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At 2:15 P.M. on Friday, March 17, 2000, a little-known reporter blew a sizable hole in the stock of a high-flying, high-tech outfit called the Xybernaut Corporation.
The company, which makes miniature computers that can be worn as accessories, had been on an incredible tear, the likes of which had somehow become breathtakingly routine in the dizzying atmosphere of Wall Street. Its stock, which had been selling for $1.31 a share the previous October, had hit nearly $30 two weeks earlier -- a more than twenty-fold increase for a firm with just eighty full-time employees -- before settling back to $23 a share.
But the situation changed dramatically when David Evans, a reporter in the Los Angeles bureau of the Bloomberg News service, got online to examine Xybernaut's filing that morning with the Securities and Exchange Commission. Evans found some troubling language that he quickly filed in a terse report for the Bloomberg financial wire.
"Xybernaut Corp.'s auditor warned there's 'substantial doubt' about the maker of wearable computer systems' ability to continue as a going concern, citing its continuing losses and need for more capital," the story began.
Xybernaut stock dropped precipitously until the market's 4:00 P.M. closing bell, and again in after-hours trading, to 14 15Ž16. In the space of a few short hours, the company, based in Fairfax, Virginia, had lost more than a third of its market value. The power of a single journalist to puncture the helium balloon of soaring stock prices had never been greater. But the lightning speed of modern technology also gave corporate executives the tools to fight back.
John Moynahan, Xybernaut's chief financial officer, was on vacation in Florida and had turned off his cell phone about fifteen minutes before the Bloomberg report hit. He was extremely upset when he belatedly learned of the story. The warning by the company's accounting firm was, in Moynahan's view, mere legal boilerplate. The company had included it in every one of its SEC statements since going public in 1996, and raising the needed cash had never been a problem. The reporter had simply put the most alarmist spin on the story, describing Xybernaut as though it were in dire financial straits. Moynahan also thought the timing of the article, late on a Friday, was suspicious, and wondered whether investors who had shorted the stock -- betting that its price would decline -- had something to do with the story.
At 9:40 on Saturday morning, Moynahan opened his laptop and signed onto a message board on Yahoo!'s Website that was devoted entirely to Xybernaut. Moynahan had founded the club, which had nine hundred members and drew as many as eleven thousand "page views" a day, and served as the site's moderator. He quickly planted his flag in that stretch of cyberspace, declaring that "in my six years with Xybernaut, the future for the company and its shareholders has never been brighter than it is today."
Many club members, who actively traded the stock, were sympathetic. "The Bloomberg piece was a hit job, more or less," one person said.
"The article and the timing smelled very fishy!" said another.
Moynahan spent the rest of the day helping the company draft a press release assailing the Bloomberg piece. A company attorney had already complained to Bloomberg executives, who stood by the story. On Monday morning, Xybernaut said in its statement that the plunge in the stock price "was based on reaction to an article released late Friday afternoon and was not based on any fundamental change in our operations....The article did not accurately nor fairly describe our current position...or our future opportunities."
David Evans was unperturbed by the conspiracy theories, since no one had prompted him to check the SEC filing. This was what he did for a living, digging out the fine print that companies declined to put in their press releases. Evans was accustomed to being deluged with angry e-mail from investors who blamed him when their stocks tanked, who viewed him as the evil messenger. But he was simply using government documents to tell the full story.
On Tuesday morning, March 21, company executives issued another release that would prove even more important. Xybernaut said that the company and its products would be featured that evening on CNBC, the business network that carried immense clout with investors. The mere announcement of the upcoming segment helped boost Xybernaut's stock 24 percent, to just over $21 a share, or slightly below where it had been when the Bloomberg piece hit the wires.
At 5:39 P.M., Evans moved another damaging story on the Bloomberg wire. Weeks earlier, Xybernaut had trumpeted a "buy" rating on its stock from a research firm called Access 1 Financial, which had predicted that the price would double within six months. Indeed, the price doubled within a month. What the company did not disclose, Evans had found, was that Mark Bergman, the president and founder of Access 1 Financial, was a former Xybernaut executive who still owned options to buy shares in the company.
But Evans's report was immediately overshadowed. At 6:21, CNBC anchor Bill Griffeth introduced the segment on Xybernaut by saying: "You can wear just about everything else, why not your computer? It turns out that you can....A small company called Xybernaut has already made big strides in the hands-off computer sector." The story was punctuated by upbeat comments from Moynahan, and reporter Mike Hegedus posed in the studio with a computer attached to his belt and a futuristic-looking headset that enabled him to see the monitor by peering into a small mirror dangling before his right eye. Shortly after 7:00 P.M., CNBC's Business Center reported that Xybernaut stock had gained another dollar in after-hours trading. In the space of five days, the company's stock had been decimated and then magically revived, thanks to the media power-brokers who wielded such enormous influence on Wall Street.
When journalists cover politics, their outsider role is clearly defined. No single reporter can affect White House policies or a candidate's campaign through mere analysis or commentary. True, if several news organizations pound away in unison, they can put an issue on the national agenda or throw a politician on the defensive. But such efforts can be measured only roughly, through the fleeting snapshot of opinion polls. Much of the public distrusts the press, muting the impact of a concerted editorial attack on the president or other national figures. In this realm, journalists are scorekeepers and second-guessers and naysayers, and their influence is ephemeral and diffuse.
In the business arena, however, financial journalists are players. They make things happen instantaneously, and their impact is gauged not by subjective polls but by the starker standard of stock prices. A single negative story, true or not, can send a company's share price tumbling in a matter of minutes. A report about a possible takeover attempt can immediately pump up a stock, adding billions of dollars to a company's net worth. The clout of financial journalists affects not just the corporate bottom line but the hard-earned cash of millions of average investors. In business, unlike politics, the reporting of rumors is deemed fair game, since rumors, even bogus ones, move markets. And in an age of lightning-quick Internet reports, saturation cable coverage, and jittery day traders, moving the market is a remarkably easy thing to do.
Journalists, of course, don't spew out information and speculation in a vacuum. They are used every day by CEOs, by Wall Street analysts, by brokerage firms, by fund managers who own the stocks they are touting or are betting against the stocks they are trashing. These money men are as practiced in the art of spin as the most slippery office-seeker, measuring their success not in votes but in dollars, not in campaign seasons but in minute-by-minute prices.
Amid this daily deluge, there's one inescapable problem: Nobody knows anything. These are savvy folks, to be sure, but all of them -- the journalists, the commentators, the brokers, the traders, the analysts -- are feeling their way in a blizzard, squinting through the snow, straining amid the white noise to make out the next trend or market movement or sizzling stock. They traffic in a strange souplike mixture of facts and gossip and rumor, and while their guidance can be useful, they are just as often taken by surprise, faked out by the market's twists and turns, their piles of research and lifetime of learning suddenly rendered irrelevant. They talk to each other, milk each other, belittle each other, desperately searching for someone who knows just a little bit more about the stock that everyone will be buzzing about tomorrow. They are modern-day fortune tellers, promising untold riches as they peer into perpetually hazy crystal balls.
Still, they wield great influence. In a confused world where everyone is jockeying for advance intelligence on what to buy or sell, information is power. The ability of a single analyst to drive investors in or out of a particular stock, once his views are amplified by the media echo chamber, is nothing short of awesome. Some reporters, to be sure, manage to ferret out useful stories amid the blurry landscape. But there is no real penalty for being wrong; the journalists, the commentators, and the analysts blithely chalk up their mistakes to the market's unpredictability and quickly turn to the next day's haul of hot information. It is a mutual manipulation society that affects anyone with a direct or indirect stake in the market, which is to say nearly everyone in America.
Ever since the southern tip of Manhattan became a fledgling financial center in the 1790s, much has hinged on the speed of information. The original brokerage houses had to be near each other so that messengers could race back and forth with the latest prices. Before long, men with telescopes and flags stood on hills and buildings so they could relay information by semaphore code between New York and Philadelphia. The launch of Samuel Morse's telegraph in 1844, followed by the invention of the stock ticker twenty-three years later, proved ideal for rapidly transmitting data around the country. The New York Stock Exchange installed its first telephone in 1878. Over the next century, radio, television, fax machines, and computers each kicked the financial markets into new and ever-faster territory.
Over the past generation these changes, and the evolving culture of financial news, have been nothing short of startling. In the first weeks of 1971, Irving R. Levine, returning from two decades of overseas reporting, had lunch with NBC's Washington bureau chief to figure out what he should do next. Levine wanted to cover the State Department, but only two backwater beats -- business and science -- were available. He chose business news, a subject deemed so specialized that no other network had bothered to assign a full-time correspondent.
The bow-tied Levine would offer pieces to NBC Nightly News when the monthly figures on unemployment or inflation were released, but the producers were rarely interested. "It's not a story," they would say.
In those days, when most American households considered the stock market foreign terrain, the business world was covered largely for insiders. The Wall Street Journal was a single-section newspaper. Business Week, Fortune, and Forbes were generally considered trade publications. There were no computers in the office, no cable television, no programs devoted to business. It was, Levine realized, a third-tier assignment.
Things began to change on August 15, 1971, when Richard Nixon stunned the nation by imposing wage and price controls. Now the Today show wanted a weekly spot from Levine. The Arab oil embargo of 1973 and the federal bailout of Chrysler in 1979 also boosted the visibility of business news. Louis Rukeyser launched his PBS program Wall Street Week, and the birth of CNN in 1980 produced the first nightly business report on national television, Lou Dobbs's Moneyline. Levine began getting invitations from business groups for paid speeches. He was summoned back from Denver, where he was giving a speech, when the stock market plunged by 22 percent in October 1987. Financial news was now indelibly part of the media mainstream.
By 1989, Levine was such a recognizable figure that the network begged him to become a contributor to its new cable business channel, CNBC. There was no money in CNBC's meager budget to pay him, but Levine reluctantly agreed to do a weekly commentary. Several years later, as CNBC became more glitzy, the straight-arrow Levine found himself abruptly disinvited. Soon afterward, he retired from television.
The business world of the twenty-first century moves with a lightning quickness that would have been unimaginable when Irving R. Levine entered the fray: online investing, global trading, an increasingly volatile stock market. And the media play a vastly more important role in pumping and publicizing the money machine. In the 1980s, an entrepreneur named Michael Bloomberg made a fortune by sending out streams of complex financial data and news reports through leased computer terminals that became mandatory on trading floors and in newsrooms. Online news operations like TheStreet.com and CBS Marketwatch.com, and investor chat rooms on such Websites as Yahoo! and Silicon Investor, exploded in the late 1990s. In fact, the money and media cultures have reached a grand convergence in which corporate executives boost their companies by trying to steer the nonstop coverage, while news outlets move stocks with an endless cascade of predictions, analysis, and inside dope.
Nearly everyone, it seemed, was paying attention. A decade ago, those chronicling the ups and downs of Wall Street spoke to a narrow audience comprised mainly of well-heeled investors and hyperactive traders. But a communications revolution soon transformed the landscape, giving real-time television coverage and up-to-the-second Internet reports immense power to move jittery markets. This mighty media apparatus had the ability to confer instant stardom on the correspondents, the once-obscure market gurus, and the new breed of telegenic chief executives. CNBC was now as important to the financial world as CNN was to politicians and diplomats, and like Ted Turner's network, it had the power to change events even while reporting on them. This was America's new national pastime, pursued by high-powered players and coaches whose pronouncements offered the tantalizing possibility that the average fan could share in the wealth. Like the fortune tellers of old, they gazed into the future where unimaginable riches awaited those who could divine the right secrets.
The fortune tellers began 1999 bursting with confidence. The bulls had been running strong for four years, the Dow improbably surging from 4,500 to over 9,000, and that doubling of investor wealth tended to obscure the mistakes of the media and market gurus. Everyone was making money and feeling good. Of course, any other business with such an erratic track record would have felt a bit humbled. The Dow's nearly 2,000-point decline the previous August and September had sent much of the media into growling bear mode. "The Crash of '98: Can the U.S. Economy Hold Up?" asked Fortune magazine. "Is the Boom Over?" wondered Time. Walter Russell Mead wrote in Esquire that if the world's economic ills reached the United States, "stock prices could easily fall by two-thirds -- that's 6000 points on the Dow -- and it could take stocks a decade or more to recover." In the same issue, writer Ken Kurson declared: "This market will crash hard and stay crashed."
Only it didn't. In an extraordinary turnaround, the Dow was back above 9,300 before Christmas. The warnings of a few weeks earlier quickly faded. Optimism was again all the rage. The commentators and the Wall Street analysts were back on the bandwagon. Yesterday's blown predictions were fish wrap. Back in the summer of 1997, Money had used big red letters on its cover to scream: "Sell Stocks Now!" The Dow was then at 7,700; anyone who had taken Money's advice would have missed another year and a half of a spectacular bull market. All that counted in this hyperventilating atmosphere was: What's the stock market gonna do tomorrow? And how can I get in on the action?
Everyone, it seemed, was playing the market, from the New York hairstylist who kept a twelve-hundred-dollar quote machine next to his barber's chair to the day traders at the computer-equipped Wall Street Pub in Delray Beach, Florida, to the retired bureaucrat buying on his home computer through E*Trade. Some folks were becoming millionaires, others losing their student loans and second mortgages. There were 37,129 investment clubs in the country, compared to 7,085 in 1990. More than $230 billion a year was being invested in stock mutual funds, compared to less than $13 billion in 1990. Nearly half of American households had some stake in the Wall Street boom, either through 401(k) plans or fund shares or hastily acquired stocks. Some eleven million people were trading online, a phenomenon that was less than three years old.
But more than mere money was at stake. The market was now an integral part of American pop culture. All the cable news channels now displayed little boxes at the bottom of the screen showing the latest score of the Dow and the S & P 500 and the Nasdaq Composite, whether the president was being impeached or bombs were falling on Baghdad or Belgrade. In New York, the 11:00 P.M. newscast on WCBS-TV provided updates on the Hang Seng, the Hong Kong stock market, right after the murders and fires and rapes. Mobile phones on airline seat-backs flashed liquid-crystal updates on the Dow and the Nasdaq. Vanity Fair featured stock guru Abby Joseph Cohen in a spread on hot commodities, along with the Lexus LX 50 and thong underwear. Sam Donaldson kept CNBC on in his office. Don Rickles and Lily Tomlin did TV ads for Fidelity Investments with superstar strategist Peter Lynch. Basketball coach Phil Jackson pitched the online brokerage T. D. Waterhouse, while Star Trek's William Shatner hawked the discount services of priceline.com. Barbra Streisand and the "Fonz," Henry Winkler, searched for promising Internet firms, and found that their celebrity helped them to obtain stock at an insider's price. Mike Doonesbury, the comic-strip character, launched an Internet IPO that soared and crashed. Time asked porn star Jenna Jameson for her stock tips. The New York Observer found a woman who listened to stock reports on her radio headset while making love to her husband. Howard Stern mused about buying a stock, touting it on the air, waiting for the price to surge, and flipping it for a quick profit. Wall Street was hotter than sex in the sixties, disco in the seventies, or real estate in the eighties. And that meant the market soothsayers were reaching a wider audience, a voracious audience, each day.
No matter that some of these prophets had been spectacularly wrong. Barton Biggs, a veteran sage at Morgan Stanley Dean Witter, had warned in the early days of the Clinton presidency, back in 1993: "We want to get our clients' money as far away from Bill and Hillary as we can. The president is negative for the market." The Dow had risen nearly 8,000 points since Biggs uttered those words. But he remained one of the most quoted strategists around.
Every so often, some trader whispered the truth. Ted Aronson, a Philadelphia broker who managed more than $2 billion, admitted to Money magazine that he invested his own family's money in Vanguard index funds because, with their automatic-pilot approach and rock-bottom costs, they almost always beat the managed funds. But few others publicly acknowledged that most mutual funds were laggards, and the media outlets peddling financial wisdom had little reason to encourage them.
The endless swirl of market advice was built upon the notion that a get-rich-quick scheme was always just around the corner. An exploding number of mutual funds -- from 2,599 in 1993 to 5,183 in 1998 -- beckoned from every stall in the media marketplace. The magazine covers of early 1999 fervently hawked such wares. "The Best Mutual Funds," said Business Week. "Best Buys," said Forbes. "The Best and Worst Mutual Funds," said SmartMoney. "Secrets of the Stock Stars," said New York magazine. "Hot Picks from America's Best Analysts," said Money.
But the advice proved ephemeral. Money magazine had run its annual cover story on a dozen hot stocks in 1992. A year later, only one of the previous year's dozen had made the list. And by '95, not one of Money's previous forty recommendations had made the cut. Each month, each week, the media needed something new to sell, and Wall Street operators were only too happy to comply.
The thriving casino in the narrow streets of lower Manhattan created a hunger for information and a growing belief that amateurs could gain access to sensitive data as quickly and as thoroughly as big-time institutional traders. The explosion of financial intelligence itself became a growth market for the media, and for professionals determined to influence the media. One result was the spectacular rise and huge cult following of CNBC, whose programming consisted mainly of middle-aged white guys in suits talking about market trends.
A network such as CNBC, or a magazine like Fortune, or a newspaper like The Wall Street Journal, needed a steady parade of experts, analysts, and wise men to fill air time or column inches and convey the appearance of authority. It needed a nonstop flow of tips, touts, picks, and pans to lure consumers with the idea that they just might get in on the Next Big Thing.
But the whole contraption resembled a house of cards, a sustained illusion that both sides had a vested interest in perpetuating. Much of the media hype surrounding the stock market was essentially an orgy of pontification and speculation that pretends it is possible to know the unknowable. A single Wall Street analyst, his voice amplified by the media megaphone, could send a stock soaring or sinking with opinions that might well turn out to be wrong. A columnist could goose a company's stock with takeover talk that often proved to be nothing but gossip. While vast sums were riding on the latest pronouncement from the fortune tellers, they often had blurry tarot cards and cloudy crystal balls.
Nearly nine out of ten fund managers failed to beat the Standard & Poor's 500 in 1998, the culmination of a five-year trend; 542 even managed to lose money. Yet they were still trotted out by the press as the purveyors of financial wisdom. A boring, buy-and-hold strategy generally yielded greater profits over the long run than trying to time an unpredictable market. But admitting that fact would hurt the industry's quest for new investors and the media's quest for new readers and viewers. So everyone played The Game.
Few paused to notice that those dishing out the advice often had a vested interest in the outcome. Outright corruption was rare; the most notorious case involved R. Foster Winans of The Wall Street Journal, who had been sentenced to prison in 1985 for selling advance information from the influential Heard on the Street column he helped write in exchange for his share of $30,000 in payoffs. Yet the web of incestuous relationships was in some ways just as troubling. Market gurus touted stocks in which their firms were heavily invested. Brokerage analysts were under internal pressure to be upbeat about corporations that might hire their houses for investment-banking services; a few had even been fired for their pessimism. Fortune, Forbes, Money, SmartMoney, Business Week, Barron's, CNBC, and CNNfn made media stars of brokers whose investment companies they courted for lucrative advertising.
"PETER LYNCH & friends uncover THE BEST STOCKS to buy NOW," blared the cover of Worth magazine; inside was a full-page ad for Lynch and Fidelity. This was hardly surprising, since Fidelity owned the magazine.
"Mexican Stocks May Finally Look Appealing," said the Journal's Heard on the Street column. Who said so? Eduardo Cepeda, managing director of J. P. Morgan in Mexico City, who declared that "it's time to buy at least a few top names in Mexico." And his firm would be happy to sell them.
In Business Week's Inside Wall Street column, Gene Marcial was bullish on Inktomi, a software provider whose stock had just dropped 20 points because Microsoft was phasing out its Internet search engine service. "Is it downhill from here?" Marcial wrote. "No way, say some pros." One of the "pros" was John Leo, head of Northern Technology Fund, which, the column noted, owned Inktomi stock and was buying more.
Seth Tobias, head of Circle-T Partners, used his slot as guest host of CNBC's popular morning show Squawk Box to talk up AT&T and MCI WorldCom as companies that were well positioned to benefit from the Internet boom. They are, he added, "our largest holdings."
Conflicts seemed to be lurking everywhere. When mutual fund manager Garrett Van Wagoner appeared on CNBC's Street Signs in January 1999, he touted an online company called OnHealth Network. Its stock, which had opened at 81Ž4, surged as high as 21 7Ž8 before closing at 18 1Ž2. Anchor Ron Insana had prodded Van Wagoner into admitting that his company owned more than 10 percent of the shares, but that didn't seem to matter to those bidding up the stock. Insana was furious when The Wall Street Journal discovered weeks later that OnHealth had sold Van Wagoner Capital Management a big chunk of stock in a so-called "private placement" for just $5.50 a share, a fraction of its market price. Van Wagoner, who now owned 16 percent of the company, insisted that there was nothing wrong with telling CNBC's viewers what he liked.
The financial media, with CNBC at the forefront, seemed to specialize in stoking the flames surrounding white-hot Internet stocks, which increasingly were driving the rest of the market even higher. After all, Net companies were sexy and fascinating to journalists, compared to, say, the Exxon-Mobil merger, which was important but dull. Even the ever-cautious Alan Greenspan, chairman of the Federal Reserve Board, said he understood that buying Net stocks was like playing the lottery. And millions of people wanted to know which tickets were most likely to hit the jackpot.
"Could Yahoo! merge with CBS? How about America Online with Disney?" asked the Journal's Heard on the Street column in February 1999. But the writers quickly acknowledged that "the chatter hasn't yielded much" and "it's all speculation at this point." Such speculation, of course, invariably moved the market. And the market for tech stocks was already so overheated that it was starting to resemble the Dutch tulip craze of the 1600s. Some investors even called themselves Tulipheads. The tulips, of course, wound up nearly worthless.
USA Today ran a remarkably upbeat cover story the same day on eBay, the Net auction site that was trafficking in everything from Beanie Babies to Elvis signatures, reporting that the company's "volcanic success looks unstoppable...nothing, it seems, can slow eBay." Recent "embarrassments" -- system crashes and a consumer fraud investigation -- were dismissed as minor. The fact that the stock had dropped more than 39 points the day before, to 239, was brushed off as "almost humdrum." The day the piece appeared, eBay's stock dropped another 18 points. But who cared? The dramatic swings simply made for better copy. Fifty key Web-related stocks had jumped 187 percent in 1998, and another 55 percent in the first days of 1999, before dropping by 20 percent.
This, then, was the dilemma facing the fortune tellers as the turn of the century approached. The old rules didn't seem to apply. The old valuations didn't seem to matter. Investors were tripling and quadrupling their wealth in weeks or months, despite the cautionary warnings of the more traditional experts, and the media were breathlessly trumpeting the bull market as one of history's great events. It was, in short, one heckuva roller coaster. But the ride down could be rather scary.
Copyright © 2000 by Howard Kurtz