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[Joshua Goldberg <josh@goldbergs.com>]

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On the fine day of 12/2/00 12:15 AM, my friend geert lovink at
geert@xs4all.nl typed:

> In good or bad times, Internet business consultants are always right. In
> rosy times they will predict infinite growth of stock values because of
> predicted hyper growth. In times of recession they will blame the very same
> market they trusted a few months earlier. Is there anyone to blame here, one
> wonders? The experts of Andersen Consulting, Deloitte, etc. seem to get away
> with everything. There is no accountability whatshowever. It is like suing
> the weatherman for a bad prediction. How about bringing Internet gurus to
> court, charging them for ignoring key business figures, selling unrealistic
> high price-earnings multiples? Take Mr. Nicolas Tingley of Morgan Stanley.
> In the midst of the NASDAQ the Australian Financial Review of December 1
> portraits this investment banker as an "interested bystander at the down at
> the downturn of the technology sector". I am sure he would not have
> presented himself as such a year or so ago. Tingley is portrayed a high tech
> sceptic, commenting the six myths of technology stocks, listed by the Wall
> Street Journal (October 17, 2000). "People desperately wanted it to be true,
> wanted it to be a new era. And it always is different - until it turns out
> it isn't." Tingley is trying to talk himself out of the episode of the short
> boom of 1999, blaming the overvaluation of tech stocks on "psychology". Yet,
> the agents of "psychology" remain anonymous. Morgan Stanley is certainly not
> one of them. No. They are only interested in "fundamentals", focussing on
> "opportunities that it can understand and adequately forecast." Who then, if
> no US-American investment banks such as Morgan Stanley were the driving
> forces behind the speculative dotcom.mania? The current business rhetoric
> cannot answer this question, not even the WSJ's myths, which were written by
> E.S. Browning and Greg Ip. Let's quote them here in full:
> 
> -----
> 
> Myth No. 1:
> 
> Tech companies can generate breathtaking gains in earnings, sales and
> productivity for years to come.
> 
> This was probably the most pervasive and influential of all tech-stock
> myths, partly because it seemed so hard to challenge. Growth in tech-company
> sales and earnings was undeniably outpacing growth elsewhere. This
> discrepancy was widely believed to make big New Economy companies different
> from big Old Economy companies, most of which typically achieve single
> percentage-point increases in annual sales.
> In February, Jeffrey Warantz and John Manley of Citigroup Inc.'s Salomon
> Smith Barney unit published a report claiming that the huge gains in
> tech-stock prices were reasonable because "the growth in projected earnings
> has been equally impressive."
> Technology's contribution to economic growth underpinned the analysis by
> Merrill's Mr. Steinberg in his Tulip report. In the late 1980s, he noted,
> earnings at big tech companies grew more slowly than at most other
> companies. By the late 1990s, tech earnings were growing twice as fast as
> those of other companies, which was a good reason to value tech stocks more
> highly.
> The facts weren't wrong. But this view didn't take into account that the
> price of tech stocks had grown so fast that the stocks had become "priced
> for perfection," as the skeptics like to put it. Any false step and the
> stocks would plummet. Nor did this perspective on the market take into
> account a historic reality: No matter how good a company is, it can't
> maintain as a large organization the same growth rate it had when it was
> much smaller.
> Dell, for example, boosted revenue by about 50% a year from 1996 through
> 1998. Skeptics said that a company selling a commodity like a personal
> computer just couldn't keep posting those kinds of gains year after year.
> Dell enthusiasts, whose numbers grew as the astounding results rolled in,
> maintained that its direct-sales model and use of the Internet would permit
> it to surprise skeptics for years to come.
> Then, in 1999, sales growth slowed to 38% -- still enormous, the bulls
> enthused. But earnings growth also slowed, and in the fall of 1999, Dell
> warned investors that its earnings would fall short of estimates. The stock
> bounced around as bulls and bears fought it out over the company's growth
> prospects. But in the end, the skeptics were proved right. Dell warned
> repeatedly that its performance would disappoint. On Oct. 4, it said that
> this year's third-quarter revenue and fourth-quarter earnings would miss
> targets.
> 
> Myth No. 2:
> 
> Tech companies aren't subject to ordinary economic forces, such as a slower
> economy or rising interest rates.
> 
> Until the late-1990s, technology was considered a cyclical business, its
> sales and profits rising and falling with the overall economy. But as the
> tech craze shifted into high gear, one of the most popular arguments in
> favor of technology companies was that demand for their products was so
> enormous that it would keep growing through the peaks and troughs of the Old
> Economy.
> Demand has remained strong, but not as strong as many more-optimistic
> investors had hoped. Personal-computer sales, for example, were thought to
> be able to grow regardless of general economic conditions, as they had
> through most of the 1990s, says Andrew Neff, an analyst at Bear Stearns Cos.
> As recently as early August, he told clients to expect a strong second half
> for PC sales, "driven by multiple factors," including the end of Y2K
> hangover, Microsoft's Windows 2000, a turn-up in Europe and the launch of
> Intel's Pentium 4 chip.
> But then one PC-related company after another shocked investors with
> warnings of softening business, from Intel to Dell to Apple Computer Inc.
> Mr. Neff, who used to dismiss such warnings as "company specific," now says
> he has changed his thinking. "Demand problems are serious and difficult to
> quantify," he says. The PC business is now cyclical, he adds, and investors
> should sell PC stocks when the fundamentals begin to deteriorate.
> In the same vein, rising interest rates were once thought bad for tech
> companies because they slowed the economy and made it costlier for customers
> to finance purchases of tech equipment. But as the Fed began raising rates
> last year and tech stocks, after a brief dip, kept rising, many analysts
> argued tech companies were immune to interest rates because demand for their
> products was so strong and their borrowing needs so slight.
> As it turns out, even though tech companies don't borrow much themselves,
> their customers do. And as buyers have curtailed spending, tech suppliers
> have suffered. Lucent, for example, has warned investors that fiscal
> fourth-quarter profit would be hurt by reserves it is taking against bad
> loans extended to its customers.
> 
> Myth No. 3:
> 
> Monopolies create unbeatable advantages.
> 
> Some tech companies were thought to deserve extraordinary valuations because
> the nature of their products created near monopolies. The huge number of
> people using Microsoft's operating-system software or America Online Inc.'s
> instant-messaging service gave those companies a critical mass of
> customers -- a network -- that made it hard for others to break in and
> compete.
> "Networks offer the opportunity for explosive shareholder returns," Michael
> Mauboussin, Credit Suisse First Boston Corp.'s chief investment strategist,
> wrote in May. "Network effects played a prime role in Microsoft's ability to
> create $350 billion in market value over the past 15 years."
> One problem with this argument is that government may become suspicious of
> monopoly power. The Justice Department's antitrust suit against Microsoft
> has helped cut its stock in half and reduce its market value to about $285
> billion. Now, authorities are raising questions about AOL's
> instant-messaging service. WorldCom Inc., the dominant carrier of Internet
> traffic, has seen its stock hammered since a proposed merger with Sprint
> Corp. was derailed by antitrust concerns.
> Moreover, monopolies may erode as the marketplace evolves. Beyond the
> government antitrust suit, Microsoft faces the far more daunting danger that
> its customers will reject the desktop computer as online and wireless
> technologies open the way for new handheld devices and inexpensive "dumb"
> terminals that can connect to the Internet. Mr. Mauboussin notes that he
> always acknowledged that some network effects are stronger than others and
> that in technology, the effects tend to have a shorter life span than
> elsewhere.
> 
> Myth No. 4:
> 
> Exponential Internet growth has just begun and, if anything, will
> accelerate.
> 
> J. Thomas Madden, chief investment officer at the Federated Investors Inc.
> mutual-fund group in Pittsburgh, a one-time skeptic of tech stocks,
> gradually found himself embracing the idea that the Internet would strongly
> influence the future of the stock market. He recalls being told by a
> scientist at Carnegie Mellon University that if you plotted on a chart the
> number of Internet users or of network parts needed, it would rise
> geometrically.
> When an investor "begins to believe that such growth may continue for years
> to come, it is easier to withstand very lofty valuations," Mr. Madden has
> explained.
> But demand for Internet products and services, though strong, hasn't proven
> infinite. Once most companies set up a Web strategy and a home page, growth
> in their Internet spending tends to slow. As the overall economy has
> downshifted a bit, Internet-advertising dollars have flowed less readily.
> Last week, the stocks of Yahoo! Inc. and DoubleClick Inc. were clobbered on
> signs of flagging growth in Web advertising, finishing the week down 76% and
> 91% from their highs, respectively.
> What's more, Internet companies had assumed shareholders would wait
> patiently for years before demanding that they show significant profits.
> Instead, investors are bailing out of companies that spent aggressively on
> attracting customers: Amazon.com Inc. is down 75% from its all-time high,
> E*Trade Group Inc. 81%, and iVillage Inc. 98%.
> The myth was "that there was no price that was too high for a good tech
> company," says Ed Keon, director of quantitative research at Prudential
> Securities, himself a reformed advocate of high-priced technology stocks.
> But "eventually, there is a price that is too much to pay even for a
> fabulous stock such as Cisco Systems or JDS Uniphase," makers of
> communications equipment used in building the Internet. "At some point," Mr.
> Keon says, "you had to ask yourself, wait a minute, is there anybody left
> that doesn't have a Web site now?"
> 
> Myth No. 5:
> 
> Prospects are more important than immediate earnings.
> 
> Henry Blodget of Merrill Lynch expressed the core of this myth in December,
> when he wrote of Internet leaders like Yahoo! Inc., "It is a mistake to be
> too conservative in projecting future performance." Yahoo at that time was
> trading at 500 times projected profits for 2000. "The real 'risk,' " Mr.
> Blodget asserted, "is not losing money -- it is missing major upside."
> Today, investors are nervous about Yahoo's slowing revenue growth, and the
> company's stock is down 68% since December. In retrospect, Mr. Blodget
> concedes that while advising investors not to be too conservative "was the
> right prescription for 1995 to 1998, as soon as we got into 1999, it was a
> mistake. Expectations got ahead of reality." Valuing these stocks on
> prospects and potential size of market sometimes made analysts forget what
> could change -- such as competition. FreeMarkets Inc., which operates online
> auctions for industrial companies' purchasing needs, went public at $48 last
> December. By February, when co-lead underwriter Goldman Sachs & Co.
> initiated coverage, it was trading at $217. Goldman analyst Jamie Friedman
> said that in six to 12 months, the stock would be worth between $300 and
> $400. That was based, among other things, on the expectation that
> FreeMarkets would eventually handle 5% of an estimated $5 trillion in global
> procurement. But FreeMarkets' potential customers saw similar opportunities
> and began forming their own online procurement consortia. Since February,
> FreeMarkets has lost 81% of its value. Mr. Friedman says he didn't foresee
> the creation of competing consortia.
> 
> Myth No. 6:
> 
> This time, things are different.
> 
> More than any other misconception, this was the most fundamental of the
> myths to which people succumbed. And like many of the others, what made it
> so seductive was that it had so many elements of truth to it.
> Rarely had a series of phenomena -- the Internet, wireless communications
> and computer networking -- so quickly become such a big part of so many
> people's lives. Analysts compared the situation to revolutionary
> developments of the past -- the popularization of the telephone, radio,
> television and car -- all of which took far longer to grab the national
> consciousness.
> But tech fans ignored the fact that even companies involved in a revolution
> eventually face market forces. Most early auto makers failed to survive.
> Radio Corp. of America and General Motors Co. were two of the hottest stocks
> of the 1920s, but that didn't prevent both from crashing along with the rest
> of the market in 1929. RCA eventually lost 98% of its value.
> Some analysts remain unrepentant defenders of their views on tech stocks.
> Mr. Steinberg of Merrill Lynch says he never tried to justify the highest of
> the tech valuations. As for the rest of the sector, he adds, it will
> recover. "I think the new economy is alive and well," he says, "and I don't
> think this is the end of the story right now."
> But some money managers warn that certain tech stocks, notably in the
> networking and optical-fiber area, still haven't fallen enough to reflect
> the real world. Says Michael Weiner of Banc One Corp.'s money-management
> unit in Columbus, Ohio: "It doesn't look to me like we have entirely learned
> our lesson."
> 
> -----
> 
> It is funny to see how the global financial discourse brokers of the Wall
> Street Journal debunk their own belief system. "The higher you fly, the
> deeper you fall." That's a popular belief of the outsiders. The unconscious
> call for punishment for those who made, and are losing millions of dollars
> these days, might be too simplistic. The question should rather be: who
> talked up these stocks in the first place? Most likely the same journalists,
> column writers, analysts and consultants who are now predicting further
> losses. Why are these experts getting away with such a lack of memory? I
> would propose to add one myth to the list:
> 
> Myth No. 7:
> 
> Financial analysts, consultants and business reporters are merely
> bystanders.
> 
> In the Internet economy, technological change is a complex, dynamic,
> integrated system. It's direction is increasingly dictated by financial
> markets, which are no longer "feeding" the IT industry with capital from the
> outside. Investment decisions of venture capitalists direct the way in which
> technology is being developed, thereby effecting  A cloudily, dense
> information structure is intrinsically intertwined with its object (Internet
> technology, wireless applications, telecoms, hardware etc.). This
> hypersensitive environment is also open for a variety of factors such as
> currency exchange rates, interest rates, and even, to some extend domestic
> and foreign policy. And let's not forget the prize of crude oil. Factors
> which all define the technological state of the art itself as parameters,
> constantly changing settings which have to be closely monitored. The media,
> be it television, print magazines, or Internet, are in constant feedback
> with both the financial markets and the technological sector, becoming one
> big PR marketing machine. Competition does not lead into diversification of
> opinions and formats. Within this turbulent climate of "digital convergence"
> there is little interest in independent reporting and critical research in
> new media and IT development.  (geert)
> 
> -----
> 
> As an appendix, from Thestandard.com of Friday December 1, 2000:
> 
> The Incredible Shrinking NASDAQ
> 
> You surely know by now that the market tanked yesterday. The 4
> percent, 109-point NASDAQ decline spells a 50 percent decrease since
> its March high. According to the San Jose Mercury News, "Tech stocks
> are having their worst year since the benchmark NASDAQ index was
> created 29 years ago. So far, the NASDAQ is down 36 percent this year,
> and no one knows when the free fall will stop." The Dow fell 2.02
> percent, or 214.62, leaving it down 9.4 percent since the start of the
> year. CBS MarketWatch reports that "an amazing 985 Nasdaq stocks hit
> new 52-week lows Thursday versus a mere 48 reaching fresh 52-week
> highs."
> 
> Many reporters agreed that gloomy forecasts from Gateway and Altera
> were to blame, and some proposed other factors - according to Wired
> News, a spike in unemployment has spooked the market, while the Wall
> Street Journal cited anxiety about the election imbroglio, and
> MarketWatch pointed to fears of an impending recession.
> 
> The real question is how much worse things will get. Every time the
> market dives, there's always some sanguine analyst around to claim
> that the market has hit its bottom and to chirp about buying
> opportunities. The New York Times quoted a note from Abby Joseph
> Cohen, a bullish market strategist at Goldman Sachs, to her clients,
> saying, "Indications that cash is building in portfolios, and that
> valuations are the most appealing they have been all year, support the
> forecast of rising stock prices." Of course, that note came out before
> the market opened yesterday, so clients who took her advice might be
> feeling shaken.
> 
> Some of them may be wishing they listened to Tim Morris, chief
> investment officer at Bessemer Trust in New York. He was quoted in the
> Wall Street Journal dismissing the hopeful notion that the flailing
> market offers lucrative bargain hunting: "We aren't in the business of
> catching falling knives." - Michelle Goldberg
> 
>> From Bad to Worse
> http://tm0.com/thestandard/sbct.cgi?s=87972342&i=281982&d=683559
> 
> Tech Stocks Suffering Worst Year Since 1971
> http://www0.mercurycenter.com/svtech/news/top/docs/market120100.htm
> 
> Markets Mired in the Red
> http://www.wired.com/news/business/0,1367,40437,00.html
> 
> Stock Sell-Off Accelerates and Broadens
> http://www.nytimes.com/2000/12/01/business/01STOX.html
> 
> Stocks Open as Techs Bounce From Steep Drop
> http://interactive.wsj.com/pages/money.htm
> (Paid subscription required.)
> 
> Buyers Lurking on the Sidelines
> http://cbs.marketwatch.com/news/current/snapshot.htx
> 
> Recession Fears Rise as Stocks Fall
> http://washingtonpost.com/wp-dyn/articles/A6984-2000Nov30.html
> 
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--
Josh Goldberg      
josh@goldbergs.com

"I've been ionized, but I'm OK now." 


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