Downside® old news

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.

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

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.

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.

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

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.

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.

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.

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?

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.

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.

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.

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.

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

A Downside book recommendation.

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.

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.

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.

"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.

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.

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.

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.

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.

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.

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.

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.

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.

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?.

"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.

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.

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.

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.

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.

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.

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.

• 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.

"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.

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."

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.

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.

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.

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".

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.

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.

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.