by Maggie Mahar
29. Bob Woodward, Maestro, 184.
30. Steve Roach, interview with the author.
31. James Grant, “Irrational Exuberance Towards Mr. Greenspan,” The Financial Times, 10 January 2000, 13.
32. Martin Mayer, The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets (New York: Plume, 2002).
CHAPTER 15
1. Dean Foust, “Alan Greenspan’s Brave New World,” Business Week, 14 July 1997, 44.
2. Michael J. Mandel, “Where to Invest in 1997: The Triumph of the New Economy,” Business Week, 30 December 1996, 68.
3. Jeff Madrick, “Economic Scene: Tarnished New Economy Loses More Luster,” The New York Times, 30 August 2001.
This is not to say that productivity did not grow at all in the late nineties, but while it climbed at a faster rate than it had from 1973 to 1995, it did not grow as quickly as it had in the fifties and sixties. “There is perhaps an increase of five-tenths of a percentage point a year in the long-term productivity growth trend,” Madrick concluded, “and over time,” he acknowledged, “this will be significant. But promises of a once-in-a-century transformation are not supported by the facts.”
4. See James Grant, Grant’s Interest Rate Observer, 26 May 2000; 16 February 2001.
5. Mark Veverka, “New Economy? What New Economy?” Barron’s, 22 October 2001. “Granted, the convenience of online banking was not reflected in government productivity figures,” Veverka noted, “but its impact was ‘probably modest,’ the study’s authors surmise.”
6. Leon Levy, with Eugene Linden, The Mind of Wall Street: A Legendary Financier on the Perils of Greed and the Mysteries of the Market (New York: PublicAffairs, 2002).
7. See Paul Krugman, “Enemies of Reform,” The New York Times, 21 May 2002. See Chapter 16 (“Fully Deluded Earnings”) for further discussion of corporate earnings.
8. Alan Abelson, “Up & Down Wall Street: Cereal Killer,” Barron’s, 3 September 2001. Abelson reported that Sanford Bernstein cleaned up the numbers by “adjusting for nonrecurring items and the effect of stock options and pension plans.” For a discussion of how these items inflated earnings, see Chapter 8 (“Behind the Scenes, in Washington [1993–95]”) and Chapter 16 (“‘Fully Deluded Earnings’”).
9. “Q & A With Jeremy Grantham,” Business Week, 18 March 2002.
10. James Grant, “The Bulls Stand Corrected,” The New York Times, 29 October 1997.
11. Gretchen Morgenson, “Reality Check,” Forbes, 27 January 1997, 42.
12. Joseph Kahn, “China’s Overcapacity Crimps Neighbors: Glut Swamps Southeast Asia’s Exports, Roiling Currencies” The Wall Street Journal, 14 July 1997.
13. Mitchell Martin, “Wall Street: Too Healthy Right Now to Succumb to a Case of ‘Asian Flu’—Asia’s Financial Turmoil/The View from Wall Street,” International Herald Tribune, 3 November 1997, 11.
14. Perry’s piece was originally published on October 28, 2002, on PrudentBear.com.
15. Dudack made the remark in 2003.
16. Gail Dudack, “Happy Anniversary,” UBS Global Research, 17 October 1997. The quotations from Kindleberger that follow are drawn from Dudack’s report.
17. Steve Roach, interview wih the author.
18. Allan Sloan, “Retirement Roulette (Investing Social Security Funds in the Stock Market),” Newsweek, 20 January 1997.
19. In order to go back to 1900, Dickson had to make some educated guesses: “Since the Consumer Price Index, which is used to peg Social Security benefits to inflation, didn’t exist until 1917, Dickson had to create his own pre-1917 measure of inflation and had to rely on studies by G. William Schwert of the University of Rochester for stock performance from 1900 to 1925,” Sloan reported. “After thus piling assumption on assumption, Dickson decided that 7 percent above inflation for stocks…was a reasonable guess.” As noted, he did not claim that it was anything more than a guess.
20. Allan Sloan, “Retirement Roulette.”
21. Erin E. Arvedlund, “Wall Street Meets K Street: Washington Draws a Bead on Mutual Funds,” Barron’s, 3 March 2003, F2.
CHAPTER 16
1. Jim Chanos, interview with the author. Jim Grant originally reported on Jim Chanos’s discovery in Grant’s Interest Rate Observer, 17 July 1998.
2. Jeff Madrick, “Economic Scene; Bush Is Talking Tough on Corporate Ethics, but Where Is the Regulatory Bite?” The New York Times, 11 July 2002.
3. Steven Pearlstein, “Hooked on a Fast-Growth Habit,” The Washington Post, 25 November 2001.
4. Greg Ip, “Abreast of the Market: Do Big Write-Offs Artificially Inflate Earnings?” The Wall Street Journal, 6 July 1998, C1.
5. Walter M. Cadette, David A. Levy, and Srinivas Thiruvadanthai, “Two Decades of Overstated Corporate Earnings: The Surprisingly Large Exaggeration of Aggregate Profits,” The Jerome Levy Forecasting Center, 2001.
6. Arthur Levitt, “The Numbers Game,” remarks delivered at the NYU Center for Law and Business, 22 September 1998.
7. Grant’s Interest Rate Observer, 3 December 1999.
8. Noble originally recounted the story to Kate Welling who published it in welling@weeden (9 March 2001). Noble repeated it in an interview with the author.
9. David Henry, “The Numbers Game,” Business Week, 14 May 2001.
10. The Levy report quotes Buffett on page 11.
11. Nanette Byrnes, Richard A. Melcher, and Debra Sparks, “Who Can You Trust: Earnings Hocus-Pocus: How Companies Come Up with the Numbers They Want,” Business Week, 4 October 1998, 134.
12. Nanette Byrnes, Richard A. Melcher, and Debra Sparks, “Who Can You Trust.”
13. Gail Dudack, SunGard Institutional Brokerage, Weekly Report, 5 March 2003.
14. For a full discussion of how accounting rules allowed companies to mask the cost of options, and Levin’s battle to reform options accounting, see Chapter 8 (“Behind the Scenes, in Washington”).
15. Gretchen Morgenson, “Scandal’s Ripple Effect: Earnings Under Threat,” The New York Times, 10 February 2002.
16. Interview with the author.
17. Michael K. Ozanian, “Upward Bias,” Forbes, 15 May 2000. On insider selling as the market peaked, see Chapter 19 (“Insiders Sell; the Water Rises”).
18. The Levy Institute report included the estimates from the Federal Reserve Study (Lian and Sharpe, 1999) as well as a 2000 estimate by Bear Stearns analysts that if the cost of options had been subtracted from profits, earnings for S&P 500 companies would have been as much as 8 percent lower. That same year, a study by Smithers & Co., an economic consulting group based in London, reckoned that if S&P companies had been forced to expense options, operating earnings would have fallen by a full 17 percent. See Grant’s Interest Rate Observer, 15 February, 2002.
19. Even though corporations were not required to show the cost of options as an expense of doing business, the IRS did let them take a deduction for options (implicitly acknowledging that they were an expense). Under the formula, companies were allowed to deduct the difference between the price that an executive paid for the stock when he exercised his option to buy shares at a fixed price, and the market price when he sold.
20. Ciesielski’s Analyst’s Accounting Observer can be found at www.aaopub.com. Welling published the results of his findings in welling@weeden, 3 August 2001.
21. In Focus, The Leuthold Group, June 2002.
22. The Levy Center report cites the Federal Reserve study.
23. Loren Steffy “Options Charade,” Bloomberg News, April 2000.
24. Thomas A. Stewart, “The Leading Edge: Does Michael Dell Need Stock Options?” Fortune, 2 August 1999, 240.
25. Erin E. Arvedlund, “Dell-uded Put Sales Come Home to Roost: A Bottom in Tech?” Barron’s, 6 May 2002.
26. Floyd Norris, “Dell’s Share-Price Bet Cost It $1.25 Billion,” The New York Times, 3 May 2002.
27. Jon Corzine, interview with the author.
28. Maureen Allyn, interview wi
th the author. Unless otherwise noted, the quotations that follow are drawn from an interview with the author and an internal memo that Allyn wrote while at Scudder.
29. Allyn quoted Soros from Jaye Scholl, “Exit Shaken,” Barron’s, 1 May 2000.
30. For the story of Acampora’s call, see Chapter 1 (“The Market’s Cycles”).
31. Roger Lowenstein, When Genius Failed (New York: Random House, 2000), xix.
32. Leon Levy with Eugene Linden, The Mind of Wall Street (New York: Public Affairs, 2002), 142, 143, 144.
33. Nassim Nicholas Taleb, interview with the author. See Maggie Mahar, “No Such Thing,” Bloomberg Wealth Manager, June 2003.
34. Nicholas Nassim Taleb, Fooled by Randomness (New York: Texere, 2001).
35. Peter Bernstein, interview with the author. See Maggie Mahar, “No Such Thing.”
36. Peter Bernstein, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996).
37. Nassim Nicholas Taleb, interview with the author. See also Maggie Mahar, “No Such Thing.”
38. Roger Lowenstein, When Genius Failed, xviii.
39. Martin Mayer, The Fed (New York: The Free Press, 2001), 11–12; 266–67.
40. James Tyson, “Cruise-Control Investing,” The Christian Science Monitor, 1 January 1999.
41. Maureen Allyn, interview with the author.
CHAPTER 17
1. “Boo! And the 100 Other Dumbest Moments in e-Business History,” Business 2.0, 28 April 2002.
2. Andrew Bary, “The Trader: Wow! ’98 Had Enough Thrills for Several Years,” Barron’s, 28 December 1998, MW3.
3. Ianthe Jeanne Dugan, “Where No Investor Has Gone Before; Amateurs Steered the Ship Through a Spacey Year,” The Washington Post, 3 January 1999, H01. As proof, Birinyi pointed to trading activity on the New York Stock Exchange. That year, $63 billion of net buying was in blocks of $10,000 or less. In comparison, $44.7 billion was in “big-block” trades.
4. Rubino’s story originally appeared in Mike Cassidy’s column in The San Jose Mercury News (“Market Actions Add to a Sicko’s Heavy Breathing,” 23 November 1999).
5. Andrew Bary, “What’s Wrong, Warren? Berkshire’s Down for the Year, but Don’t Count It Out,” Barron’s, 27 December 1999, 16.
6. The story that follows and all quotations from Blodget are, unless otherwise noted, based on three interviews with the author. All interviews were completed early in 2002.
7. When Barron’s crowned Meeker ’Net Queen, it quoted from some of her reports: “Of Yahoo, for example, she said last spring, ‘Hmm, what’s the value of leadership in the fastest-growing medium in the history of the planet?’ In a recent year-end outlook piece, she wrote that stocks of the Internet leaders are ‘yes, cheap. Why? It’s simple; the market opportunities are really large.’” Andrew Bary, “’Net Queen: How Mary Meeker Came to Rule the Internet,” Barron’s, 21 December 1998, 23.
8. Interview with the author.
9. Amazon closed at $138; since the stock had split three for one since Blodget made his forecast, this was the equivalent of $414.
10. Lise Buyer, interview with the author. Unless otherwise noted, all further quotations are drawn from an interview with the author.
11. Jonathan Cohen, interview with the author.
12. The Eileen Buckley article “Holding Analysts Accountable” ( The Industry Standard, 10 June 2000) counted how often Blodget was mentioned in ’99. In “Who Blew the Dot.com Bubble? The Cautionary Tale of Henry Blodget” (The Washington Post, 12 March 2001), Howard Kurtz, reported on the references to Blodget through 2001.
13. Joseph Menn, “Noted Analyst Sees Net Stock Shakeout,” The Los Angeles Times, 2 October 1999, C-1.
14. Jonathan Clements, “Getting Going: Vanguard Founder Blasts Funds’ Focus,” The Wall Street Journal, 16 May 2000.
15. In “Internet Trades Put Merrill Lynch Bull on Horns of a Dilemma” ( The Wall Street Journal, 12 February 1999), Charles Gasparino and Randall Smith quote Joan Solotar of Donaldson, Lufkin & Jenrette when estimating what share of Merrill’s revenue comes from its retail brokerage business. See Chapter 10 (“The Information Bomb”) on how deregulation turned the economics of Wall Street research upside down.
16. James M. Clash, “Henry Blodget Debates Jeremy Grantham,” Forbes Global, 12 June 2000.
17. Kenneth N. Gilpin, “Market Insight: America Online Is No Longer Invincible,” The New York Times, 9 August 1999.
18. Andrew Bary, “’Net Queen: How Mary Meeker Came to Rule the Internet,” Barron’s, 21 December 1998, 23.
19. James M. Clash, “Henry Blodget Debates Jeremy Grantham.” Blodget explained what he meant by “stuff I hope will survive a nuclear war” in an interview with the author.
20. See Prologue.
21. Peter Truell, “The Soothsayer Who Never Blinked,” The New York Times, 27 July 1997.
22. Steve Einhorn, interview with the author.
23. The year that Blodget was hired, The New York Times was one of many publications that made it clear that Blodget was hired to bring in investment banking business. See Prologue.
24. David Henry, “Internet Stock Bull Dresses in Caveats,” USA Today, 8 June 1999, 03B.
25. Kimberly Seals McDonald, “Just Too Darn Many Long Words,” The New York Post, 11 April 1999, 61.
26. Steve Einhorn, interview with the author.
27. Henry Blodget, “Merrill Lynch Overview Internet e-Commerce—Investment Philosophy: Key Points,” 14 September 1999, 16.
28. Gretchen Morgenson, “Dow Finishes Day Over 10,000 Mark for the First Time,” The New York Times, 30 March 1999.
29. Robert McGough, “In New York: Heard on the Street—Some Stocks Just Seem Irresistible, Whatever the Price,” The Wall Street Journal Europe, 16 March 1999.
30. “Anatomy of a Bear Market,” McKinsey Quarterly, 28 January 2003.
31. Tice testified before the Capital Markets, Insurance and Government-Sponsored Enterprises Subcommittee on June 14, 2001. See Chapter 2, note 15.
32. Andy Engel, Steve Leuthold, Mike Schurmann, “Religion Stocks and the Nifty Fifty,” The Leuthold Group Leuthold/Weeden Research, 1972 and 1999. For a discussion of the implications of Leuthold’s research for buy-and-hold investing, see Maggie Mahar, “Three Wall Street Truths You Can’t Trust,” Bloomberg Personal Finance, November 2000.
33. In “The Trader: Wow! ’98 Had Enough Thrills for Several Years,” Andrew Bary made out the argument that, in part because interest rates are so low, the Nifty Fifty of the nineties enjoy brighter prospects than the stars of the seventies. Barron’s, December 1998.
