investors on the Internet has now engulfed and
overwhelmed not just the market policing apparatus of the regulators, but
indeed the whole of the stock market itself -- in particular the
market-making system of Nasdaq, where the riot has reached its most
deafening decibel level.
In the process, more than a half a century of scholarship and study into
the nature of investment and the theories of financial analysis have been
trampled into the dust. Remember the so-called "efficient market
theory"? It's the theory that holds that more or less everything worth
knowing about a stock is built into its quoted price in the market -- which
in turn means, of course, that the best investors are those best able to
analyze the known facts. It's the theory that explains, for example, why
Warren Buffett is a billionaire whereas Ivan Boesky -- who stole
information about various stocks and traded on it before the information
could be reflected in the market -- is now an ex-con living quietly in
France.
Yet what is now taking place on the Nasdaq stock market in the name of
"momentum investing" in Internet stocks has thrown the efficient market
theory out the top window of a 50-story building. Investors in Internet
stocks need know only two things: (1) the stock's ticker symbol, and (2)
whether some day-trading guru they follow on the Web says the shares
are "going up." What the company actually does, doesn't matter.
Whether it ever made a dime (or ever will), doesn't matter. All that
matters is whether the chat rooms say it's going up.
This is a disaster developing right before our eyes -- for the markets, for
investors, for Wall Street as a whole … and unless it ends soon, it will
prove a disaster for the nation. Sadly, I fear that the end is nowhere in
sight.
Some of the biggest and best-known firms on Wall Street are in this oily
vat up to their necks. They've all plotted to game the system. Their
favorite strategy: gin up a 2 million share IPO for some juvenile, no-name
company, then get a handful of momentum hedge funds to buy the deal
at $10 or $15 a share, hold it for an hour or two, then flip it into the
grasping, open hands of retail investors on the Web.
If market regulators thus want to do something really useful for their pay,
they could subpoena every trading record, memo and document
generated by Bear, Stearns & Co. and its momentum-fund clients in
theGlobe.com IPO from Nov. 13th and ask some tough, no-excuses
questions as to how that smelly deal was priced by Bear at $9 when
everyone involved knew the stock's first after-market trade would probably
be north of $50. Within minutes after that, the shares were at $97!
Shame on them.
MONDAY'S MADNESS
As for what happened on Monday, well, there's plenty the market cops
could look into there too if they only would. I personally think they're too
shell-shocked even to try. A week before Christmas, I spoke to an SEC
investigator about the most recent Outrage of the Week -- evident
games-playing in the shares of a Web-site operator named Tel-Com
Wireless Cable -- and he said that getting to the bottom of it would
probably be too hard: foreign brokerage accounts, and that sort of thing.
So I doubt anyone at the SEC or Nasdaq or anywhere else will be
rushing to ask why it was that an obscure Nasdaq SmallCap stock
named 800 Travel Systems Inc. (IFLY) sold for $6.75 last Wednesday
yet by 4 p.m. Monday was selling for $16.12. This company, which went
public last spring at around $5 per share, quickly sank to barely $1 in the
after-market, and was still selling for barely $4 as recently as
Thanksgiving week. Then came Monday when, for no apparent reason,
the stock nearly tripled in a day, on roughly 70 times normal volume.
Why? One good place to start looking for answers would be the
co-underwriter of the company's IPO: First Liberty Investment Group Inc.
The SEC investigated an employee and a consultant of the firm, a
microcap underwriter, as part of a 1997 probe of penny stock swindles. If
that avenue leads nowhere, then investigators might ask questions of at
least one IFLY board member: Pasquale Guadagno. Guadagno may be
pure as the driven snow in all this, and no evidence is known to suggest
otherwise. But he might have some helpful suggestions for investigators
since prior to joining IFLY's board he served as a senior vice president of
a now-defunct Boca Raton swindle-shop, Euro-Atlantic Securities, that
was expelled from the National Association of Securities Dealers for
market manipulation and deceptive sales practices. Maybe Pasquale
has some thoughts on how IFLY got from $6.50 to $16.12 in a day.
Here's another company the feds might take a look at: Active Apparel
Group Inc., a direct mail retailer of sports fashions for women. Between
the start of the year and Christmas Eve, this stock sank from $3.50 to
$1.25 per share. Then, on Monday morning at 7 a.m. ET -- two and
one-half hours before the start of trading -- the company put out a press
release announcing that it would begin selling its wares over the Web.
By noon the stock was selling for $15.
It would be interesting to know if anyone associated with the company --
or who knew of the pending press announcement -- was among those
who bought stock the previous week, when an average of about 30,000
shares per day changed hands. On Monday an unbelievable 15 million
shares were traded -- i.e., 500 times normal volume.
The feds might also take a look at the trading in a company called
SkyMall Inc., another $2-plus stock for most of the year. SkyMall sells
consumer goods via catalogues such as the ones you find in the
seat-backs of airplanes. On Dec. 9th the company announced that it
would begin selling its wares over the Web as well, and this $3.80 stock
became a $5.87 stock. Then, for no apparent reason, on Monday
SkyMall became a $35.50 stock on volume of nearly 26 million shares; a
week earlier daily volume had fallen as low as barely 50,000 shares.
Why? Most press accounts have pointed to investor excitement over
reports that retail business was brisk on the web this Christmas.
Be that as it may, it would be interesting to know whether any of the
Web chat room operators who were touting SKYM on Monday were
front-running their recommendations.
AUTHORITIES REMAIN SILENT
The reason these questions are important is because no one in a
position of authority seems to be asking them. I remember once, several
years ago, visiting the NASD's market surveillance operation and
watching a large room full of people do nothing but watch CNBC to see
when Dan Dorfman, the then Wall Street stock columnist, would come
on the air with news of some deal. When that happened, everyone would
sit bolt upright and instantly begin staring at their computer monitors in
hopes of detecting irregularities in the trading that followed.
Nothing even remotely like that seems to be going on now. But it should,
before the fire that is burning through the Internet sector consumes the
whole of Wall Street. The stock market is ablaze and the firemen are just
gawking at the spectacle."
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