<nettime> The Seventh Myth

["geert lovink" <geert@xs4all.nl>]

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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