[WSJ/MSNBC] There's no mania like Web mania.

I Find Karma (adam@cs.caltech.edu)
Sun, 3 Jan 1999 06:03:49 -0800 (PST)

Happy 1999, people. Hope some of those non-Californian Americans among
us are enjoying the biggest snowstorm in the last two decades. Where's
that global warming when you need it?

363 days till we find out Y2K was all hype and no hope. And counting.

Here's a pair of articles about why some people are panicking and
pulling money out of the market and/or Internet stocks. I'm staying
stupid and in the market. Then again, I really don't have much to lose
since my nest egg resembles a goose egg.

Like it or not, 1998 was a great year for the market and a fantastic
year for the tech stocks and an amazing year for the Internets. I don't
give a damn if this *is* the signal for the end of the bull market --
I'm enjoying the excitement the Internet stocks provide us, and I for
one will go down with the ship. Rohit, now would be an *excellent* time
for a 4k-you.com or fork-you.com registration and subsequent IPO...
quick, before the so-called "bubble" bursts!

For what it's worth, I think it's just as likely that there is no bubble
at all, since the grand total of the Internet stock market caps is still
less than just Walmart's market cap. Shows you how much I know. I have
no formal economics training. If I walk down the street and see a $20
bill on the ground, I'm likely to pick it up. And by posting this, I
can go back someday and point to the precise moment in time where I went
irrevocably wrong... if stocks are a fad -- and Internet stocks are a
fad within a fad -- then I'm a fadchaser. Judging by my music tastes,
we already knew this to be true.

Still, you gotta wonder when America Online can "buy" The New York Times
for roughly 10% of its outstanding AOL stock. Then again, Microsoft
could splurge and flat out buy The New York Times with 1/3 of its CASH
RESERVES. Heck, at this point, is there anything Microsoft *can't* buy?
The last item on the rumor mill was that MS Cambridge now has access to
the expertise of Tony Hoare...

But I digress. This was supposed to be an "Internet stock" introduction
and I failed miserably. Rohit, get that TimByars.com engine revving...
there's gold out there to pan while surf's still up...

> http://www.msnbc.com/news/227614.asp
> There's no mania like Web mania:
> Internet-stock rises are dwarfing levels in previous trading frenzies
> By Greg Ip, the Wall Street Journal, 12/28/98
> The U.S. has seen stock manias before, but nothing, it would appear, on
> the scale of the current frenzy for Internet stocks. The magnitude of
> Internet stocks' price increases and market values dwarfs what some
> longtime market watchers recall in previous speculative frenzies, like
> that for biotechnology stocks in 1991.
> And compared with America Online's trailing price-earnings ratio of 418,
> the 95-times-earnings Polaroid hit in 1972 at the peak of the "Nifty
> Fifty" era was a model of value investing.
> "If you were looking for something that was a fitting finale to the
> biggest bull market in history, it would be the biggest speculative
> mania in history -- and that's what it does look like," says Robert
> Farrell, senior investment adviser at Merrill Lynch.
> A veteran market analyst, Mr. Farrell recalls similar crazes for
> franchise and computer-leasing companies in 1968, and for bowling stocks
> in 1961.
> "The big public participation and parabolic price rises, the initial
> public offerings going up more than any other IPOs have on the first day
> of trading -- that kind of thing has happened before. The only
> difference is the extent and size of it. These stocks are getting to be
> worth more than many of the old-line blue chips."
> For example, at its record close Monday of $157.25, America Online had a
> market value of $72 billion, which would have ranked it 33rd largest in
> the Standard & Poor's 500-stock index, to which it will be added at
> Thursday's close. That's bigger than PepsiCo, Gillette or General
> Motors. (Tuesday, AOL's value slipped to $70.8 billion.) Yahoo would
> have ranked 84th, while Amazon.com would have been No. 118. All three
> declined Tuesday while the S&P 500 rose, depressing their rankings.
> Shares of eBay, which had revenue of $12.9 million in the company's
> third-quarter report, its first after going public Sept. 23, have a
> market value of $11 billion, exceeding Federated Department Stores, with
> third-quarter revenue of $3.6 billion.
> "I know of no new-issue market that has exploded on the scene with this
> degree of intensity," says Jeremy Siegel, a professor of finance at the
> Wharton School and a renowned markets scholar. He says buyers of the
> stocks must believe not only that the Internet is as revolutionary as
> the telephone or telegraph, but also that any future profits won't be
> lost to competition. "That's where a lot of us have problems," Prof.
> Siegel said. "We're not denying the revolutionary aspect of the
> Internet."
> Except for some high-profile analysts, most of Wall Street is skeptical
> of the Internet craze. Mr. Farrell says that at year-end luncheons, a
> regular recommendation is to sell "short" an Internet stock. (Short
> sellers hope to profit from a decline in a stock's price.) Individual
> investors appear to have far more faith.
> The professionals aren't skeptical so much about the value of the
> Internet or that some companies will make a fortune on it. Rather, they
> are skeptical that so many companies can hope to survive, let alone meet
> the expectations built into their stock prices.
> "Survivability, not valuation, is the key issue," Edward Kerschner,
> investment strategist at PaineWebber, wrote in a May report. He drew
> parallels between Internet stocks and personal-computer stocks, darlings
> of the 1982-83 bull market. At the end of 1982, the most-prominent PC
> makers were Apple, International Business Machines, Atari, Commodore,
> Tandy and Texas Instruments. Only Apple "was a good long-term vehicle"
> for playing the PCs business, and most of today's leaders -- Compaq
> Computer, Dell Computer or Gateway 2000 -- weren't even public at the
> time.
> The best parallel to the Internet mania was the craze of biotechnology
> stocks in 1991-92. These were companies that similarly rarely had
> revenue, let alone earnings, and therefore defied standard valuation
> efforts. According to Securities Data Co., 101 biotech companies went
> public in 1991 and 1992, raising $4.4 billion. Only 44 are still
> trading.
> By comparison, Securities Data counts 73 Internet companies that have
> gone public since the beginning of 1997, raising $4.6 billion. (AOL and
> Yahoo have been public for more than two years.)
> But by one measure, the Internet mania has been far more intense:
> Internet shares have gained an average of 38% on their first day of
> trading, compared with the 7.5% average for biotech companies,
> Securities Data calculates.
> One lesson of the biotech and other technology manias, Mr. Kerschner
> wrote, is that "too much will be paid for even the best companies." He
> noted that Amgen, the leader of the biotech group, didn't sustainably
> break its end-of-1991 level until 1995. (In an eerie parallel to America
> Online, Amgen entered the S&P 500 on the last day of 1991.) "Amgen was a
> great company but an overpriced stock."
> Even if AOL's per-share operating profit was to grow 50% a year for the
> next five years, investors are now paying 55 times those five-years-out
> earnings. But that might be justified if it survives an industry
> shakeout that vanquishes dozens of competitors.
> "At current valuations, I can't say AOL is a good buy," says Aash Shah,
> a fund manager at Federated Investors. "But AOL will be one of the
> long-term successes within the Internet space."
> Prof. Siegel notes that many investors doubted IBM could sustain its
> double-digit earnings growth in the 1960s. Skeptical investors were
> reluctant to pay the high price its stock consistently commanded
> relative to earnings -- thus passing up one of the most impressive
> companies of the era. "There are arguments... these growth premiums
> might have some justification," says Prof. Siegel.


The Company That They Keep

The Biggest Internet Stocks Market Cap ($b) Revenue ($b)
America Online $70.8 $2.90
Yahoo! 26.6 0.15
Amazon.com 17.5 0.42
eBay 11.0 ----
AtHome 9.6 0.03
Network Associates 8.2 0.82
Netscape Comm 6.6 0.57
E*Trade Group 3.3 0.20
CMGI 2.9 0.11
Excite 2.5 0.12

Rival the Old Standards Market Cap ($b) Revenue ($b)
Walt Disney $62.4 $23.0
Colgate 27.5 9.0
J.P. Morgan 18.5 19.0
J.C. Penney 12.4 31.0
RJR Nabisco 9.5 17.0
Gateway 8.0 7.1
New York Times 6.6 2.9
A.G. Edwards 3.3 2.2
American Greetings 2.8 2.2
B.F. Goodrich 2.5 3.8

Source: Baseline, WSJ research


Chris Byron in a separate MSNBC opinion story...

> 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.
> Web sales may be lifting share prices too easily. 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.
> There's no mania like Web mania.
> 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.
> 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.


Greed captures the essence of the evolutionary spirit... Greed will save
our paper company, and that other malfunctioning company, the United
States of America... Greed, for lack of a better word, is good. Greed works.
-- Michael Douglas as Gordon Gekko in the movie "Wall Street"