Discussion:  As quoted in the proviso aggravate, and in K&W, Bill Fleckenstein, a specie director in Seattle, glorious: 'There ought to be a law in this dominion that antecedently you're known to buy a supply you own to be talented to peruse its estimate quibble."  Grounded on the instruction, the textbook peruseing, and your own inquiry, fascinate examine why the estimate quibble strength prepare a sounder examination of a assemblage's coming prospects than the pay announcement.

Source: NY Times

March 18, 2001

How Did They Appreciate Stocks? Count the Absurd Ways; Those Lofty 'New Economy' Measures Fizzle


IT has now behove burdensomely unobstructed, and terminal week's gyrations simply acquired aggravate probation, that Wall Street is a divergent assign than it was equal a closinging term ago. A barbarous, rude trade has brought delay it deflated hopes and new realities.

Among the severe realities one insists out. Of all the hot air propagated during the gigantic bull trade of the slow 1990's, none propelled supply costs advance than the idea that new administration supplys were a lift privately and should not be held to restrictive, old administration investing insistards. Internet companies and cutting-edge telecommunications moments, following all, were revolutionizing the globe. So, the thinsovereign went, their portion-out costs adequate resembling innate valuation methods. Out went unwritten methods used by securities anatomy that prized lawfuls. In came freewheeling esteems of appreciate, affection allowance augmentation, Web condition exchange and equal customer ''portion-out of procure.''

''The examination was, 'We've got a new technology, for-this-conclude it's accurately okay to own a new way of approaching the pay announcement and estimate quibble,' '' said Anthony Maramarco, a portfolio director at the Babson Appreciate Fund in Boston. ''But precedent or slowr you own to propagate capital and if all you're doing is using capital, you can simply narrate that recreation for so covet.''

That recreation, as investors are tuition to their utmost worry, is definitely aggravate. When supplys were galloping afront, investors were blissful to siege their eyes off lawfuls and grapple instead upon surging ''page examinations'' to exonerate tall supply costs. Who scarcitys dogmatic capital proceeding when the sum of ''selected shoppers'' are evasion? Why vexation delay the ways of Graham and Dodd, the severe appreciate-hunters, when Wall Street was donation investors the allurement of new investing metrics?

Henry Blodget, Merrill Lynch's notability Internet analyst, may own put the new administration examination best on Jan. 10, 2000, when he wrote in a rumor, ''Valuation is frequently not a beneficial utensil in determining when to vend hyperaugmentation supplys.'' Mr. Blodget was referring specifically to Internet Capital Group, an incubator of Web companies that was trading at $173.88 then -- and $3 a portion-out now.

But he could own been examineing any one of the sundry tallevasion supplys that caught investors' fancies.

In their infatuations, possibly the biggest missiege investors made during the bull trade was to apconfirm oppidan propaganda encircling which sum supposedly prepared the best window on the narrate of their operations.

''Public kinsfolk is driving financial rumoring,'' said Jack Ciesielski, publisher of The Analyst's Accounting Observer newsletter, and moderator of R. G. Associates, in Baltimore. ''Everybody's plucsovereign the metric they procure be umpired on. But investors are somewhat to reprehend for not void to subsist delay what the lawfuls were effective them. It sounds hesitating or unhip but, if the lawfuls aren't there, why retain at straws?''

Now, delay the costs of almost all these ancient tallfliers in the cellar and the aggravateall supply trade recondite in permit trade province, investors are spectacle how crime they were to repudiate unreasonefficacious valuation rolls and to buy supplys grounded on ephemera affection ''selected shoppers'' or so-called pro forma harvests. Suddenly, new administration rationalizations to buy supplys seem as funny as the old administration esteems seemed hopelessly recondite a year ago. Shellshocked investors -- who own obsolete almost $4 trillion in trade appreciate past a year ago -- are wondering equitefficacious what hit them and how to pluck up the pieces.

Survivors of former trade fads that fizzled own some counsel. The best man investors can do to secure their portfolios secured from coming destruction, they say, is to imbibe from their strikes. Simply by brains how they known themselves to inoppidan the new administration valuation fad can they inocuslow themselves from such ills in the days afront.

Lesson One is as isolated as caveat emptor: when investors believe on others for bombardment inquiry, they must be utmostly understandingful. Past the anatomy prepared by most big brokerage firms is rotten by their use of upbeat inquiry rumors as magnets for bombardment-bansovereign deals, the burdensome certainty is that investors who buy and vend alloticular supplys own to imbibe to do some of their own inquiry on companies to umpire their harvests and their prospects. Equitefficacious in term for annual rumor occasion, supply investors own to go tail to perusing estimate quibbles and pay announcements.

'THERE ought to be a law in this dominion that antecedently you're known to buy a supply you own to be talented to peruse its estimate quibble,'' said Bill Fleckenstein, a specie director at Fleckenstein Capital in Seattle. ''That's where companies try to blink anything. That's where all the shenanigans pretext up.''

A end sifting of estimate quibbles was decidedly waste during considertalented of the slow-1990's bull trade, equal in sundry Wall Street analysts' rumors. As a harvest, sundry investors missed such notice signs as bloating inventories and mound accounts receivables that foretold a slowdown in sales at sundry technology companies. These interjacent Gateway, Cisco Systems, Nortel Networks and Alcatel.

Steve Galbraith, an equity strategist at Morgan Stanley Dean Witter, said that in the developed years of the technology supply peal, equity investors took on the role of financing fledgling companies -- existing in their harvest -- that hazard capitalists had unwrittenly inconsequent. Normally, companies cannot go generally-known delayout a way archives that confirmd their ability to rotate a advantage.

Not this term environing. ''The undiminished occasioning span for relatively tall-occasion equity bombardments was curt into months, not years,'' Mr. Galbraith said. As a harvest, in the primary locality of 2000, fewer than one in five companies that made judicious generally-known supply donations had advantagetalented operations. In 1995, almost two-thirds of new progenyrs were advantagetalented when they took their supplys generally-known.

Another esteem of how procureing sundry investors were to disabide their distrust during the mania was the span in 2000 during which the aggravate specie a assemblage obsolete, the meliorate its supply did, opportunity the aggravate specie a assemblage earned, the worse its supply fared. Believe, iVillage and Priceline, all of which took haughtiness in the amounts of specie they were spending.

Just as investors felt that lawfuls were no coveter a inevittalented element for supplys to fume skyward, neither did they invent conclude for moment when companies appeared to be consumeing through their capital. On July 12, 2000, for development, Michael Parekh, an Internet strategist at Goldman Sachs who aggravatesees a clump of analysts that caggravate 60 Internet companies, including Inktomi, DoubleClick and AOL Term Warner, wrote a rumor arguing that the capital consumeed by dot-com companies was ''primarily an investor maxim progeny'' and not a covet-term occasion for the sector.

Eight months slowr, a closing of capital has brought encircling the demise of hundreds of Internet companies and has hammered the harvests of innate companies affection Yahoo. Mr. Parekh was redress that it was not a covet-term occasion for the sector. As it rotateed out, it was an contiguous occasion.

Mr. Parekh said on Friday that the slowdown in the administration that followed his July rumor suddenly transitional the undiminished delineate. ''Cash consume is a discriminating progeny for us and it is not a metric we repudiated,'' he said. ''But we've had a complete new set of progenys environing the administration which restrain the tlearn at which unwritten companies are spending on technology. These companies were masovereign proceeding in the third locality, then on top of that the earth of all these companies got hit by the administration slowing down.''

Of way, analysts affection Mr. Parekh cannot be held entibelieve accounttalented for the specie investors own obsolete in new administration supplys. Investors themselves must siege province for succumbing to a trade fad. Following all, they known themselves to be established that these companies were in certainty divergent from unwritten moments and should be topic to less-restrictive valuation insistards.

Every bull trade has its own strange bombardment fad, of way. In the gigantic one of the 1960's, for development, the conglomerate was sovereign. Companies affection Litton Industries and Textron thrived by gorging up other companies on the hypothesis that owning divergent kinds of matteres delay divergent matter cycles would secure them from downturns in the administration.

BETWEEN 1966 and 1969, when the earnestness for conglomerates was at its altitude, investors approved that their portion-out costs could nincessantly gravitate. Then, in 1970, they plunged, and delay them went the ordinary discernment.

More of-late, the bombardment fad was to exonerate eminent costs of technology supplys grounded, in allot, on a litany of so-called nonfinancial metrics. These interjacent customer fealty, Web-condition exchange and ''selected shoppers.'' Nincessantly procure that none of these translated into advantages or equal, in some cases, allowances.

Mary Meeker, a triton Internet analyst at Morgan Stanley, was incomplete the sundry Internet and technology analysts citing upbeat ''usage metrics'' as concludes to buy supplys. In a rumor on published in October, Ms. Meeker cited the assemblage's popularity as a Web shopping goal as a conclude to own the supply. She glorious that page examinations per user per month rose to 14.9 in the third locality, up from 12.5 in August. Then she keen out the mastery of to rival PlanetRX's monthly page examinations of 10.3 as an evidence that customers were aggravate satisfied.

''Additionally,'' Ms. Meeker keen out, '' maintained a roll of 48 percent selected shoppers (a rare user who examinations at smallest three minutes of conciliateing delayin the nature) afront of PlanetRx, which had 45 percent.'' No hint of whether an ''selected shopper'' incessantly became a spending shopper. of-late traded at $1.16, down 54 percent from its cost when Ms. Meeker penned her rumor. (PlanetRx, which Nasdaq has de-listed, is trading at 29 cents a portion-out.)

Last week, Ms. Meeker explained that her use of nonfinancial metrics began tail in 1993 delay Intuit and AOL and had confirmd, in those cases, to be a sensitive way to esteem coming operation. Both companies obsolete specie judiciously on their customers, but Ms. Meeker said she supstanding that if they kept their customers blissful they could diffuse their customer cheap. And that would in rotate despatch allowances and, slowr, lawfuls. She was confirmn lawful.

''The appreciate of a matter is its coming capital proceedings,'' Ms. Meeker said. ''The canvass is figuring out what those coming capital proceedings are. If a assemblage wins in its tradeplace, if the trade is fascinating sufficient and big sufficient, and if we can invent the assemblage that is going to be a director, the canvass is to invent out how customers can be monetized.''

About, Ms. Meeker said the jury was stagnant out. ''These mans siege a covet term to evolve,'' she said. ''If there is a soundness and grace trade online, we believe drugstore procure be a director. If there isn't, the supply procure abide to be a nonattainment.''

Wall Street analysts were not the simply ones citing nonfinancial metrics as key to investors. Terminal year, in its Global Onmethod Retailing Report, Ernst & Young seasoned to confirm operation esteems most appreciated by e-commerce investors. The con-over of 31 generally-known companies spanned 18 months, outset in existing 1999. In the succor locality of 2000, Ernst & Young plant that investors were concentrating on two certaintyors: sensual advantages (rights antecedently sundry costs affection diminution and heed costs) and sum Web-condition visits. Net pay, possibly accordingly so sundry e-commerce companies had none, was not pertinent.

Another nonfinancial metric was the so-called portion-out of consumers' procures that a assemblage demonstrated., for development, had a ''innate procure portion-out incomplete consumers'' according to a Morgan Stanley inquiry rumor dated Oct. 20, 2000. The probation for this assertion was that almost 72 percent of the sum term gone-by by Internet users on real-estate-related Web conditions in September was gone-by on Homestore's properties.

But having a innate procure portion-out could not secure's supply from sliding 26 percent to $19.31 past that rumor.

Ms. Meeker said: ''On, our top of examination is that sundry persons procure seem for homes onmethod and Homestore procure be in a innate insisting. We're procureing to fabricate a bet that they procure be talented to monetize those users.''

Mr. Ciesielski, the accounting expeditions, said investors' heed in nonfinancial notice was not pernicious when wholly delay financial anatomy. The problem is, during the Internet craze, investors weighed the nonfinancial facts too heavily, he said.

'I USED to caggravate railroads and liveliness, and they used to own this supernatural nonfinancial notice incessantlyy month encircling miles traveled or carloads loaded,'' Mr. Ciesielski said. ''Analysts seemed at that, but equitefficacious to recover where lawfuls were going to go. They weren't retaining at straws. If carloads were going down, you knew lawfuls were going down.''

Although sundry chastened investors own sworn off the use of Internet page examinations or selected Web shoppers to succor them fabricate their supply plucks, another bull trade promotional manner by corporations abides atlearn equal following the permit has awakened. That is the peddling of so-called pro forma sum, which enucleate pesky costs from a assemblage's harvests and fabricate lawfuls seem meliorate. Using Alice-in-Wonderland explanations, new administration companies said that for them these figures meliorate heeded their permitted harvests than those arrived at using generally real accounting principles.

How pro forma lawfuls are conjured varies by assemblage, but frequently extreme are method items affection heed costs and payroll taxes, thus consumeishing the assemblage's harvests.

Assovereign investors to repudiate these costs -- which the companies must pay in calm, constrained capital -- is assovereign them to recognize a myth encircling a assemblage's harvests.

In the old days, companies would enclose pro forma sum in financial announcements following an wages to heed how the two newly wholly companies would own executed if they had been attached for the undiminished year antecedently the merger. Now, pro forma sum moderation someman considertalented aggravate dishonorconducive and are comely in-effect ubiquitous. Anyone heeded in the unwritten lawfuls sum has to dig recondite into the harass releases.

To esteem how despicconducive pro forma sum own behove, investors can quest the Web conditions of or to invent companies using them. In a three-day span peculiar terminal week, a quest on PRNewswire executed 36 citings of pro forma figures.

Companies accentuating the dogmatic through the use of pro forma sum enclose Palm, Intel, Yahoo and Cisco. Aggravate darken companies that do so enclose Stanford Micro Devices and Engage.

At Yahoo and Cisco, for development, pro forma permitted pay moderationt save the cost of payroll taxes. At Roll 8 Systems, a software preparer, a net forfeiture of $4 darling in the third locality terminal year was transformed into pro forma net pay of $1.8 darling by adding tail noncapital beak affection diminution and amortization of imperceptible possessions.

The creativity goes on and on. Mr. Ciesielski believes that the immense sum of corporations using pro forma figures own made lawfuls releases increasingly suspicious. ''The complete concept of what's lawfuls and what's on the capital-proceeding announcement has behove so bastardized that noman fabricates considertalented reason any aggravate,'' he said.

INVESTORS can thank the raiders of the 1980's for the running affection matter delay pro forma sum, Mr. Ciesielski said. ''Back then, persons would seem at companies delay ungainly lawfuls, but they had cheerful capital proceeding underneath accordingly diminution was big,'' he said. The leveraged buyout peal, he said, ''was easily fueled by amateurs up-hill to invent companies delay big diminution beak.''

''And in the 90's, we all jumped on that, tasovereign out the allots we didn't scarcity to confirm our top,'' he acquired.

Mr. Ciesielski advises investors to pay no heed to pro forma sum and to do their own math to invent out where companies veritably insist.

Byron Wien, highest United States bombardment strategist at Morgan Stanley, is dreadful that companies that convert their harvests using pro forma figures could do grave injury to investor faith in the financial trades. ''Corporations own a lot of flexibility in how they rumor harvests,'' he said. ''Nobody knows aggravate encircling the certainty than the oppidan executives themselves. Tasovereign a closinging-term examination of certainty may fabricate mans seem cheerful in a localityly rumor. But it procure besides clutch up delay them.''

That is a cheerful style of what seems to be happening today.

Discussion:  As quoted in the proviso aggravate, and in K&W, Bill Fleckenstein, a specie director in Seattle, glorious: 'There ought to be a law in this dominion that antecedently you're known to buy a supply you own to be talented to peruse its estimate quibble."  Grounded on the instruction, the textbook peruseing, and your own inquiry, fascinate examine why the estimate quibble strength prepare a sounder examination of a assemblage's coming prospects than the pay announcement.

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