Qwest now trades at 95 times year 2000 earnings estimates, but Wall Street can sleep soundly at night not fretting over potential preannouncements or earnings disappointments! Elsewhere, the Bloomberg Hollywood index has gained about 10% this year and now sports a P/E of almost 300.
Nothing, however, compares to Internet companies. The current Internet craze clearly epitomizes Wall Street's attraction to stocks of companies without products, earnings expectations or other fundamental issues that could lead to disappointment. Indeed, not only do investors not have to worry about products or earnings, here the bulls can simply dream like they have never dreamed of stocks before. This has truly been a speculator's paradise as the Interactive Week Internet index of 50 companies has gained 24% so far in 1999 and 165% in the past 52 weeks. This group now trades with a market capitalization of $575 billion, although is has no earnings over the past year. The Street.com Internet Index of 20 companies has a year-to-date gain of 40% despite, again, the lack of earnings. The market value placed on these companies is truly stunning: Yahoo! $35 billion, Amazon.com $21 billion, eBay $17 billion and America Online $90 billion. For comparison, the market values Boeing at $32 billion.
Interestingly, Yahoo!, with its online business isolated from collapsing prices for PCs and related hardware and components, has been the leading stock this year in the Morgan Stanley High Tech index. And this leads us to a critical question: Will technology companies continue as Wall Street darlings despite mounting evidence of a developing earnings crisis? For months now, the high tech industry has been a favorite, but now we see growing indications that many previous darlings, and potentially the entire industry, may be relegated to the status of unattractive stocks of companies struggling to make money selling real products in a global competitive dogfight. We suspect investors are now in the process of re-evaluating many companies, and perhaps much of the technology industry.
Importantly, for some time, we have watched, with no small amount of frustration, the outperformance of stocks from companies without products, with spurious or unsound businesses, with aggressive or dubious accounting, with less than forthright management, and with negative cash flows and/or poor earnings prospects. Indeed, in many cases, it is quite apparent that the bulls have gravitated to exactly these types of stocks; a way to play this liquidity and speculation-driven market isolated from the deteriorating pricing and earnings of many real businesses. Indeed, we see as clearly unsustainable the environment where the stocks of dubious businesses much outperform legitimate businesses. In fact, this is the key "under the surface" analysis that illuminates weak market underpinnings. And, importantly, this has gone on now for some time, and has progressively distorted the marketplace, leading to a most unfortunate misallocation of resources. We can not with conviction predict the near term direction of the market; we can, however, with great conviction, state unequivocally that the fundamental underpinnings of this market are very poor and deteriorating by the week. It is not "if" there will be huge consequences from years of egregious excess, but "when".
Next Friday is "triple witching" expiration, so we expect a particularly volatile week. All eyes on the technology sector; if this vulnerable sector breaks, the market may have a difficult time holding itself together. |
