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2007-10-32 - Oil at $94

Back in 2005, we predicted an oil crunch. Today, NYMEX crude hit $94, purely on demand, without any major supply disruption.

We weren't pessimistic enough.

Many of the things we predicted for 2006 happened in 2007. The mortgage meltdown and housing crash happened, a bit later than we expected. Chrysler was sold off at a bargain price.The Iraq war continues as a stalemate.

2007-09-12 - Where are they now? Behind bars.

Federal Bureau of Prisons Inmate Locator
Inmate Information for

Bernie Ebbers Inmate Register Number 56022-054
Age 66
Projected Release Date 07-04-2028

Bernie Ebbers, former CEO of Worldcom. Serving 25 years in Federal prison in Louisiana.

Responsible for the largest known single-business investor loss due to fraud, $180 billion.

Federal Bureau of Prisons Inmate Locator
Inmate Information for

Richard Causey Inmate Register Number 29261-179
Age 47
Projected Release Date 10-16-2011

Enron's former Chief Accounting Officer, in charge of the "creative accounting" that hid Enron's losses.


Federal Bureau of Prisons Inmate Locator
Inmate Information for

Jeffery Skilling Inmate Register Number 29296-179
Age 53
Projected Release Date 02-21-2028
Enron's former CEO, Jeff Skilling, is in Federal prison in Minnesota.
2007-08-26 - Notes on the current crises

We have been working on another data-mining project, SiteTruth, which does automated due diligence on the businesses behind web sites. That's why Downside hasn't been updated in recent months. The real reason we don't have much to say about the current market negatives is that we don't have enough information to evaluate them.

Debt markets don't have enough transparency for fundamental analysis. We predicted, over a year ago, "Homeowners with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market." We were right. It was obvious that something had to break. What wasn't obvious was the failure mode. We had no idea who the counterparties in all those mortgage based hedges were, though. Neither did anyone else, including, apparently, top management of some of the parties.

A comment on derivatives generally: no linear combination of bets can produce an expectation higher than the highest expectation of any of the bets. This is why casino "betting systems" don't work. Derivatives are usually linear combinations of bets. Derivatives thus do not have higher expectations than their components. The basic effect of derivatives is to reshape the expectation vs. probability curve, typically to yield a high probability of a moderate gain coupled with a small probability of a large loss.

Remember "portfolio insurance"? Long Term Capital Management? They entered the inescapable "small probability of large loss" region. This time it's the "25 sigma event" in Goldman Sachs hedge funds.

2006-12-31 - 2006 predictions recap

We finish the year by looking back at the predictions from the beginning of the year.

  • Saudi Arabia finally admits the Gawar field has peaked. Oil passes $70 per barrel.Oil did pass $70/bbl, and has been trading in the $60/$70 range since. Close for the year at $61.05. But the Saudis say Gawar has not peaked.
  • US interest rate spike. "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market.
    No interest rate spike. Foreclosures are up and housing prices down, but not to the level of a crash.
  • Nobody wins in Iraq. Neither side can force a decision, so both sides keep bleeding.
    That's what happened.
  • One of the big three US car manufacturers goes bankrupt.
    Both GM and Ford are in terrible shape, mergers have been discussed, and Delphi went bankrupt, but GM and Ford are hanging on.
  • A major hurricane wipes out another southern US city.
    Totally wrong. Very slow hurricane season.
2006-10-16 - Andrew Fastow behind bars

Federal Bureau of Prisons Inmate Locator
Inmate Information for

Andrew Fastow Inmate Register Number 14343-179
Age 44
Projected Release Date UNKNOWN

Andrew Fastow, the primary architect of the Enron debacle, is now safely behind bars.

Ken Lay, of course, is dead.

Sentencing for Enron's Jeff Skilling is scheduled for October 23, 2006. Sentencing for Richard Causey is pending. Once those two are in prison, it's over.


2006-10-08 - There's a new member of the club
Map of nuclear detonation
USGS automatic earthquake monitoring system report.
2006-09-03 - Drop and give me 20

As our contribution to reducing America's obesity epidemic, Downside offers the Youth Fitness Song. This song was commissioned by the President's Council on Youth Fitness during the Kennedy administration. A record with this song was sent by the U.S. Government to every school in America, to be played over the public address system each morning, while students exercised. It's past time to revive this.

2006-08-09 - Oil and war

With the shutdown of Prudhoe Bay production for pipeline repair, and threats from Iran to use the "oil weapon", we are about to find out if Saudi Arabia has the extra production capacity they claim.

When Saudi Arabia runs out of extra capacity, any major OPEC country can force a worldwide oil shortage. The 1973 embargo required coordination amongst the OPEC countries. Next time, individual members will have that power. Political events will determine if it is used, and against whom.

2006-07-01 - Downside's predictions at midyear

At midyear, it is time to review our predictions from the beginning of the year:

  • Saudi Arabia finally admits the Gawar field has peaked. Oil passes $70 per barrel.
    Oil hit $75 per barrel and remains above $70. The Saudis still don't publicly admit that Ghawar has peaked, although there have been hints.
  • US interest rate spike. "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market.
    Interest rates continue to go up, at the Fed's "measured pace", but no spike or housing collapse.
  • Nobody wins in Iraq. Neither side can force a decision, so both sides keep bleeding.
    That statement continues to describe the war.
  • One of the big three US car manufacturers goes bankrupt.
    GM is about to be bought out at a very low price, and Ford's bonds are at junk status.
  • A major hurricane wipes out another southern US city.
    Hurricane season has just started.

We see no need to change the predictions.

2006-05-25 - Oil production flat
2006 oil production

World oil production, millions of barrels per day.
Source, International Energy Agency oil market report.

We may have reached peak oil.

Those are actual numbers, not projections.

2006-05-25 - Guilty, Guilty, Guilty

Ken Lay - guilty on all counts. Jeffrey Skilling - guilty on all securities-fraud counts. Thus ends the Enron debacle.

Neither is actually in jail yet. Sentencing is set for September 11, 2006. Few of the Enron criminals have started doing their time yet. That will change now that they are no longer needed as witnesses.

2006-04-21 - Oil at $75

At the beginning of this year, we predicted "Saudi Arabia finally admits the Ghawar field has peaked. Oil passes $70 per barrel." Oil has been above $70 for most of the week. We're there.

No traumatic events are currently affecting production. No wars. No sabotage. No embargoes. This is pure lack of capacity. Economically, "peak oil" seems to be here.

The Saudis still aren't admitting that Ghawar has peaked. Many suspect, but few know. Mexico does admit that their biggest field, the Cantarell, peaked in 2005, and Kuwait has admitted that their biggest field also peaked in 2005. So two of the big three have peaked.

The higher prices are not yet significantly affecting demand in the developed world. That takes time. The combination of limited elasticity on the demand side and limits on the supply side imply further price rises.

2006-04-14 - Downside at 5

Five years ago we started Downside. We were right about the dot-com crash; it was worse than even we expected. This year we're predicting trouble due to short oil supplies, too much debt, and cllimate change.

The problems the US faces are technically solveable, but we do not yet see the political will to admit the problems, let alone solve them.

2006-01-11 - Skilling and Lay on trial

"This is a criminal case. The defendants are Mr. Jeffrey Skilling and Mr. Ken Lay." With those words, the trial of the former top people at Enron began today. Skilling and Lay may take the position that they didn't know what was going on (the "idiot defense"). They may try to blame Fastow, the former CFO. They may try to argue that Enron was a legitimate business run into the ground by the people below them. With eighteen Enron executives already convicted, none of those defenses are likely to work.

Q: When we talked as you were becoming CEO, I asked you what setbacks or failures you'd ever had in your life. You said none. Do you consider this to be your first failure?

A: Maybe this will sound awful, but I don't. I remember when there were three of us on the 39th floor at Enron, when we got this whole nonregulated side of the business going. Like I said, I am very proud of what I and others accomplished at Enron. We built a company that, 10 years from now, 20 years from now, is going to be a factor to be reckoned with. I can probably say I have no regrets.

- Skilling interview in Business Week, August 2001

2006-01-11 - Why interest rates are so low
Interest rates are still low by historical standards. This is because China is buying far more low-paying US treasury paper than makes economic sense. This is part of a deal with the Bush Administration - the US doesn't erect trade barriers against China's products, and China doesn't pull their money out of the US. This deal makes possible high deficits and tax cuts without financial collapse.

If China pulls their $250 billion out of US Treasuries, or even stops further Treasury purchases, interest rates will go up. If mortgage rates go up, the speculators who have interest-only loans with adjustable rates see their payments rise. Many will default, resulting in foreclosure. The housing bubble finally pops. Baby boomers who expect to sell their houses at a profit lose their equity.

China has not made significant US Treasury purchases in the last six months. China has stopped financing the US deficit. CNN reported on January 6th that China is discussing moving its foreign exchange reserves out of US Treasuries. This is significant.

The government of China has been using this economic power for political, rather than economic leverage. This statement by Zheng Bijian, a recent member of the Central Committee of the Communist Party of China, in People's Daily, the official organ of the Chinese government, is worth a close reading. This outlines the political conditions for continued economic support of the United States. The style is diplomatic and oblique. It is clear, though, that China sees itself as being in a position to dictate terms. Which China is. China now has the power to pull the plug on the US economy at modest cost to themselves. Actions here will be politically, not economically motivated, so we cannot make any predictions. We should expect, though, that any significant political disagreement between the US and China will result in a rise in US interest rates.

It's now necessary to follow the statements of the People's Bank of China as closely as one follows those of the US Federal Reserve.

2006-01-09 - The foreclosure trap
Interest-only loans graph

Interest-only loans as a percentage of new loans.
(Data from Loan performance)

People with these loans are not homeowners. They're renters, with an option to buy. One interest-rate spike and they're out on the street.

2006-01-01 - Predictions for 2006

Consistent with our tradition of pointing out obvious negatives, we offer the following predictions for 2006:

  • Saudi Arabia finally admits the Gawar field has peaked. Oil passes $70 per barrel.
  • US interest rate spike. "Homeowners" with adjustable-rate interest-only loans default and are foreclosed. Housing prices crash as foreclosures glut market..
  • Nobody wins in Iraq. Neither side can force a decision, so both sides keep bleeding.
  • One of the big three US car manufacturers goes bankrupt.
  • A major hurricane wipes out another southern US city.

Happy New Year.

2005-12-28 - Richard Causey pleads guilty, cuts deal
Richard Causey

Richard Causey, formerly Enron's chief accounting officer, has agreed to plead guilty and cooperate with prosecutors. Just in time for the trials of Skilling and Lay next month.

Movie recommendation: Fun with Dick and Jane. If you've followed the Enron debacle closely, you'll recognize some scenes. And check the ending credits.

2005-12-12 - Kuwait's largest field just peaked, early
The second largest oil field in the world, the Burgan field in Kuwait, just peaked, years earlier than expected. The reserve numbers from OPEC countries have been known to be overly optimistic for years. Reality is now intruding.
2005-05-22 - Oil
Futures June 2005 oil futures

From a fundamentalist perspective, oil is now the major driver of the economy. We will thus have more to say about oil from now on.

Keep these points in mind when looking at the chart above.

  • Oil demand is only weakly elastic in the short term on the demand side. On the supply side, only Saudi Arabia had excess capacity, and they are now at maximum output.
  • Capacity increases slowly. Reserves are not increasing at all. Demand is increasing steadily.
  • Large, short-term price swings are to be expected, because supply and demand are both closely matched and inelastic. Watch the annual price trend, not the daily variations. Press reports focusing on small day to day changes are not significant.

Read "Beyond Oil", by a Shell petroleum geologist who knows something about the subject.

2005-03-15 - Bernie Ebbers convicted
Bernie Ebbers

Bernie Ebbers, who led Worldcom into the tank, was convicted today for his role in the biggest fraud and bankruptcy in all of history. As the indictment puts it, "from in or about September 2000 through in or about June 2002, BERNARD J. EBBERS, Scott D. Sullivan,and their co-conspirators engaged in an illegal scheme to deceive members of the investing public, WorldCom shareholders,securities analysts, the SEC, and others, concerning WorldCom ’s true operating performance and financial results."

Worldcom's MCI unit was the source of the "Internet traffic is doubling every 100 days" statement that fueled the dot-com boom, and that false statement was part of that fraud scheme.

2004-10-11 - The weakening dollar
Dollars per euro, 2004.
The Federal deficit doesn't mean free money for the Government. There's a price to be paid.
2004-10-11 - The coming mortgage crunch

The next crash looks to be housing-related. Fannie Mae is in trouble. But not because of their accounting irregularities. The problem is more fundamental. They borrow short, lend long, and paper over the resulting interest rate risk with derivatives. In a credit crunch, the counterparties will be squeezed hard. The numbers are huge. And there's no public record of who those counterparties are.

Derivatives allow the creation of securities with a low probability of loss coupled with a very high but unlikely loss. When unlikely events are uncorrected, as with domestic fire insurance, this is a viable model. When unlikely events are correlated, as with interest rate risk, everything breaks at once. Remember "portfolio insurance"? Same problem.

Mortgage financing is so tied to public policy that predictions based on fundamentals are not possible. All we can do is to point out that huge stresses are accumulating in that sector. At some point, as interest rates increase, something will break in a big way. The result may look like the 1980s S&L debacle.

2004-07-08 - Kenneth Lay arrested
Ken Lay in handcuffs

Kenneth Lay, the former Enron CEO, has finally been arrested. He claims he didn't know his company was a Ponzi scheme.

Glisan gave up Fastow. Fastow gave up Skilling and Lay. Will Lay give up Bush?

2004-06-22 - Spam purporting to be from Downside

An unknown party has been using the Downside name to promote a stock. The stock being promoted is XcelPlus (XLPI.PK). We are not involved with this promotion, and our name is being forged by the promoter.

A quick look at XLPI shows it to be a thinly traded penny stock in the Pink Sheets. The company, "Xcelplus International Inc.", is a Virginia corporation. It does not appear to be registered with the SEC, despite being publicly traded and promoted to the public. This is highly suspicious. We have notified the SEC.

2004-06-16 - Lea Fastow behind bars

Federal Bureau of Prisons Inmate Locator
Inmate Information for LEA W FASTOW

Ben Glisan Inmate Register Number 20290-179
Age 42
Projected Release Date UNKNOWN

Two down, more to follow.

Next, Enron CFO Andrew Fastow. Convicted but still on the street. Skilling has been indicted, with a trial to come.

2004-05-16 - Non-flying cars
The Moller Skycar from Moller Corporation has been in the news recently. We have some negative information about that company. As the SEC put it in their fraud complaint, "As of late 2002, MI's approximately 40 years of development has resulted in a prototype Skycar capable of hovering about fifteen feet above the ground."
2004-04-14 - Downside at four
Four years ago today, we started Downside. We had this to say:

2000-04-14 - Today begins the Second Great Depression

All bubbles burst. This one just did. The great Internet bubble is over. First we had Internet companies with no profits. Then we had Internet companies with no revenue. Towards the end, we saw attempts to take public Internet companies with no operations. It had to end, and it just did. This is healthy. It's not the end of the Internet, just the end of the stupidity. Now we have to get through a return to reality. "Reality", in this context, is a return to historical P/E ratios, in the 6 to 20 range. What about the companies with no earnings? Uh oh. Losing money on every sale and making it up on volume is a joke, not a business plan.

We said that Internet stocks were insanely overpriced. We said that the market as a whole was 2 to 3 times higher than it should be. We said that the bubble would burst sooner, rather than later. We were hated and derided as pessimists. We were right.

The last year has brought some recovery. But equity prices are still far too high by historical standards.

Compare the US situation with that in Japan, where the equity bubble peaked in 1989. In Japan, as in the US today, Government policies were put in place to prevent equities from dropping to their proper level. Interest rates were kept artificially low. So what happened in Japan?

20 years of the Nikkei 225 index

Sometimes, they don't come back.

2004-02-18 - Enron's Skilling indicted

Jeff Skilling, Enron's former CEO, was indicted today. Finally. While there are apologists for Skilling, as CEO, he knew, or should have known, that his company was a Ponzi scheme.

Will Ken Lay be indicted? That gets close to Bush, and just in time for election season.

2004-02-12 - Enron Treasurer in prison

Federal Bureau of Prisons Inmate Locator
Inmate Information for BEN F GLISAN

Ben Glisan Inmate Register Number 20293-179
Age 38
Projected Release Date 1/17/2008

After much delay, the first Enron executive is safely behind bars.

Next to go to jail will be former Enron CFO Andrew Fastow. Fastow, although he pled guilty, is currently "out on bail awaiting sentencing" until April. He's "cooperating with prosecutors" to get some time knocked off his sentence. As a result, former Enron CEO Jeff Skilling is scheduled to be indicted next week.


2003-12-06 - Job losses continue

The current US "recovery" doesn't include jobs.

Job gains/losses, by President
Job gains/losses, by U.S. President
Source: U.S. Bureau of Labor Statistics, AFL-CIO

Eighty percent of new US jobs last month were in the low-paying "temporary", "heath care and social assistance", and "food services and accommodations" categories. Manufacturing and engineering jobs continue to decline. As the New York Fed analyzes this psuedo-recovery, "The job losses associated with cyclical shocks are temporary: at the end of the recession, industries rebound and laid off workers are recalled to their old firms or readily find comparable employment with another firm. Job losses that stem from structural changes are permanent."

2003-10-10 - Enron's chief accounting officer flips

Wesley H. Colwell, the former chief accounting officer of Enron North America, has cut a deal to escape prosecution. He agreed to "continue to cooperate with on-going investigations into Enron Corp. by the Securities and Exchange Commission and the U.S. Department of Justice Enron Task Force".

Colwell, as chief inside accountant, appears to have been responsible for the mechanics of Enron fake earnings inflation. He should know where all the bodies are buried. Colwell will presumably appear as a witness for the prosecution in the Fastow case. The main question at this point is whether Cowell has given enough information to prosecute Skilling and Lay.

2003-09-23 - Enron update: more indictments

Three senior Merrill employees involved in Enron's earnings deception were indicted last week. Merrill, once a highly respected Wall Street brokerage, was directly involved in assisting Enron's accounting frauds.While Merrill previously denied wrongdoing, they have now entered into a cooperation agreement with the FBI.

2003-09-10 - Enron update: guilty, guilty, guilty

Former Enron treasurer Ben Glisan pled guilty today and was sentenced to five years in the pen. Glisan admitted that "he and others engaged in a conspiracy to manipulate artificially Enron's financial statements". This follows the conviction of Enron exec Michael Kopper. Next up, Enron CFO Andrew Fastow, scheduled for trial next spring on charges that could lead to a life sentence. Still being investigated are former CEOs Kenneth Lay and Jeff Skilling. The known connection between Lay and Bush is being avoided, but if Lay goes down, he might take Bush down with him.

Secret hearings in the Fastow case indicate activity on that front. Keep watching.

2003-06-30 - The post-bubble bubble

Why hasn't all the air come out of the market bubble yet? In the June 28th issue of The Economist, (p. 25), we read this: "The Fed, it seems, will stop at nothing to keep the post-bubble economy afloat. ... After playing an key role in nurturing the equity bubble of the late 1990s by holding down interest rates, it has since propped up the economy by furthering first a property bubble and then a bond bubble." This article is worth a close read.

The Fed can do no more. Interest rates are almost zero. What we're seeing looks like a replay of the Japan of the 1990s. The Nikkei peaked in 1989, around 39000, before Japan's crash in that year. Government policy was manipulated to keep the market up. Interest rates went to near zero. It didn't help. A decade later, the Nikkei is around 9100.

2003-06-26 - The bottom is still a long way down
There's loose talk going around that the depression in the market is over. Wrong. Stock prices are still far too high for earnings
S&P 500 Index Relative to Normal P/E range

We last showed this DecisionPoint chart in July 2002. A year later, the P/E ratio for the S&P 500 is 33.22, down from 34.07 last summer. Normal P/E ratios for the entire market are between 10 and 20.Whenever the black line is above the red line, stocks are overpriced.

Over time, earnings usually increase, but that's a slow process. It would take a decade of ordinary earnings growth to bring the red line up to meet the black line. The earnings bubble of 2000-2001 was just that, a bubble. Some of those earnings were faked, as we now well know.

Yes, the momentum investors are back, fueled by the usual televised hype. That's gambling, not investing.

2003-05-01 - More Enron indictments

More indictments in the Enron case today. Money laundering, wire fraud, bank fraud, filing false tax returns, insider trading, falsification of records... Fastow, of course, was indicted again, along with six others. From the indictment: "Between at least 1996 and November 2001, FASTOW, GLISAN, BOYLE and other devised various schemes to defraud Enron and its shareholders, the investing public, the SEC, and others. ... fradulent manipulation of Enron's financial results ... manipulation of the share price ... appearance of business skill ... personal enrichment ... filing false and misleading statements with the SEC ... false and misleading public statements".

On August 24, 2001, Ken Lay said this in a Business Week interview: "There are absolutely no problems that had anything to do with Jeff's departure. There are no accounting issues, no trading issues, no reserve issues, no previously unknown problem issues. The company is probably in the strongest and best shape that it has ever been in." Less than four months later Enron was bankrupt. So far, Ken Lay and Jeff Skilling haven't been charged, but that may yet happen.

2003-04-26 - TV Turnoff Week

This is National TV Turnoff Week. While that event may seem an exercise in futility, Downside readers should recognize that heavy television viewing is negatively correlated with income.

The scandals continue. Frank Quattrone, who put Credit Suisse First Boston into the overhyped IPO business, was arrested this week for ordering the shredding of incriminating documents. WorldCom's former CFO, Scott Sullivan, was indicted for bank fraud, in addition to previous indictments related to WorldCom's bankruptcy. Further indictments in the Enron cases are expected next week. It's not over.

2003-04-14 - Downside at 3
Three years ago today, we started Downside. We had this to say:

2000-04-14 - Today begins the Second Great Depression

All bubbles burst. This one just did. The great Internet bubble is over. First we had Internet companies with no profits. Then we had Internet companies with no revenue. Towards the end, we saw attempts to take public Internet companies with no operations. It had to end, and it just did. This is healthy. It's not the end of the Internet, just the end of the stupidity. Now we have to get through a return to reality. "Reality", in this context, is a return to historical P/E ratios, in the 6 to 20 range. What about the companies with no earnings? Uh oh. Losing money on every sale and making it up on volume is a joke, not a business plan.

We said that Internet stocks were insanely overpriced. We said that the market as a whole was 2 to 3 times higher than it should be. We said that the bubble would burst sooner, rather than later. We were hated and derided as pessimists. We were right.

In retrospect, we weren't pessimistic enough. We didn't realize the extent to which even "value" stocks were overpriced. We didn't see the extent of accounting fraud. We didn't anticipate the biggest bankruptcies in history.

In the First Great Depression, the financial community was in denial for about three years. We are now three years into the Second Great Depression. It's just started to be accepted that things won't get better any time soon. Reality is finally sinking in.

What ended the First Great Depression? Not the war, but the technical advancements that came from it. No new technology is poised to have a similar impact in the next few years. We may be stuck until some truly new ideas come along.

2003-03-23 - The first casualty of war
... is truth. News reporting on this war is rather tightly controlled. Note that most lead stories are based on official statements by one side or the other. What's not being said is perhaps more important than what is being said. Over the next few weeks, as reporters start gathering information on their own, the quality of the reporting will improve. For now, a degree of skepticism should be maintained. The fog of war is quite real.
2003-03-13 - Spam

Spam with a return address on "downside.com", advertising a pornography site, did not come from us. We are in the process of tracing the forger via their payment service.

Downside® is a registered trademark.

2003-03-08 - Don't bunch up

On the eve of war, the traditional infantry advice, "don't bunch up" is appropriate. If Iraq does have weapons of mass destruction, we're about to find out the hard way. Don't assume that a war with Iraq will be entirely "over there". It's a good time to get out of the obvious target areas, like lower Manhattan and downtown Washington. Massive destruction is unlikely, but substantial disruption is quite possible. Last time, the war was about pushing Iraq out of Kuwait. Iraq's survival as a country wasn't threatened. This time, it is. There's no reason for Iraq to hold back if the US bombs Baghdad.

From a financial perspective, it would be prudent to assume that the financial system might go down for a few days or weeks. Any option, derivative or hedge which requires functioning markets and liquidity is risky in this environment. Hard copies of account statements will become important if key systems are disrupted. Be prepared for ATM and credit card processing outages.

It might be a short, victorious war. War may be avoided. Or not. Better safe than sorry.

2003-03-02 - Where are they now?

From "When you ride alone, you ride with bin Laden."

A Downside book recommendation.

Moving to tax havens didn't help those companies. They're all bankrupt. Excessive mucking about with the financial structure seldom bodes well for the stockholders, although management may benefit.
2003-02-12 - On becoming the conventional wisdom

CNN now sounds gloomier than we do. But for the wrong reasons. Bear in mind that P/E ratios are still far too high by historical standards. The bubble still hasn't fully deflated. It may take several more years, perhaps longer, to reach the bottom. In the first great depression, P/E ratios bottomed out around 10. A comparable ratio today would put the S&P 500 around 250, down from 818 today. The climb back took decades last time. That's a pessimistic estimate, but it might not be wrong.

One could take the position that the bottom will only see P/E ratios at a historically high value of 20, that earnings will recover in the near term, and that none of the current and upcoming wars will badly hurt the US. That yields an S&P 500 value of maybe 600-700, still well below current values, for a very optimistic set of assumptions.

2002 Q4
2002-12-25 - Bah. Humbug!

The stock market has now had three down years in a row. Only twice in the last century has that happened, most recently in the early 1940s, and, of course in the first Great Depression. Yet price/earnings ratios remain high by historical standards. The bottom is still a long way down from here.

Retail was slow this season, which shouldn't surprise anybody.

Much has been made of increased productivity in recent months. That's not an indicator of economic growth. Productivity rises in a recession, simply because the least efficient producers and plants shut down first.

We have a war with Iraq coming up, al-Queda is still active, and the Administration is putting in comprehensive Big Brother systems.

Happy holidays.

2002-12-08 - Insiders vs. stockholders

The San Jose Mercury News, as their top story today, today provided a list of 40 companies whose top management made hundreds of millions of dollars selling their stock before the company tanked. The top five:


of insiders

Insiders sold stock worth
Stock then
went down by
Portal Software
$704 million
$600 million
$549 million
Redback Networks
$441 million
$356 million

This is marginally legal under current US law, but stockholder lawsuits are definitely indicated. The presence of any officer or director of any of those companies in management of another company should be regarded as a sell signal. In some European countries, those people would be barred by law from a management role in a public company for life.

As we've been saying for some time, the current system of compensation by short-term stock options rewards management for volatility, not long-term profitability. We need longer holding periods, much longer ones. Management must be at risk of loss if the company tanks.


2002-12-07 - Bush fires Lawrence Lindsey

President Bush has fired Lawrence Lindsey, his chief economic adviser and former Enron director. Better late than never.

Meanwhile, United Airlines is expected to go bankrupt tomorrow. Most major analysts issued "sell" recommendations a month or two ago, a contrast to the dot-com era, when we'd see "buy' recommendations right up to the bankruptcy. Happy-talk analysis seems to be out of fashion.

2002-11-17 - Scandal updates

Enron's Fastow was arrested a few weeks ago, but pled not guilty. It may take a while longer to get to Ken Lay.

It's now come out that Williams Energy shut down power plants during California's energy crisis to drive up prices.

Pitt and Webster are gone from the SEC, but haven't yet been replaced. It matters who replaces them. If it's somebody with a history of putting crooks in jail, the mess may get cleaned up. If not, the problems will continue.

2002-10-20 - Enron - how high will the prosecutions go?

The Enron investigation continues to move up the food chain. The prosecutors are working this like an organized crime case, which it is. First, Enron exec Michael Kopper was arrested in September. He provided information about Andrew Fastow, Kopper's boss and the architect of Enron's offshore entities for creating fake earnings. Fastow was arrested a few weeks ago. In turn, Fastow can probably give up Ken Lay and some of Enron's board members. They had to know what was going on; that's clear from the board minutes that have been published.

But will it stop there? Many Bush Administration people had strong ties to Enron. Vice President Cheney's connection, of course, is well known. Some less-prominent officials are now trying to hide their Enron ties. The U.S. Trade Representative, Robert B. Zoellick, has removed his connection with Enron from his official biography. (Compare this archived version from 2001. Note the disappearance of the sentence "Mr. Zoellick was a board member of Alliance Capital, Said Holdings, and Jones Intercable, and served on the Advisory Council of Enron Corporation.") Lawrence Lindsey, Assistant to the President for Economic Policy, also doesn't mention in his official biography that he was a director of Enron. Mr. Lindsey is the Administrations's leading advocate of tax cuts as a solution to most economic problems.

2002 Q3
2002-09-18 - Tyco CEO headed for Ryker's Island Jail

Tyco's former CEO, L. Dennis Kozlowski, goes to jail tomorrow. He can't make the $10 million bail; his assets have been frozen as ill-gotten gains of criminal activity. Kozlowski is the first CEO of a Fortune 500 company to be jailed for business crimes in recent years. More will follow.

Some General Electric top executives were jailed for price-fixing in the 1960s, which had a salutary effect on the rest of the CEO community that lasted a decade. A few CEO convictions with long jail sentences will go a long way to turn things around.

In other news, documents obtained from Enron litigation now indicate that Enron had a larger role in California's power crisis than previously believed. That scandal may be moving to the front burner.

2002-09-16 - So many frauds, so little time

That's just a sampling of recent news stories. There's more to this mess.

Recommended reading:
How Companies Lie, a bitter little book that's not wrong. Valuable insights into the extent of the problem.
Anatomy of Greed, a fun read from an Enron insider.
DownTime, a Guide to Federal Incarceration - suggested as a gift for your least favorite CEO.

2002-08-21 - Enron exec pleads guilty, agrees to cooperate with investigation

Today, Michael Kopper, a former Enron financial executive, pled guilty to conspiracy to commit wire fraud and conspiracy to commit money laundering. Kopper agreed, as part of his plea bargain, to cooperate with investigators. Kopper knew where the bodies were buried; he helped Andrew Fastow, Enron's former CFO, construct all those deceptive off-balance entities Enron used to fake revenue. Note Kopper's position: he's pled guilty, but the sentence will be determined by how well he cooperates. This is standard procedure in organized crime cases, but it's not common in fraud cases. But then, this was organized crime.

Now the rest of Enron's crooks will go down. Fastow, at least, Ken Lay, probably. Maybe some Andersen people, too; Andersen was in on the planning of those off-balance entities.

2002-08-01 - Criminal investigation of AOL Time Warner

The Justice Department has opened a criminal investigation of AOL Time Warner. It appears likely that there were phony earnings reports and fake deals designed to exaggerate revenue.

AOL was already in trouble for bad financial reporting. The company was fined $3.5 million back in 2000 for capitalizing the cost of those ubiquitous AOL disks. AOL is under a cease-and-desist order from the Securities and Exchange Commission. That apparently wasn't a strong enough sanction to make management stop.

Who's next? Probably the brokerage firms and banks that made the Enron debacle possible.

2002-07-27 - Executive arrests expected in WorldCom case

WorldCom executives will be charged next week, reports the Wall Street Journal. The former CFO, controller, and probably the former CEO are to be charged with fraud. Now we're getting somewhere. Arrests in all the major cases are needed to restore confidence in the markets.

In many of these big financial fraud cases, it's clear that there was illegal activity in top management, but it's been hard to tell from the outside who knew what when. The Justice Department has been hesitant to indict executives without a "smoking gun" clearly establishing individual guilt before the indictment. But that's not required. Big financial frauds are a form of organized crime, and should be treated as such.

2002-07-24 - First mass arrest of executives of a failed company
Five members of Adelphia's former management team were arrested today on federal fraud charges. Each was charged with conspiracy, securities fraud, wire fraud, and bank fraud. A bit late, but a step in the right direction.
2002-07-22 - Where's the bottom? A long, long way down.
S&P 500 Index Relative to Normal P/E range

We've been harping on this for a while now, but it's worth saying again: The market is still overvalued. The history of P/E ratios shows just how overvalued the market remains. Even with the dot-coms gone and all the big bankruptcies, stock prices remain far too high. P/E ratios remain higher, far higher, than they have ever been in the entire history of the U.S. stock markets. The black line has to come down to the neighborhood of the blue line.

Chart courtesy of Decisionpoint.com.

2002-07-20 - WorldCom bankruptcy

WorldCom to declare bankruptcy Sunday. This is the largest bankruptcy ever. There's not much more to say.

Markets are still far too high based on fundamentals. See "Stop this Dream", in the Economist for July 20, 2002. We've been saying that here for some time, but now it's a mainstream position. "The postwar average P/E for the S&P 500 is 15; now it is 40", writes the Economist. So the S&P 500 needs to drop to around 340 (from 848 today) just to get back to the postwar average. That's an average; at times P/E ratios are lower. There are periods when prices are so low that some companies sell below book value. When bubbles collapse, they usually collapse all the way. So the market bottom may be below that average. Again, the bottom is a long way down.

2002-07-14 - "This is Fraud 101".

"This is way beyond aggressive accounting. This is Fraud 101, you know, basic illegal conduct." - Congressman Tauzin on WorldCom. Still no arrests, an indication that the Administration's "get-tough" policy remains cosmetic.

2002-07-10 - Faith-based investing

"All investment is an act of faith, and faith is earned by integrity." - from a recent Bush speech. When the integrity goes away, so does the investment. But speeches won't help. Tough audits and long jail sentences will. There haven't been any CEO arrests yet. The "crackdown" is, thus far, not seriously hurting the people who perpetrated these frauds.

We're not seeing companies selling below book value yet. P/E ratios are still too high. We're nowhere near the bottom.

Remember, the true value of a stock is the present value of its future dividends. Anything above that is based on the assumption that there's a "greater fool" willing to buy the stock. Much of the time, such fools exist. There's thus a sizable "optimism premium" in many markets. When that optimism premium goes away, we're back to the basics - assets and dividends. We are seeing that now.

Q2 2002
2002-06-28 - The Worldcom mess

More phony numbers. Another collapse. Another Andersen audit client, too.

We predicted the dot-com collapse. That was easy. The dot-coms had terrible, but mostly honest, numbers, and ordinary fundamental analysis worked well on them. Now we're seeing companies go under that had reported good numbers, but were lying. Reading the financial statements doesn't help if they're bogus.

There is no investment without honest reporting. There is only speculation. In the current reporting environment, one could argue that pension funds and others with fiduciary responsibilities shouldn't be in stocks at all.

2002-06-24 - Where's the bottom?
Fifty years of the Standard and Poor 500 Index

There's the bubble. For half a century, through boom and recession, the S&P 500 (the broadest of the widely-followed indices) stayed in a trading range around a long term trend. Until the late 1990s. This gives a sense of how broad-based the "irrational exuberance" was. It wasn't all tech stocks.

The market top of 2000 was about fifteen years too early. And we're still well above the historical trend, even after the collapse.

The basic fundamentals also indicate that the market as a whole is still far overvalued. Historical price/earnings ratios over the decades average around 16. The Economist says that U.S. companies are averaging a P/E of around 40 now.

The bottom is a long way down from here.

2002-06-22 - Rite Aid CEO indicted

The Washington Post reports that the former chairman and chief executive of Rite Aid Corp was indicted on Federal charges of inflating the company's earnings, destroying evidence, tampering with a witness and secretly moving millions in company funds to a personal side business. Rite Aid stock, around 50 at its peak two and a half years ago, is now down to 3. Yet again, we see how criminal activity led to the collapse.

2002-06-15 - Andersen guilty

Arthur Andersen LLP was convicted of obstruction of justice today. The accounting firm that made the Enron mess possible will soon be history. But the individuals responsible remain at large. None of the principals of Enron or Andersen are in jail. Some of them should be.

Jail is a highly effective deterrent against corporate crime. Executives are good at insulating themselves from losses at their companies. It takes prison sentences to get the message through that society will not tolerate illegal acts by management.

2002-06-09 - The coming wars

The current adminstration proposes to start wars. "The Bush administration is developing a new strategic doctrine that moves away from the Cold War pillars of containment and deterrence toward a policy that supports preemptive attacks against terrorists and hostile states with chemical, biological or nuclear weapons." This is a great change in American foreign policy. Never before has such an aggressive policy been proposed at the Presidential level.

2002-05-30 - National Coverup Month

This was a big month for failed coverups. The big ones:

Investigations continue in the Wall Street recommendations scam, mentioned last month.Merrill Lynch settled for $100 million.

Reports of inflated earnings by major companies continue to surface. Boeing and Global Crossing are some of the most prominent, but the list is long. The proposed reform measures are probably insufficient to get honest numbers. Accounting firms can still consult for the firms they audit, and brokerage houses can still offer analysis of companies whose stock they sell. Sham transactions that inflate earnings are still permitted. The problem has not been fixed.

2002-04-28 - How the dot-com IPO boom was fueled by a huge scam

The truth is starting to come out. Much of the dot-com boom was a scam, fueled by corrupt investment banks who, in the words of the San Jose Mercury News, took "kickbacks from preferred clients in exchange for big allocations of shares in coveted Internet IPOs." The SEC is investigating Morgan Staley, Goldman Sachs, J.P. Morgan, Robertson Stephens, and others for "laddering", a market manipulation scheme designed to inflate stock prices immediately after the IPO. This may turn out to be the biggest "pump and dump" scheme of all time.

New York State Attorney General Elliot Spitzer is widening his investigation. The Securities and Exchange Commission, the New York Stock Exchange, the National Association of Securities Dealers, the North American Securities Administrators Association, and a number of states are now investigating. This could be bigger than Enron and Andersen.

Some of the companies involved, such as VA Linux, were mentioned on our Deathwatch or Misery Row. Those first-day runups were suspicious at the time. Now it's becoming clear what was going on.

2002-04-10 - Merrill Lynch stock ratings phony

New York State Attorney General investigation of Merrill Lynch
"As part of a quid pro quo between the firm and its investment banking clients, Merrill Lynch analysts skewed stock ratings, giving favorable coverage to preferred clients, even when those stocks were dubious investments. This problem and other conflicts of interest are revealed by internal e-mail communications obtained during the investigation by the Attorney Generalís office. These communications show analysts privately disparaging companies while publicly recommending their stocks. For example, one analyst made highly disparaging remarks about the management of an Internet company and called the company's stock "a piece of junk," yet gave the company, which was a major investment banking client, the firm's highest stock rating."

"This was a shocking betrayal of trust by one of Wall Streetís most trusted names." - Elliot Spitzer, New York State Attorney General.

Which stocks received phony ratings? The court affidavit names names. Many of these were on Downside's Deathwatch.

"Thus, as previously covered stocks such as Pets.com, Mypoints.com, Quokka Sports, Webvan, iVillage, Buy.com, 24/7 Media, E-Toys, Internet Capital Group, and InfoSpace plummeted, sometimes all the way to zero, retail customers and the investing public were never advised to sell."

This may be just the beginning. Subpoenas have been issued to other securities firms.


Q1 2002

2002-03-14 - Andersen goes down

"On or about and between October 10, 2001, and November 9, 2001, ... ANDERSEN, through its partners and others, did knowingly, intentionally, and corruptly persuade and attempt to persuade other persons, to wit: ANDERSEN employees, with intent to cause and induce such persons to (a) withhold records, documents, and other objects from official proceedings, namely: regulatory and criminal proceedings and investigations, and (b) alter, destroy, mutilate, and conceal objects with intent to impair the objects' integrity and availability for use in such official proceedings. (Title 18, United States Code, Sections 1512(b)(2) and 3551 et. seq.)"

"The shredder at the ANDERSEN office in the Enron building was used virtually constantly, and, to handle the overload, dozens of large trunks filled with Enron documents were sent to ANDERSEN's main Houston office to be shredded."

This speaks for itself.

2002-02-04 - Our god can lick your god - film at 11.

Religious wars are picking up. India is having religious massacres on a scale not seen since the last days of the Raj. Israel is shelling Palestinian areas. The Afghanistan war, which seemed to be over, is heating up. We have the big ones, the U.S. vs. Iraq and India vs. Pakistan, as real, near-term possibilities. And that's ignoring Bush's "axis of evil" speech, which adds Iran and North Korea to the enemies list.

The big question is whether these separate wars will combine into a big one. It could happen.

It's worth remembering that this was bin Laden's stated goal.

2002-01-22 - Another major bankruptcy

Kmart went bankrupt today. Largest retail bankruptcy ever, at $17 billion. The US is "overstored"; there are far more retail outlets than are needed. Especially during a recession. Some of them have got to go.

The dot-coms are long gone, yet the collapse continues. The companies that are going bankrupt now are ones that appeared in reasonably conservative portfolios a year or two ago. The effect on pension funds could be substantial.

2002-01-12 - Largest bankruptcies of 2001

Company Bankruptcy Date Total Assets 
Enron Corp.
Pacific Gas and Electric Co.
FINOVA Group, Inc., (The)
Reliance Group Holdings, Inc.
Federal-Mogul Corp.

Source: BankruptcyData

Enron appears to be the largest corporate bankruptcy of all time, assuming they actually had $63 billion of assets. There's some question as to whether the asset figure for Enron is any more meaningful than the rest of the numbers in their 10-Q. Press reports indicate considerable "creative accounting", if not outright fraud.

There is talk of a crackdown on auditing firms. Believe it only if Andersen, Inc. is forced to exit the accounting profession or some of its principals do jail time.

Note that none of the companies listed were "dot-coms". Although dot-coms saw declines in market cap on that scale, the dot-coms never had enough assets to make this list.

2002-01-06 - New features for 2002

Downside now offers a daily update of the latest 10-K, 10-Q, and related filings with the U.S. Securities and Exchange Commission. Today's new filings appear at the left of this page. Click on any company name shown for the latest balance sheet and income statement.

The search box at the top returns the income statement and balance sheet for any company filing with the SEC.

The new, calmer, color scheme helps to reduce stress when reading financial statements of companies in trouble.


Q4 2001

12.31.2001 - Ä day

Today Europe switches to a common currency. While the exchange rates between the European currencies have been locked together for a year, and accounting has been in Euros for some months, today is the practical, and psychological, moment at which the national currencies disappear. Some of the national paper currencies do have to be exchanged within a limited time, so if you have a cash hoard in some European currency, it's time to convert.

12.27.2001 - Instant Financials

Try our new Financial Statement Search. Enter a company name or NASDAQ ticker symbol in the box at the top of the page. We look up the latest balance sheet and income statement from the company's SEC filings. Updated directly from the SEC database.
The financial extraction system is under development. Please let us know of any problems.

This is a free service of Downside, offered for casual use. If you need high-volume access to this data, please contact us.

12.25.2001 - Bah, Humbug!

Holiday shopping is over. We now return to our regularly scheduled depression.

We have two major wars coming up: India vs. Pakistan, and U.S. vs. Iraq. What happens in 2002 will depend more on whether those two are avoided than on any economic factors. We're still in a period where politics trumps economics.

11.28.2001 - The Internet Depression

"The Internet Depression", by Michael Mandel, is the first good analysis we've seen of the aftermath of the Internet bubble. It's by someone who saw it coming (the previous hardcover edition, from mid-2000, was titled "The Coming Internet Depression"), so he has credibility. A key point is that there's no Next Big Thing on the near-term horizon to get the high-tech portion of the economy out of the tank. He's probably right. Recommended reading.

11.26.2001 - U.S. officially in a recession

Now it's official. The National Bureau of Economic Research announced today that the U.S. recession began back in March, 2001. These official announcements of recessions trail reality by at least six months: "The Bureau waits until the data show whether or not a decline is large enough to qualify as a recession before declaring that a turning point in the economy is a true peak marking the onset of a recession." This announcement shouldn't surprise anybody who's been paying attention.

11.04.2001 - Wars with non-state actors

In the post Cold War era, most wars so far have involved parties other than nation-states. The developed world has a hard time dealing with such wars. We recommend reading USMC Doctrinal Publication 3, "Expeditionary Operations" which was written by people who deal with small, messy wars on a daily basis. Issued in 1999, "Expeditionary Operations" outlines the post-Cold War situation in brutal clarity: "While threats to national security may have decreased in order of magnitude, they have increased in number, frequency, and variety. These lesser threats have proven difficult to ignore. The main point of this discussion is to point out that the post-Cold War geopolitical situation has fundamentally altered the nature and scope of future military conflicts. This situation requires a diverse range of military methods and capabilities for effective response. Far from creating a new world order, the end of the Cold War has led to what former United Nations Secretary-General Perez de Cuellar has described as the new anarchy." Chapter I of "Expeditionary Forces" provides more insight into the current situation than most of the talking heads on TV today.

Despite the war, it's important to bear in mind that the current economic troubles stem more from the collapse of the bubble than the external threat. The dot-com collapse alone erased more than $1.7 trillion in shareholder value. The attacks on the U.S. did far less financial damage.

Q3 2001

9.21.2001 - Crusading

In recent years, economics has driven U.S. politics. Now, politics is driving economics. Worse, to some extent religion is driving politics. On both sides. Historically this leads to bad political decisions. The history of the Crusades is relevant. From the call for a crusade by Pope Urban II in 1095 AD, through three bloody but indecisive Crusades, until the peace agreement between Richard the Lion-Heart and Saladin in 1192, almost a century elapsed. And that agreement didn't hold; there were four more Crusades, the last ending in 1291 AD. The Crusades were two centuries of intermittent, indecisive bloodshed.

There's a good reason that successful modern democracies are secular states.

9.18.2001 - Overreaction

Fundamentals haven't changed substantially in the last week. All that's happening is that the air left over from the overinflated boom is coming out faster than before. Stocks are overpriced when they're valued at more than the present value of their future dividends, remember. All else is based on the assumption there's a "greater fool" out there. We won't have many of those around for a while.

Airline lobbyists are calling for a federal bailout of the airline industry. That's corporate welfare, not disaster recovery.

9.12.2001 - This is a disaster. But it's not a financial disaster.

Bear in mind that the events of the last two days destroyed far less dollar value than the dot-com collapse. This will not have a major, direct economic effect. The political and social fallout, however, will be significant.

We're entering a serious, perhaps grim, period. Substance will matter more than style. We now have a tough-minded decade ahead, like the 1950s. The 1950s were a period of progress, but with a repressive tinge. We may see both progress and repression again.

We may, in time, look back on the last 20-30 years as a golden age.

8.31.2001 - The world is in recession

The Economist (August 25-31, p. 22) now agrees we're in a recession. Worldwide, not just the US. Their outlook is gloomy: "Perhaps the biggest downside risk is that American share prices still look overvalued." The Dow fell through 10,000 this week. The US government budget surplus is gone. The irrational exuberance is over.

Forbes reports signs of a crash in housing. (Commercial real estate is already at the see-through office building stage.) The big run-up in house prices of the late 1990s is starting to run down. It's not clear yet how severe this will be.

7.17.2001 - Doerr takes it back

John Doerr has publicly taken back his widely quoted remark about this bubble being the "largest single legal creation of wealth in history." A bit late. Hype is not wealth creation. Wealth creation requires profits.

Some of the companies on Deathwatch have, in the last few weeks, reached the final stage of collapse - the liquidation auction. It's a great time to buy slightly used office furniture.

Q2 2001

6.24.2001 - Deathwatch cleanup

Deathwatch remains as a historical record of the dot-com bubble. We've now using NASDAQ charts instead of Stockmaster charts, which changes the appearance. NASDAQ charts, unfortunately, are not available once trading in a stock has ceased, so when a company is gone, its chart goes blank. This is a lack; it's important to remember the dead and not repeat their mistakes.

The predictions remain frozen as of January 1, 2001.

A new, improved Deathwatch is coming. Watch for further announcements.

6.17.2001 - Summer power crisis

When the red line reaches the green line, California goes dark.

This is a nice illustration of the nature and limitations of markets. Markets don't reach equilibrium; they vary around it. In a market like electricity, where there's no inventory and adding capacity takes years, the variations are huge. There's no surprise here. This is how systems with negative feedback and delay behave. Utilities were run on a regulated rate-of-return basis for a century, damping out volatility at some cost in excess capacity, until some politicians forgot this.

Live data at left from the California Independent System Operator.

4.14.2001 - One year ago on Downside

Downside is one year old today. Here's what we said a year ago when we started Downside:

"All bubbles burst. This one just did. The great Internet bubble is over.

First we had Internet companies with no profits. Then we had Internet companies with no revenue. Towards the end, we saw attempts to take public Internet companies with no operations. It had to end, and it just did.

This is healthy. It's not the end of the Internet, just the end of the stupidity. Now we have to get through a return to reality. "Reality", in this context, is a return to historical P/E ratios, in the 6 to 20 range. What about the companies with no earnings? Uh oh. Losing money on every sale and making it up on volume is a joke, not a business plan."

Any questions?.

4.12.2001 - "101 dumbest moments in E-business history"

"eCompany Now" has a list of the 101 dumbest moments in E-business history. Items on the list go back to 1997. Of course, it would have been more useful if these items had been reported as dumb before the bubble collapsed.

We have removed "Dot Com Failures" from the list of resources in the toolbar at the left because that site has disappeared. Also, "Stock Detective" hasn't been updated much since its acquisition by FinancialWeb.

Only 4846 NASDAQ symbols today. The failed dot-coms are being flushed out of the system.

4.7.2001 - Aftermath of a bubble

With the NASDAQ at 1720, and no bottom in sight, it's worth looking back at other bear markets. In the Great Depression of the 1930s, it took 25 years, (and World War II) before the DJIA again reached its 1929 high. The Nikkei has been below its 1989 peak for over a decade, and is still down over 60% from that high. That's what the aftermath of a bubble looks like. Recovery takes decades, not months.

There are only 4864 NASDAQ symbols today, down from 5021 at the beginning of the year. The shakeout continues.

Q1 2001

3.13.2001 - NASDAQ index below 2000

The NASDAQ index is down 62% from its all-time high. The NASDAQ's home page says today: "A good company before yesterday's selloff is probably a good company today--but it pays to diversify. Money market and certificate of deposit accounts remain safe, profitable havens." Better late than never.

We're freezing our Deathwatch predictions at where they were on January 1, 2001. This lets everyone see how the bubble plays out. The charts and notes will continue to be updated as the collapses, bankruptcies, mergers, and delistings continue.

2.15.2001 - NASDAQ below 5000 symbols

Lately we've been monitoring the number of ticker symbols on the NASDAQ. It's at 4952 today, down from 5021 at the beginning of the year. That's a big drop for six weeks. Many more will follow. Companies with stock prices below 1 are kicked down to the pink sheets, in accordance with the NASDAQ rules, and there are all too many of those among the one-time high flyers.

Many of those companies should never have been listed on a major exchange.

1.10.2001 - Corporate whining about Deathwatch

We've been hearing complaints recently from some companies mentioned in Deathwatch. The main complaint is that Deathwatch is harsh on companies writing off big non-cash items. On request, we'll put a note on Deathwatch for companies where this is an issue. But we're not going to adjust the death date manually. Deathwatch is automated; we don't make judgement calls about it. Income is "Net Income" from the income statement; cash is "Cash" from the balance sheet. The death date is computed from those two numbers. It's simplistic, but free of spin control.

The loudest complainer's stock is down 98% over the last year. Their stockholders have our sympathy.

Q4 2000

12.24.2000 - Time off for Xmas Eve? Bah! Humbug!

The EDGAR database at the U.S. Securities and Exchange Commission is broken today. Both the forms search engine and filing retrieval by known URL are failing. Looking up Microsoft's latest quarterly numbers returned "page not found". The forms search engine can't find General Motors, Microsoft, or Cisco. Not good.

12.18.2000 - The Golden Life Raft - the rule change that made the Internet bubble possible

Until the late 1990s, the Securities and Exchange Commission's Rule 144 generally required that insiders hold their stock for two years after an IPO. That rule was changed on February 20, 1997 to allow insider sales much sooner. The boom in dumb IPOs followed shortly thereafter. Under the old rule, if the company tanked months after the IPO, management, and the venture capitalists, went down with the ship. The new rule provides a "golden life raft", allowing management and the VCs to cash out and watch from safety while the ship goes down without them.

It's instructive to read the position of the National Venture Capital Association, the VC's trade association, when they were lobbying for this change: "The NVCA supports a further shortening of this holding period. This further shortening would enable venture capital funds to provide faster liquidity to fund investors, thereby increasing their returns and attracting more capital for investment in emerging growth companies." This is financial-speak for "let's party".

That single rule change made the bubble possible. In retrospect, making insider sales easier was terrible public policy. The only people who benefit are those doing IPOs that shouldn't have been done at all.

12.11.2000 - Housekeeping and corrections
  • Kanakaris Wireless (KKRS) is showing on Deathwatch with the ticker symbol and chart of Kana Corporation (KANA). The death date shown applies to Kanakaris Wireless. This will be fixed in the next update cycle.
  • Salon's latest 10-Q filing with the SEC contains inconsistent data affecting Deathwatch. Salon has been informed. We've added a note to Salon's entry on Deathwatch.
  • The charts on Deathwatch now cover 12 months instead of 6, so you can see how overpriced Deathwatch stocks were in their heyday.
12.9.2000 - This isn't the first time

"When the going is good and new issues are readily salable, stock offerings of no quality at all make their appearance. They quickly find buyers; their prices are often bid up enthusiastically right after issuance to levels in relation to assets and earnings that would put IBM, Xerox, and Polaroid to shame. Wall Street takes this madness in its stride, with no overt efforts by anyone to call a halt before the inevitable collapse in prices. (The SEC can't do much more than insist on disclosure of information, about which the speculative public couldn't care less, or announce investigations and mild punitive actions of various sorts after the letter of the law has been clearly broken.) When many of these minuscule but grossly inflated enterprises disappears from view, or nearly so, it is all taken philosophically enough as "part of the game." Everybody swears off such inexcusable extravagances - until next time." -- Benjamin Graham, in his The Intelligent Investor, p. 216. Sound like the current market? That was written in 1973. If this surprises you, buy the book; you need it.

12.5.2000 - Recent bankruptcies

TSR Wireless (privately held) went bankrupt today, leaving several million pagers without service. Chapter 7 liquidation. It's a serious problem when an infrastructure company goes under. Customers of companies in trouble should be thinking about alternative providers.

SportsPrize Entertainment (JOCK) also went bust. Their last words: "Game Over! SportsPrize Entertainment has filed for bankruptcy under Chapter 7 of the Federal Bankruptcy Code. As a result Sportsprize.com has ceased to operate, effective December 1, 2000. The echoes of the fat lady's song linger in the stadium for all of us who worked tirelessly for the company."

11.19.2000 - Q3 2000 reports are coming in, and they're not good

Deathwatch has been updated with Q3 2000 numbers where available. All companies should have filed their 10-Q for Q3 with the SEC by now. Many on Deathwatch haven't. We consider late reporting a strong sign of trouble.

We're seeing fewer mergers and more outright collapses this quarter. Taking on debt is also popular, as are complicated deals involving preferred stock and warrants. These all have the effect of reducing stockholder equity. We're also seeing too many "golden parachute" deals that benefit the CEOs of dying companies. On the other side, we're seeing more securities fraud litigation. Where appropriate, we've noted these events on Deathwatch.

Deathwatch's predictions continue to be surprisingly accurate for such a simple tool. Companies on Deathwatch either refinance or die close to schedule. (Ziplink ceased operations the day after its predicted death date.) Very few get off Deathwatch by turning profitable.

11.9.2000 - The 1.7 trillion dollar Internet bubble

CNN reports that the 280 stocks on the Bloomberg Internet index have fallen to $1.193 trillion currently from $2.948 trillion at their respective peaks. This is a loss of $1.755 trillion, most of which occurred between March and September of this year. And that includes the dot-coms that actually make money. It's even worse for the turkeys. "(Investors who bought dot-com stocks) were goaded by bullish reports from sell-side securities analysts and market forecasts from IT research firms, such as IDC, Gartner and Forrester Research." Yes. See our comments for 11.6.2000.

When we started Downside on April 14, 2000, we said: "All bubbles burst. This one just did. The great Internet bubble is over." Any questions?

Still, the survivors aren't down to P/E ratios that make them look attractive to a value investor.

11.8.2000 - Election day aftermath

For stocks on Deathwatch, the election doesn't matter. For companies in serious cash trouble, change in the political environment won't be rapid enough to save them. But expect some unrealistically optimistic press releases once the election is decided.

The US Senate is so closely divided we're probably in for two years of gridlock.

11.6.2000 - No news is bad news

Most of what passes for "news" on online stock services is pure hype. "News" marked as coming from PR Newswire or Business Wire is a press release. Don't expect to see any bad news from those sources. See Eric Moskowitz's article "Propaganda Dot-Com" in the Red Herring for November 13th.. What Moskowitz doesn't point out is how rare bad news is in that stream of hype. Look up the "news" for some of the companies on Deathwatch. You'll find most failing companies issuing upbeat press releases, sometimes right up to the day the doors close. Sometimes the upbeat press releases continue past downsizings, bankruptcies, and delistings.

The SEC requires companies to file "significant event" reports for disastrous events. These are worth reading. Quite often, you'll find disastrous "significant event" reports for which the company issued no press release. They're filed in EDGAR.

"News is what someone doesn't want published. All else is publicity".

11.2.2000 - Life after death

Many companies on Deathwatch have outlived their death dates. The same cannot be said of their stock. For almost all Deathwatch companies, if you'd invested six months to a year before the death date, you would have lost most of your investment. That is the point of Deathwatch. The strategies available to companies running out of cash usually result in a major loss to the stockholders. Bankruptcies do occur, but more common is selling out to a more successful company at a very low price, leaving the original stockholders out in the cold. Refinancing schemes which put debt and preferred stock ahead of the existing stockholders are also common. We're also seeing executive compensation gimmicks which benefit CEOs of failing companies. Most of these events don't show up in the press releases that pass for "news" in the financial world. They are, though, in the SEC filings.

10.26.2000 - Heavy traffic on Downside

Downside has been mentioned on some major sites recently, and has been overloaded due to the resulting heavy traffic. We've added capacity and changed hosting providers. This should eliminate those annoying "overload" - try later" error messages.

10.16.2000 - Downside's Deathwatch reports success of its prediction model

Most of the stocks on Deathwatch are in the tank, just like we predicted. Not that this is rocket science. All we do is look at cash flow. When you run out of money, you're in trouble. The incredible thing is that, for a brief period in 1998-1999, people believed otherwise.

We've recently noticed that many of the companies on Deathwatch have been late filing their 10-K and 10-Q numbers with the Securities and Exchange Commission. On Deathwatch, these are the ones whose predictions are based on older quarters. Notice that those companies are still tanking. Trying to hide the numbers isn't fooling the market. Doesn't fool Deathwatch, either.

Some stock graphs on Deathwatch have flatlined. Trading in those stocks has ceased. We'll be seeing more of those.

Q3 2000

8.3.2000 - Downside's Deathwatch adds coverage of most Internet stocks

Deathwatch now covers most Internet stocks. Many of them don't look too healthy. This shouldn't surprise anybody. If you're shaking your head and wondering what went wrong, we suggest some books on fundamentals.

7.6.2000 - Downside's Deathwatch starts

Downside begins its Deathwatch. We're now monitoring the cash flows of failing dot-coms, waiting for the money to run out.

Q2 2000

6.27.2000 - FTC acting on software warranties.

Slashdot reports that the FTC is preparing to act on software warranties. We have something to say about this.

5.1.2000 - April is the cruelest month

"In the last year, the ability to monetize shareholder ignorance has never been greater." - Warren Buffet.
We agree.

4.26.2000 - Down a little

"It (the market) will fluctuate" - J.P. Morgan, Sr.

4.25.2000 - Up a little

Don't get carried away now. The boom times aren't back.

4.24.2000 - A flight to quality

The Internet stocks continue to slide, while the Dow moves up a bit. Finally we're seeing the expected flight to quality.

4.19.2000 - Down, but not much

The long slow slide continues, but no big news.

Visit Misery Row, our gallery of companies once highly touted.

4.18.2000 - A reprieve, for now?

Probably not. Expect the long slide in Internet stocks to continue. Ask this question of your favorite dot-com: how long before they run out of money? You can find this out from the SEC filings in EDGAR. Look at the last quarterly report, see how much they lost, and see how much cash and securities they have left. Divide the assets by the quarterly loss, and the result is how much time they have left. Don't expect another round of financing. A merger on unfavorable terms, maybe.

4.17.2000 - Of course there's a place to hide

You don't have to participate in the recession. Think cash. T-bills. Sitting this one out. Sleeping nights.

Not gold, though; gold is a commodity now, like soybeans.

4.14.2000 - Today begins the Second Great Depression

All bubbles burst. This one just did. The great Internet bubble is over.

First we had Internet companies with no profits. Then we had Internet companies with no revenue. Towards the end, we saw attempts to take public Internet companies with no operations. It had to end, and it just did.

This is healthy. It's not the end of the Internet, just the end of the stupidity. Now we have to get through a return to reality. "Reality", in this context, is a return to historical P/E ratios, in the 6 to 20 range. What about the companies with no earnings? Uh oh. Losing money on every sale and making it up on volume is a joke, not a business plan.