The Trouble
With Bubbles
A bubble, once created, cannot be stabilized it must inflate, or pop!
James
Stack, editor of the highly-regarded InvesTech Market Analyst
began his Personal Perspective column with the following notable
quote by Lord Overstone, 1846 (Steve Leuthold's Perception),
"No warning can save a people determined to grow suddenly
rich."
According to Stack,
"A bubble is a psychological, as much as a monetary, phenomenon.
Yes, it cannot be created unless a central bank is overly accommodative
in the first place. And yes, it quickly becomes more grotesque
if the central bank introduces a "moral hazard"an implied
guarantee of support. But in the end, it must still be investor
psychology that fuels the mania and pushes valuations to never-before-seen
extremes. The 1st quarter of this year has seen a record $30
billion-per-month flow into mutual funds. Yet TrimTabs reports
that insider selling was $40 billion in January, and likely doubled
to $80 billion in February. What you're seeing is the "fleecing
of the lambs" as history replays itself and the bag is handed
off to the ultimate bagholders.
Silent Meltdown
At the same time new Internet IPO's are doubling and tripling out of the starting gate, and Internet infrastructure stocks are still soaring, many new e-tailers appear on the brink of extinction
- eToys, new IPO last May: Fallen from a high of 86 to 11
- PlanetRx.com, new IPO last October: Fallen from a high of 36-1/2 to 9
- CDnow, new IPO in January of '98: Fallen from a high of 23-1/4 to 5
- Autobytel.com, new IPO last March: Fallen from a high of 58 to 8
- iVillage, new IPO last March: Fallen from a high of 130 to 22
- E-Loan, new IPO last June: Fallen from a high of 74-3/8 to 9
Whether
selling toys, prescription drugs, CD's, cars, clothes, or loans
over the Internet, these "new economy" stocks are finding
start-up costs high, competition fierce, and profit margins razor
thin in the world of e-commerce (where "e" obviously
doesn't stand for earnings). The March 20th Barron's lists
almost 100 new Internet companies that are burning up cash at
a rate in which they'll run out within 18 monthsand 5 of the
above 6 are among them (Autobytel.com could last over two years).
Interesting note: Insiders still have between half and 4/5's
of the above shares yet to dump on the public (if the opportunity
permits). We also found it fascinating that every single research
analyst on Yahoo! Finance rated the above stocks either "buy"
or "hold." We can only presume the word "sell"
is not in the new economy vocabulary.
Of
course, some of these stocks could get an infusion of capital
from some rich brethren, or they might recover and become profitable
with hard work and long hours. But we haven't heard anyone question
what employee morale must be like at these fallen stars. And
if key employees (with worthless stock options) jump ship, who's
remaining to keep it afloat? Apparently scared by the fallout
and red ink, the king of the e-tailersAmazon.comjust announced
plans for a secondary offering that would triple its outstanding
shares. But when you're hemorrhaging at the rate of -$700 million/year,
who cares about earnings dilution?
The most amazing
part about the Online retail hype is the disparity in numbers
bandied about. You've undoubtedly heard some huge claims
about growth over the past year. Well, the government finally
released their first quasi-official estimate of Online retail
sales for the 4th quarter, and it is(drum roll, please)$5.3 billion
or 0.6% of the $821.2 billion in total sales for the Christmas
quarter.
Feeling Inflated?
With
gas hitting $1.69/gallon locally, and a lot higher in California
we hear, it's not unusual to feel a little inflated right now.
Both wholesale and consumer prices have risen over 3% in the
past year, and are nearing 8-year highs. The official numbers
would be noticeably higher if not for fudging by the Bureau of
Labor Statistics. We've mentioned before that they "back
out" price increases that can be attributed to quality improvements.
But BLS staff acts dumbfounded when you ask if they ever adjust
prices upward for falling quality. You know what we meanthe longer
lines today, the poor customer service, the shoddy interior of
commercial airliners, the Chinese-made tools that fall apart
when first used.
Most notable finagling
is the absence of housing inflation, which accounts for 40% of
the CPI. Prior to 1983, this component would rise with housing
prices, interest rates (mortgage costs), property taxes, insurance,
and maintenance or remodeling costs. Now all of those are taken
out or forgotten, and an "owner's equivalent rent"
is magically determined by the BLS. Their current claim: this
inflation in housing actually decreased over the past yearyeah,
right!
Don't try selling the
"no inflation" argument to summer vacationers. The
Wall Street Journal reports that the price of prime summer
rentals has jumped 15-40% in the past year$20,000 for a fortnight
on the shores of Nantucket, or $5,000 for a weekly cottage in
Martha's Vineyard, and not much less on the West Coast in Malibu
or the San Juan Islands.
Excessive Excesses
You'll never see such excesses in the early or middle stages of a bull market. Only after a record long economic expansion can such unrestrained confidence, easy credit, and Ponzi schemes flourish. And flourishing they are
- Washington Federal Savings, serving a 6-state market, just announced "Enhanced 97"a new home loan ((up to $300,000) that has no income restrictions for the borrower, and only requires 3% down payment. Oh -- did we mention they also welcome your use of a credit card for the down payment and closing costs?
- From perhaps the tip of the "accounting shenanigans" iceberg: The stock of MicroStrategy plummeted 62% in a single day when the company announced it was revising downward its financial results of the past two years. (With a P/E of 1163 and a Price/Sales Ratio of 80, they weren't too hot to begin with.)
- Douglas Colt and several Georgetown University law students launched a "pump and dump" scheme to hype shares of cheap stocks (which they owned) on their Internet Web site: Fast-Trades.com. When caught by the SEC, they had to "promise not to engage in the scheme again", but, remarkably, did not have to give back the profits or pay any fines
- Headline when Microsoft, Intel, Home Depot, and SBC Communications joined the DJIA last October: `New Economy' Stocks Join Industrials WSJ-10/27/99.
- Headline when the DJIA recently dropped under 10,000: Dow No Longer Best Wall Street Indicator. AP-2/27/00. (Don't you love these "spin-to-suit" headlines?)
- Bad math: When 3Com spun off "Palm" (which makes the popular Palm organizer) in an IPO this month, they sold only 4% of the shares, so naturally the stock soared out of sight (as planned). Ironically, that meant at opening price, Palm was valued at $80 billion, or triple the $27 billion value of 3Com, yet 3Com still held over 90% of the Palm shares! (Palm has since lost 2/3's from that IPO opening.)
- Biotech IPO's lined up in the pipeline: Allos Therapeutics, AtheroGenics, Cellomics, DrugAbuse Sciences, Esperion Therapeutics, Exelixis, IntraBiotics Pharmaceuticals, Introgen Therapeutics, Lexicon Genetics, OraPharma, Paradigm Genetics, Sangamo BioSciences, and the list goes on and on and on.
- Vote for me! Here's how one Presidential candidate answered a recent question about the bubble on Wall Street:
- Rolling Stone Magazine: In terms of the economy, we're doing great now, but people fear that so much of our prosperity is based on a big Internet bubble and that if these stocks collapse, we could be in for some tough times. Is that a worry to you?"
- Al Gore: "will we have a correction? History says we will. Are we in a new era now? I think we are. How do these two realities interact? I don't know."
Editor's Note: James Stack is editor of InvesTech Market Analyst, 2472 Birch Glen, Whitefish, MT 59937, 1 year, 17 issues, $190. Visit the Web site at www.investech.com.
