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Cyber-Wall Street
by  Dana Blankenhorn


Usually we post comments about Internet Commerce, but in this article we think we should all consider the impact of the Internet on commerce, and on the real economy.

So who'll play James Cramer when this sequel to the movie "Wall Street"
comes out? He's obviously the Gordon Gecko of this age, but I'll predict
right now his importance will be no more lasting than those of his 1980s'
counterparts.

The fact is the Web has enabled a takeover of the world's largest asylum,
Wall Street, and the inmates are running wild. From "day trading" rooms,
and behind the screens at Web trading sites, individual investors are calling the shots, a few hundred shares at a time.

This can be seen most clearly in the market for Internet-related issues. It started last summer, when professionals using conventional valuation
techniques sold Yahoo and Amazon short, knowing they weren't worth what the "screen savers" were paying.

But here's what happened. While Yahoo and Amazon have a lot of stock, very little of it trades. So small changes in supply or demand for this "float"
can have a big impact on price. Remember that 10,000 people buying 100 shares each represents 1 million shares of demand, and there are now
hundreds of thousands of such investors. (The average trade in Yahoo and
Amazon in the last few months has been just 300 shares, CNBC reporter
David Faber has reported.) Thus the pros had to buy back shares and take huge losses. When the shorts retreated, and an autumn bear market turned into a mere correction, the way was clear for the real fun to begin.

When the threat of "shorting" - selling a stock now hoping to buy it back
for less - is removed, many Internet issues become as easy to manipulate as penny stocks were a decade ago. (Cramer notes you can also short a stock by "buying a put," an option to sell at today's price in hopes the price will fall before you have to put out cash.) Since the signals that induce day traders to move come in the form of price changes on screens there's no conspiracy here. The game is legal. Without short sellers, however, there's no one placing bets that can make a target fall in price and provide discipline to the market.

Let's say you were in on the move in Yahoo. What was $10,000 is now
$80,000, and it's now easy to borrow $40,000 on the position with which to buy eBay for $50/share. Within a few weeks you've now got $160,000, so you get downwind of its competitor, OnSale, trading two weeks ago around $20. (It went up to $100, then back down to $50 within a week.) You're a player now. Since the businesses are real, "news" (like a loss exceeding analysts' expectations) can be planned for. If you lighten up on your winners slowly, you're making real money. And if you're still at your day-trading screen, you can play this slot machine hundreds of times during any move.

If this game sounds familiar, you get our 'A' in history. The same game was played in the late 1920s by amateur investors. The game ended with the October, 1929 stock market crash. The problem, as with all speculative bubbles, is that if gains aren't driven by real profits, a market
correction can become a collapse. The people who run the markets were doing their best to change that psychology, until they decided a market fall
threatened the global recovery. But even if Alan Greenspan is in cahoots
with you, a bubble is still a bubble. The game ends when there's a true
rout that forces players out of the markets. Many thought that rout came
last summer, and shares fell 25% in value on average, but the quick rally
back to old highs emboldened the plungers. (This game will likely end as it
did in 1929, with a recession. President Hoover denied the next year that
recession was occurring. "It's just a small depression," he said.)

Over the last week the game has accelerated. It's also gotten more
dangerous, moving from multi-billion dollar plays like Yahoo to smaller,
more easily-manipulated issues like Books-A-Million. Even Davvix, a
Christian community site, found itself used in this way when it announced
it would sell gospel music online. (Cramer, to his credit, calls such plays
"bad Internet," but it's the overvalued "good Internet" profits that fuel
the game.) The constant churn has left those who didn't move quickly enough with big losses. Unlike the situation in a real casino, the wheel doesn't stop so you can cash out in comfort. The more you've got, the harder it is to get out the door with your gains.

The mania holds important lessons for Internet Commerce. First, cheap
liquid markets are no protection against manipulation by a herd. Second,
the Internet speeds up everything, both good and bad. Third, short sellers
aren't all bad. Fourth, lots of stock trading sites will go under when the
losers sue over what they did to themselves or just renege on bad trades.
Fifth, we're all going to be hurt when the bubble bursts, and being on the
Internet won't prevent that. Sixth, fulfilling orders, on both the buy and
sell side, is the key to staying in an Internet business for the long haul.

Finally, don't be confused by small hiccups in stock prices - when the
bubble bursts, the explosion will be heard everywhere. (How bad will the
crash be, whenever it comes? See the history of Japan, from 1987 to the
present, for answers.)

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