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Bubble market boosters { November 12 2002 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A41103-2002Nov11.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A41103-2002Nov11.html
On CNBC, Boosters for The Boom
By Howard Kurtz
Washington Post Staff Writer
Tuesday, November 12, 2002; Page A01
Third of six articles
FORT LEE, N.J.
Joe Kernen had barely slipped into his chair in the color-splashed CNBC studio here when he started needling the Wall Street fund manager across the set.
"What about AT&T Wireless?" he asked Vince Farrell Jr. of Victory Capital Management Inc., who was sitting in as co-host of the morning show "Squawk Box." "That was one of your top picks about six months ago." Since then, the stock had plunged from $14 a share to $5.
"A horrendous and a terrible pick," Farrell admitted. "But I do believe at this price it offers significant opportunity for the next couple of years."
The exchange captured what traders might call the upside and downside of CNBC, the business network where Kernen serves as stocks editor. Kernen and his partner, David Faber, are among the network's most skeptical voices, often deflating the airy assessments of Wall Street prognosticators with a vested interest in pumping up stocks. But the network continues to spotlight many of the same relentlessly optimistic traders and analysts who have been telling investors to buy, buy, buy stocks since the market imploded in the spring of 2000.
Back in the heady days of a stampeding bull market CNBC was a driving force, a cultural phenomenon, a ratings success, the play-by-play announcer for America's new pastime.
And Kernen, along with the likes of Maria Bartiromo, Mark Haines and Ron Insana, achieved a kind of cult-hero status. The "Kahuna," as he's been dubbed, was splashed on the cover of Golf magazine and named one of Playboy's best-dressed men. Barbra Streisand kept calling him for advice about her day-trading habit.
"Everyone was tripping over themselves to get into the New Economy," said Kernen, a 46-year-old former stockbroker whose blue shirt and maroon tie convey the working-stiff image of a man who never wears a jacket on camera. "We're just a reflection of that. What we were covering was what was going on in the rest of the world. In hindsight it looks like it was obvious that it wasn't going to last. But it wasn't."
All of which raises an intriguing question. Enron Corp.'s Kenneth L. Lay touted his company on CNBC, as did WorldCom Inc.'s Bernard J. Ebbers and Tyco International Ltd.'s L. Dennis Kozlowski and domestic diva Martha Stewart. CNBC played host to a steady parade of Wall Street analysts, including Merrill Lynch & Co.'s Henry Blodget, who was pushing Internet stocks -- some of them now worthless -- while he and his colleagues privately dismissed them in e-mails as "crap" and "junk." CNBC reported every time that Salomon Smith Barney Inc.'s Jack Grubman boosted his rating on WorldCom, a major client of his brokerage firm, where he secretly attended board meetings.
If many chief executives and analysts are now discredited, is the network tarnished as well?
"CNBC was the captive of those people in the industry who were on all the time," said Yale professor Robert J. Shiller, author of "Irrational Exuberance." "The kind of people they brought on tended to be cheerleaders."
But if CNBC helped turn the Blodgets of the world into minor celebrities, it had plenty of company. Newspapers, magazines, Web sites and other networks such as CNNfn and Bloomberg all hitched a ride on the dot-com express, quoting and interviewing the same financial superstars and all too rarely examining their inherent conflicts of interest. They were filled with glowing profiles of overnight billionaires and tales of small, profitless companies whose stock was jumping by 100 percent, 300 percent, 700 percent.
Those who didn't get in the game were seen as fools. "Everyone's Getting Rich But Me," a Newsweek cover blared in 1999. New magazines with names like eCompany Now began drilling for some of the newly minted gold.
And then the bubble burst. And the media started pointing fingers at everyone else -- with perfect hindsight, naturally, and little examination of their own role.
While Kernen was often one of the dissenters, he admits that at times he was swept along by the relentless tide of higher stock prices. When he criticized companies such as AOL Time Warner Inc. as absurdly overvalued, the backlash was immediate.
"We'd get so much mail from what we called the AOLians," he said. "They would work themselves into a frenzy, like the guys outside Frankenstein's castle. They were out there, they wanted blood. The idea that CNBC was inflating the bubble, on this show we were nailed for just the opposite.
"When you're in a bull market where everyone is making money, it's human nature, people think they're geniuses. In a bear market, people don't really feel like it's their fault. They're looking for someone else to blame."
Making Wall Street Accessible
As a stockbroker, Kernen worked for Merrill Lynch and Lehman Brothers in Boston and E.F. Hutton in Los Angeles. He'd make 100 calls a day to lure five or six strangers as possible new clients. Kernen can still deliver the rapid-fire pitch:
"Mrs. Jones, our institutional research department identifies a superior investment two or three times a year. If I were to get such an investment opportunity and present it to you, what would you feel comfortable with? $10,000? $20,000? And on the second call you'd close. It was so stressful. I couldn't do it anymore."
Fortunately for Kernen, television was about to get into the stock market business.
In 1989, when NBC launched a cable spinoff called the Consumer News and Business Channel, regular financial news on television basically consisted of CNN's "Moneyline" and PBS's "Wall Street Week With Louis Rukeyser." Most Americans viewed Wall Street as the playground of the wealthy.
"We thought there was a niche in business and consumer-friendly information for people managing money at home and people in business," said NBC Chairman Robert C. Wright. "I had to convince Jack Welch this was a good idea," he said, referring to the former head of parent company General Electric. "There was a lot of skepticism. Quite frankly, at NBC they thought it was the worst idea in the world."
Critics were unimpressed, especially when the first day included a segment on how to cook stir-fried chicken in a microwave oven. CNBC reached just 13 million homes and wasn't even carried in Manhattan. USA Today declared it "a pale imitation of CNN" with a "drier-than-dry style."
"In broadcast, if you don't get it right off the bat, you're cooked," Wright said. But it's easier to improve, he said, "if nobody's watching."
Kernen, meanwhile, signed on with the Financial News Network as a freelance writer for $125 a day. When CNBC bought the bankrupt cable channel the next year, Kernen was among the few staffers brought here to New Jersey.
While he had made as much as $170,000 a year as a stockbroker, Kernen was earning about $36,000 -- and enjoying life in a television studio. "I was so glad someone would pay me just to follow stocks without having to sell anything on the phone," he said.
Kernen begged producers to give him one minute of daily airtime to deliver the kind of stock advice he was writing for the anchors. The initial reviews were terrible -- "If the teleprompter went down, I would freeze" -- but few noticed.
"It was pretty Mickey Mouse back then," Kernen said. "We didn't have much of a grasp on what we were doing."
As CNBC grew in influence, Kernen grew more comfortable in front of the camera, and within a couple of years a worker carving the roast beef at a Broadway hotel was excited to meet him. The country was undergoing a quiet financial revolution. More people were getting into the stock market, through either their 401(k) retirement plans or an exploding array of mutual funds.
"Every day, there were thousands of people who had just signed up to manage their own future," Wright said. CNBC wanted to be their network.
For the first time in history, cable networks and Web sites were giving small investors access to the kind of real-time information -- analyst reports, quarterly earnings, executive pitches, Street chatter -- that had only been available to Wall Street brokers. As the bull market took off, fueled by technology stocks such as Microsoft and Intel, the media began celebrating the notion that this was a game anyone could play -- and win.
By the late '90s, as CNBC took an irreverent, sportslike approach to covering business. "Squawk Box" was cast as the pre-game show before the market opened, and Kernen's mixture of geeky stock analysis and goofy stunts was a hit.
He and Faber, nicknamed "The Brain," teased each other about their hair, clothes, favorite foods and TV shows. Kernen would play with lava lamps at his desk or brandish a sword. When four or more analysts downgraded a stock that had already plummeted, the duo would show videotape of penguins, waddling along in unison.
Faber often spoke with Grubman, who hugged him at parties, but he repeatedly criticized the analyst for his dual roles as supposedly objective researcher and reliable rainmaker for Salomon Smith Barney. He handed out "Lame-O Awards" to Grubman, Blodget and other analysts for downgrading stocks they had long championed after the shares had skidded to a dollar or two.
"There was a disconnect between what Wall Street knew and what people out there didn't seem to understand, the conflicts I was pointing out year after year," Faber said. "Nobody cared."
Stocks, in fact, were becoming a national obsession. People were watching CNBC's blue-and-white ticker in bars, restaurants and health clubs, drawn by the slogan -- "Profit From It" -- and a sense of being inside the casino.
Things got so wild that when Kernen did a satellite interview with Mark Breier, chief executive of the software firm Beyond.com, Breier showed up wearing only boxer shorts. (The company filed for bankruptcy this year.) CNBC briefly overtook CNN in the ratings, fueled by a small army of investing amateurs who, with the advent of cheap online trading, could buy and sell with the speed of Wall Street pros. Thousands of people would gather at terminals in small brokerages, some having quit their full-time jobs, and trade stocks dozens of times a day, often using borrowed money, with CNBC as their electronic lifeline. As many as 5 million people were estimated to be trading daily.
Money managers, meanwhile, would bet on the analyst recommendations unearthed each morning by Bartiromo -- known in tabloid headlines as the "Money Honey" -- from her glass-enclosed booth above the New York Stock Exchange.
In August 1999, Bartiromo reported that Merrill Lynch's Blodget was urging people to "buy the 1999 holiday basket of Internets," including America Online Inc., BarnesandNoble.com and eToys (which would later go bankrupt). Eight months earlier, when Blodget was an obscure analyst at CIBC Oppenheimer, the network and other news outlets had trumpeted his bold prediction that Amazon, then selling for $243 a share, would reach $400. When Amazon skyrocketed 128 percent and smashed through the $400 target within a month, Blodget jumped to Merrill Lynch, succeeding an analyst who believed Amazon was worth $50 a share. (Shares now sell for $19.) Even as the latest Blodget call boosted Web stocks again, Kernen was skeptical. Blodget had gotten his Merrill Lynch job, he said, "because they want somebody at the firm positive on Internet stocks."
Soon everyone wanted to be the next Blodget. In the last week of 1999, a 28-year-old PaineWebber analyst named Walter Piecyk predicted that the wireless technology firm Qualcomm Inc., whose stock had begun the year at $26 and was then selling at $503, would hit $1,000 within 12 months. The "Squawk Box" team ridiculed the call, complete with sound effects, as Faber declared that "analysts don't know much of anything." But the buzz they generated helped boost Qualcomm to $575 in pre-market trading that morning, and Piecyk was immediately interviewed by CNBC, CNNfn and the Wall Street Journal.
"We were trying to make fun of this ridiculous period we were in," Faber said. "We sat there in the morning scratching our heads, trying to explain why it was so absurd. It was the bubble. And it was amazing."
Kernen was always careful not to recommend stocks himself, lest they drop and make the network look bad. "I had been a stockbroker," he says. "Now I just play one on TV."
But in this supercharged atmosphere, the mere mention of a stock could produce what became known as the "Squawk bounce." An optical component maker named OSI Systems jumped from $14.50 to $28 a share within an hour after Kernen talked about it, then fell to $18 as traders took their profits, as Business Week later noted.
"You honestly think CNBC spawned the day traders?" Kernen asked. "Maybe we provided a couple of hypos for these people to mainline the drugs, but we certainly didn't invent the drugs."
What CNBC did, along with the rest of the business press, was buy into an interlocking system -- now widely viewed as flawed and in some cases corrupt -- in which all the key players had an incentive to push stocks. The network would trumpet the bullish forecasts of Goldman Sachs Group's Abby Joseph Cohen and Prudential Securities's Ralph J. Acampora (who predicted that the Dow would reach 13,500 to 14,000 by the end of 2000). CNBC relied on these and other Wall Street analysts, though less than 1 percent of their recommendations were to sell stocks, along with fund managers, chief executives and others who took a sky's-the-limit approach. Most of the bears were in hibernation.
"The coverage we had during the Internet market was appropriate for where we were in the market," said Pamela Thomas-Graham, the network's chief executive. "CNBC really did democratize information about stocks. I think we get unfairly characterized as having cheerleaded the market."
The cheering stopped at CNBC when the market began its long decline in 2000. A ratings slide turned into a bear market after Sept. 11, 2001. Audience numbers soared at CNN, MSNBC and Fox News Channel, which were blanketing the war on terrorism.
"It was hard to concentrate for weeks following September 11 and do business as usual," Kernen said. "How important were individual stocks? Not very."
By the first half of 2002, CNBC's ratings had dropped 25 percent from the previous year. The excitement of watching stocks soar during the great bubble period was replaced by the pain of watching them sink. Kernen and friends had to tone down some of the hijinks.
"Our coverage is quite sensitive to the emotional ramifications of people having lost real money," says Thomas-Graham, who has convened focus groups to study the matter.
Kernen, who married a CNBC producer and has two young children, jokes about being "suicidal because no one recognizes me anymore."
"The idea that we would be the most-watched cable news channel, that's not normal," Kernen said. "We were beating CNN. It's weird for business news to be in a position where global events and political events are on the back burner. It shows you how far things were out of whack."
Rethinking Greed
As some of the CEO heroes of the '90s have turned into high-profile villains, Kernen finds himself having second thoughts about the big names who hawked their wares on his show. To him, they are not distant figures but business leaders he has come to know and respect over the years.
In December, Kernen talked on the phone with Samuel Waksal during the week that he is alleged to have misled investors about the stock in his company, ImClone Systems Inc. Kernen has known the flamboyant Waksal for a decade and once went to one of his famous parties. "I watched ImClone go to 70 and couldn't believe it," he said. "Every article was so glowing."
Kernen, who has a master's degree in molecular biology from MIT and had closely followed the development of ImClone's cancer drug, Erbitux, called to ask Waksal, then the company's chief executive, why the stock was nose-diving. What the public didn't know was that the Food and Drug Administration had rejected Erbitux -- and that two of Waksal's relatives, along with his friend Martha Stewart, were dumping their shares.
"He was very careful in his wording," Kernen recalled. "He got really worried about what he was saying. He knew at that point."
While Kernen didn't crack the case, he smelled something funny. "Every scandal we've had, the stock started going down before you knew why," he said.
Kernen feels sorry for Waksal, who has since pleaded guilty to fraud and obstruction of justice. He admired such CEOs as WorldCom's Ebbers, "a self-made guy I thought was pretty cool"; Tyco's Kozlowski, once touted as the next Jack Welch, who has been indicted twice; and Albert J. Dunlap, who ran now-bankrupt Sunbeam Corp. and has paid a $500,000 fine to the Securities and Exchange Commission.
Did Kernen naively put his faith in wealthy men who turned out to be crooks? He admits as much.
"Now we realize some of the emperors didn't have any clothes, or were stealing the clothes off their employees," he said. The recent revelations have shaken his faith in the free market.
"I don't think greed is good anymore," Kernen said.
The media, of course, celebrated many of these chief executives as wizards and mavericks when they were riding high and their stocks were shattering records. But Kernen is among the relative handful of journalists who got to question the highfliers before a mass audience.
In February, when Kozlowski appeared on "Squawk Box" after the Enron meltdown, Kernen told him he had been "quite eloquent" in describing "a loss of trust in corporate America."
But Kernen also asked about a $20 million payment the company had made to a top company official, half of it to a charity the official controlled. Kozlowski said "this will never happen again at Tyco." At the time, no one knew Kozlowski would be charged with using company money to buy expensive homes and lavish art and with selling stock at inflated prices.
"I guess he just felt entitled to all that stuff," Kernen said.
Networks Switch Gears
Still, the corporate scandals have reenergized CNBC since June 25, when Faber broke the story that WorldCom would be forced to restate $3.8 billion in earnings, and ratings have since rebounded by about 15 percent. Suddenly a CNBC reporter was ambushing Grubman on the street, shouting accusatory questions about his support for the now-bankrupt WorldCom. The network that had given analysts like Grubman such credibility was turning on them with a vengeance.
This, says Thomas-Graham, is the new CNBC. "You'll see us covering the markets in a way that's more probing, thoughtful and skeptical," she said. "The questioning is more edgy. There's no pitching of softballs here."
But Kernen believes the media pendulum has swung too far. "The vast majority of analysts are trying to do a good job," he said. "They know more about the companies they follow than anyone else. I don't think we ever should have listened to them as market timers."
He is uncomfortable as well with the prosecutorial nature of the recent business coverage. "Are we at this point overdoing the whole corporate malfeasance story when it's 10 companies out of 5,000? Absolutely."
CNBC staffers now speak disdainfully of the "fringe" audience -- that is, ordinary people saving for college and retirement -- who pumped up ratings during the height of the bull market. They are catering to their "core" audience -- wealthy executives and traders whose average household net worth is $1.1 million, turning CNBC into an advertising gold mine, even during the recent economic slowdown.
But how much has really changed? The network still reports the daily upgrades and downgrades, interviews the analysts and CEOs, vacuums up the tips, blips and rumors that seem to move the market.
Kernen sees little alternative. The market, he says, moves on a minute-by-minute basis, and the people who watch him are all capable of making grown-up decisions.
"No one's dying on the operating table here," Kernen said. "We don't need to be pallbearers here."
© 2002 The Washington Post Company
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