From Harry Newton this morning:
8:30 AM Thursday, October 3, 2002: You can smell it coming: a huge drop in equity markets this
month. Yesterday's significant drop (Dow down 2.31%; Nasdaq down 2.18%; S&P down 2.36%)
was a precursor. What was significant about yesterday:
+ It came so quickly after the short covering rally of the day before. That strong Tuesday rally
didn't even last two days.
+ The losses were broad and deep, with the market suggesting that the economy is tanking in
many key sectors -- bad loans for the Bank of New York, earnings misses for Dow Chemical, lousy
earnings estimates for Cisco (which at one stage yesterday fell below $10 -- for the first time since
January, 1998).
+ Wall Street's history of lying, cheating, stealing and gross incompetence reached new heights
yesterday. The VIX is up. Keep reading.
Wall Street has its own peculiar (i.e. strange) explanation for yesterday: The Wall Street Journal
reported that "Wall Street traders blamed part of a sudden, late decline in major stocks on "sell
program" that was incorrectly executed -- a snafu that caused billions in dollars in unintended sell orders
to cascade on the New York Stock Exchange. Bear Stearns Cos., erroneously executed the
computer-guided trade at 3:40 p.m. EDT. In such trades, long lists of stocks are bought or sold in one
move. The NYSE said a trader at Bear's midtown office made a "clerical error" to sell $4 billion of
stocks that are in the Standard & Poor's 500-stock index; the order should have been entered as $4
million, the exchange said. All but $622 million of the orders were canceled before execution, it
said. Bear Stearns told the exchange that the error would have little impact on the securities firm
because the erroneous trades had been "substantially hedged." A spokeswoman declined to provide
further details."
A "clerk" can make a $4 billion "mistake!" Wall Street is incredible. If you believe Bear Stearns is
hedged against idiocy and incompetence to the tune of $3.3 billion, you'll believe anything,
including flying pigs and a great bridge I have in Brooklyn for sale.
A reader writes: Short Amazon. This company has over $2.2 billion in debt, has a negative
shareholders' equity of $1.4 billion, has never turned a profit (except a tiny one in one quarter);
its growth rate is dropping every quarter going forward, etc, etc. What's amazing is Amazon has
been rising -- it's $17. Amazon has a market cap of $6.5 billion, higher than Apple, Adobe, EDS,
KLA-Tencor and even Dow Jones (owner of the Wall Street Journal). This makes zero sense.
Stocks going lower include IBM, Cisco, Intel, Microsoft, Applied Materials, Amazon, Expedia,
Marriott and a whole lot financials etc.
If investors haven't lost complete confidence in Wall Street by now, today's news will seal it:
+ The $4 billion clerical error at Bear Stearns. No one checks anything any longer?
+ Goldman Sachs, one of the most prestigious Wall Street firms, turns out to be just as slimy as
the rest of them. To wit, from the Journal: "Prominent executives at 21 U.S. companies personally
received hot IPO shares from Goldman Sachs Group Inc., which pocketed lucrative investment-banking
fees from those companies during the stock market's extraordinary rise in the late 1990s, according to
congressional investigators. Two executives of major Goldman clients -- eBay Inc. Chief Executive
Margaret Whitman and Yahoo Inc. co-founder Jerry Yang -- each received shares in more than 100 initial
public offerings of stock managed by Goldman since 1996, and quickly resold many of the shares at a
profit. Among others, executives or directors of WorldCom Inc., Enron Corp. eToys Inc., and Global
Crossing Ltd. also received IPO shares."
+ Martha Stewart, a great icon of American culture, turns out to be a simple liar, who's greedy.
She will probably be convicted of insider trading, perjury and obstruction of justice. The assistant
to Martha Stewart's stockbroker (the one who worked at Merrill Lynch) plead guilty yesterday,
according to The New York Times, of concealing the reason behind the sale of Ms. Stewart's shares
of ImClone Systems.
He said he had done so in exchange for money, an extra week of vacation and a free plane
ticket from the stockbroker. Douglas Faneuil, 27, who entered his plea in a Manhattan federal
court, now says that Ms. Stewart sold her stock after learning that ImClone's founder, Samuel D.
Waksal, was trying to sell thousands of his shares. At the same time, Dr. Waksal's daughter sold
more than 39,000 shares. The source of Ms. Stewart's information, according to documents filed
as part of Mr. Faneuil's plea, was the stockbroker, Peter E. Bacanovic of Merrill Lynch." After this
information came out yesterday, Merrill Lynch fired both Faneuil and Baconovic. Previously they
had been on a paid leave of absence.
There are 370,000 intersections in New York City that have traffic lights. If you visit New York and
think about it, you'll be amazed how many work. When I first researched new York's traffic lights, I
was intrigued by how they keep the lights working. I found they never fixed blown lights. They
simply relamped the entire city. They used to relamp every year. But then GE came out with a
longer-lasting incandescent bulb and the city could do it every two years. Big productivity
improvement! But, guess what? They're now changing all the incandescent bulbs to LED bulbs. And
these ones will will last 25 years. BIG productivity improvement. You can still sell technology -- but
you got to deliver BIG immediate cash benefits.
One of my private equity funds (down 75%) has an investment in a small security company that
is (but shouldn't be) publicly traded. I won't mention the name of the company. It's not relevant
and the stock is virtually valueless. But as I sat and listened to the president drone on, trying to
convince the audience to give him $1 million to extend his company's miserable life, I realized
this company was a "sandbox."
When you get pitched to invest, listen for sandbox tendencies. Here's my definition of a sandbox
company: "Many inventors look for outside financing from angels or venture capitalists. Some
people look for the money to grow their company, by selling product or service and ultimately
making a profit. Some people look for the money so they can continue having fun writing
software, creating hardware, and doing whatever cool neat new things amuse them. These are
"sandbox" companies. They will never produce a real product for their customers or a profit for
their stockholders. To be a successful investor, you need to identify sandbox companies and
avoid them like the plague."
Last night I emailed the president of the private equity fund, who owns shares in the security
company: "Real depressing listening to that presentation yesterday.
It needs serious marketing help.
+ Which market?
+ Which business model?
Then focus, focus, focus.
This company is solving everybody's security problem. All with 22 people. Not possible. Unless you
fix this company this week, kiss your entire investment good bye."
The point of this story? You need to check out at least 100 opportunities before you stick your
money into anything. A friend of mine and myself were approached yesterday about funding a gas
mask company. (Everyone is trying to get in on bio-terrorism.) My friend, who's very sharp, wrote
back "This is a one product company. Can't see any exit strategy for a start-up these days and therefore
the equity has no appeal."
My advice remains: Stay away from all equities. Short only with monies you can afford to
completely blow. Keep a tight 15% stop loss on your shorts. Stay in cash. Our time will come.
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