Market Review: A Lack of Greed

It used to be a regular feature of our commentary here at the Daily Reckoning to pan pie-eyed tech nuts, economists, Fed chiefs… accountants… or anyone, for that matter, who believed – or in some way abetted the belief that – the US economy had led the world into a New Era of effortless productivity and permanent prosperity.

One after another – through collapsing share prices, failed interest rate policies, and high-profile bankruptcies – the darlings of the mainstream have gotten, not what they expected, but what they deserve. Like a bully who stops when his playground mark begins to bleed, we had to stop writing about how pathetic the New Era was cracking up to be.

Yet every once in a while a headline pops up in the mainstream press that begs further comment.

This morning, in news that smarts like a kick in the groin to an already prostrate curbside miscreant, comes word that MasterCard is threatening to cut off 13 million users of Paypal, a software program designed to make payments over the Internet easy, by May 1st.

"The promise of the Internet was that anyone could set up shop and get paid," analyst Avivah Litan is quoted as saying in USAToday.

Of course, thirteen million small businesses represents a heckuva lot of economic activity. And the ruling has yet to pass. So, it’s my guess a compromise will be worked out in time. But the fact that one company, and one ruling, can threaten a significant portion of the incomes of that many people surely must lay to rest any illusion of a level playing field.

You may recall at the outset of the automobile revolution there were some 400-odd car companies lined up ready to cash in. But by the time the industry matured there remained three big US players. And in television? CBS, NBC and ABC… until Fox came along with competitive content the big 3 networks owned the airwaves.

Is the Internet so different? We’ll see. But we suspect not.

This week, the blue-chip Dow took a lackluster earnings week in stride ending up 61 points 10,257. But investors steered clear of tech stocks. The Nasdaq dropped 5 for the day… and closed out the week at 1796.

"There is a lack of enthusiasm here," A.C. Moore, chief investment strategist for Dunvegan Associates, told USAToday referring to the post-bubble astmosphere pervading the market… "a lack of greed, a lack of confidence about the market’s future."

Somehow it all seems superfluous. It’s a beautiful spring day here in Paris. The sun is shining, birds are chirping… and a jazz-band just began playing on the sidewalk in front of the Paradis. (Gee, I hope we don’t use PayPal.)

Addison Wiggin,

The Daily Reckoning

April 21, 2002 — London, England

P.S. In this issue of the DR Weekend Edition: Bonner exacts (the revenge of gold…aqrrghh!!!) … Denning exhorts (taxes as extortion)…Davidson extols (New Growth Theorists…eh!?)… below…

…plus, Karim Rahemtulla explains why two new market trends – deal flow and increased leverage – are making opportunities in "Private Placement" ripe for the picking once again… don’t miss it – Flotsam $ Jetsam… below!

THIS WEEK in THE DAILY RECKONING

by Bill Bonner

04/19/02 THE REVENGE OF GOLD

"…Through many generations of trial, and mostly error, humans had discovered that paper currencies eventually drifted away to nothing – unless they were anchored to gold or some other solid rock of value. Thus did the Western money system of the 19th century function sowell…"

04/18/02 END OF THE HOUSING BUBBLE?

"…Here at the Daily Reckoning we do not question the consumer’s resolve. His bravery is beyond reproach, having shown himself willing to expose himself to reckless financial risks on many occasions. What troubles us is hisability…"

04/17/02 THE PLAGUE OF THE BLACK DEBT

Guest Essay by Christoph Amberger

"…Developers went into debt to build their satellite cities of cookie-cutter tract mansions. Homebuyers – lured by "no-money-down" deals – went into hock to buy the houses that Debt built…and are now stuffing their vinyl manors with stuff bought on store and credit-card debt. They drive cars they "bought" with debt, and they shop in businesses that are only in business because they are still (just barely) able to service their ever- increasingdebt…"

04/16/02 TURNIPS

"…just as east is still east – even with modern technology – so is the way to get rich unchanged by modern finance. It is not spending that makes people wealthier, it is anti-spending:saving…"

04/15/02 THE LAST BIG THING

"…Credit is as much a prisoner of the law of declining marginal utility as everything else. The first bit of it seems to work wonders. But the last of it falls like a splash of Moet Chandon on a subwaydrunk…"

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HEADLINE, NEWS And INSIGHT: Davidson and the New Growth Theorists… Denning on Extortion and the US Government… Plus, New Opportunities in Private Placement

by James Dale Davidson

The classical "Old Economy" analysis of economic growth overlooked the most important factor in continued growth… ideas. The limitless flow of new ideas promises a savvy investor increasing returns for years to come…

by Daniel Denning

Americans pay lawyers and accountants $140 billion dollars a year to file taxes. That’s $140 billion that could be spent productively elsewhere. But it gets worse…

Egregious Credit and Speculative Excess

by Doug Noland

"…What keeps me awake at night is the knowledge that the financial sector – and particularly mortgage finance – must continue its rapid expansion to sustain liquid and levitated asset markets, while it takes boom-time spending levels to stabilize the maladjusted U.S. Bubbleeconomy…"

FLOTSAM & JETSAM: Deal-Flow And Leverage: Two Market Trends Signaling It’s Time For You To Begin Reviewing Private Placement Deals, Again…

From Karim Rahemtulla,

– The Supper Club

"…first and foremost you should know, venture vapital (VC) investing is a numbers game. The more deals you see, the more chances you will have to hit it big. VC investors look at a lot of deals and they have to act fast when one that looks promising comes along. (On average I look at more than 60 deals before each Supper Club meeting.)

But once you sift through the chaff – and find the right deal – a simple investment in the four-figure range could be all you need to retire in high-style. Think Microsoft in 1987… or, an early stage big pharma company who actually does come up with a viable treatment for cancer.

You want to get in the right deal early and leverage your relatively small investment into big returns.

Two recent trends in the VC market are making ‘now’ a good time for individual investors to begin reviewing private deals again. In fact, because institutional investors and large VCs are either too shell shocked to invest, or are out of the business entirely, the opportunity for some private investors outstrips anything you might find in the public stock market.

First of all, the average accredited investor (an accredited investor must have a net worth of a million dollars or an income of $200 thousand for each of the past two years) can now participate in deals that were once only discussed behind the closed doors of some high-powered VC in Manhattan, Boston or Silicon Valley.

I compare this new revolution to make money from ground floor opportunities to the advent of on-line trading. Once the domain of money hungry brokers who charged you up to 5% just to buy or sell a stock, the stocks market is now open to anyone with a computer, modem and a few hundred dollars to invest.

The world of VC is now heading in the same direction. We can now make deals with companies, public or private, to provide the seed capital or secondary financing to become part of the initial group of "insiders" and investors who will then make a go of re-selling the company to the public at some point. If everything clicks, a small investment could provide for your entire retirement. But that’s only the beginning. As Supper Club members know the first rule of VC investing is to negotiate the best deal possible.

Enter the second trend working in our favor. Right now, we’re in the midst of a buyers market. There are a lot of companies in the market desperately in need of money. They are coming to us. They do not want to leave empty handed. So, often the deal is wide open. If a company is willing to part with 10% for xx dollars, our members will ask for 20%. If a group of members decide to get together, then the terms may be even better.

The object is not to starve the company of much needed capital – that would be dysfunctional – but rather, it is to get the best deal possible for everyone involved. If the deal works the payoff is greater. That is the cost of and reward for money. And right now the cost and reward ratio is leaning in your favor – if you’ve got the capital to invest and you can find the right deal…"