Hi Rocketman:BARRON'S AAbelson, 9/27/99:Steve Ballmer:
Take care;
(maybe one day we'll be back in AOL,GG )
TA
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SEPTEMBER 27, 1999
Say It Again, Steve
By Alan Abelson
Is Bill Gates short?
Only compared with Patrick Ewing.
No sooner did Microsoft's president, Steve Ballmer, offer the quite
reasonable assessment last Thursday that technology stocks, including his own
company's stock, were absurdly overvalued than the Street was aswirl with
speculation as to his real motive.
Was Bill Gates eager to send a message to the judge presiding over the
antitrust suit by staging a little preview of the chaos that could follow an
adverse ruling?
Was he cutting a deal with Uncle Sam: He'll do Alan Greenspan's dirty work
of popping a bubble Mr. Greenspan insists may not exist but threatens the end
of Western civilization in return for granting clemency to Microsoft for a sin it
insists it wouldn't ever dream of committing?
Was he nefariously striving to drive down the prices of tech stocks so he
could put that huge pile of cash in the company's coffers to use making
acquisitions on the cheap?
Was he trying to cripple the competition by whacking its equity?
Was the Microsoft brass hot to exercise options at sharply lower prices?
The one possibility that was never voiced, at least within our earshot, is that
Mr. Ballmer was simply speaking his mind, and he knows whereof he speaks.
And who can blame Wall Street for seeking out the devious over the obvious,
even if the obvious is true. For in this case, the truth can make you poor.
Mr. Ballmer's candid comments, which sowed destruction far and wide in the
tech sector, lopped a cool $490 billion off Microsoft's market value.
What prompted those comments, Mr. Ballmer owned up, was his
perturbation by the "gold rush" mentality that had lifted tech stocks to
valuations beyond rhyme or reason.
"It's a bad thing for the long-term health of the economy," he exclaimed.
"Anything that's false" -- as these valuations manifestly are -- "is bad."
Mr. Ballmer
addressed his
remarks to a
gathering of
business editors
and writers,
which was quite
brave of him,
since the odds of
being misquoted
by such a group
are extraordinarily
high. He paid
tribute to his audience by noting that the news media bore no little
responsibility for the tech-stock mania by portraying Silicon Valley et al. as a
"gold rush."
He described the typical treatment by the eyes-wide-shut scribblers as: "Isn't
it great to live in California in 1849, I mean 1999."
Diogenes, old boy, wherever you are, put up your feet and put down your
lantern: Your long and arduous search is over. There is an honest man and
he's alive and well in Seattle.
Given those inflated valuations that distress Mr. Ballmer and the fact that the
tech group these days accounts for roughly a quarter of the total market cap
of the S&P, it's a bit odd that the question is rarely posed, much less
answered, of just how big a part technology is of the real economy. Well,
we're happy to report, Ed McKelvey of Goldman Sachs has nobly risen to
the challenge.
In a recent commentary, appropriately entitled "Technology and the
Economy," Mr. McKelvey reckons that technology accounts for 5% of GDP.
He does so in an admirably non-tendentious way, cheerfully acknowledging
the many and formidable difficulties, not the least of which is trying to define
just what technology is. We find his low-key, undogmatic approach engaging
and, more to the point, the results of his effort to pin down the elusive estimate
persuasive.
We were a bit surprised that the percentage was so small. What we see as
"small," however, Mr. McKelvey considers quite substantial. He points out
that 5% compares with the 3.6% of GDP that Detroit kicks in and housing's
4.5%.
Further, he calculates that technology has contributed about 8% of the growth
posted by the overall economy since the start of this decade, a contribution,
moreover, that currently may be running as high as 11%. The chart, lifted from
Mr. McKelvey's musings, depicts the gradual but steady rise of the
importance of technology to gross domestic product.
Moreover, Mr. McKelvey thinks tech stocks deserve to sell above the
market multiple because of "the universal expectation that this sector will grow
faster than the economy for many years to come."
Mr. McKelvey is quite patently no Luddite revisionist. But he's also very
much aware of the perfervid exaggerations to which the techniks are so prey
and warns investors to take with a sizable grain of salt the "grandiose claims
about technology's contributions to growth in real GDP."
As we say, such relative concepts as "big" and "small" are in the eye of the
beholder, and our perception of technology's size is in sharp contrast with Mr.
McKelvey's more expert view. Our only other quibble with his excellent piece
is the seeming weight he gives to "universal expectation." In our book,
anything universally expected is automatically suspect.
Nor would we quarrel with the notion that the tech stocks merit a premium.
Our reservation here is that (a) technology, like everything else in life, is
cyclical; and (b) there's something goofy about the price of a stock
discounting as much as a century of current earnings for a company in a field
where change is the only constant and where the pace of change is constantly
quickening.
Up and Down Wall Street, Part 2
We're grateful to Gold man Sachs for putting the economic significance of
technology in proper perspective and, while doing so, casually destroying the
myth that technology now occupies a dominant, rather than merely an
important, role in the economy.
We're also grateful to another estimable securities firm, Bernstein, for the
above graphic. For what that chart shows is the relative performance of the
technology sector versus Bernstein's "large-capitalization universe" of 650
big-cap companies, including the S&P 500, a universe that serves as a
first-rate proxy for the market as whole.
As even a cursory glance at Bernstein's handiwork reveals, over the past two
decades, the techs have had stretches in which they have lagged, sometimes
badly, the market generally. They've also had stretches when they've
outdistanced, sometimes handsomely, the rest of the market.
As the chart also makes evident, in the most recent period, the techs have left
the rest of the market in the dust. And since so many members of the current
sporting crowd were born yesterday, they have naturally inferred from the
action of the past few years that come rain or come shine, in good markets
and bad, tech stocks are the place to be.
That, the chart says loud and clear, ain't necessarily so.
Steve Ballmer's remonstrance with the media for its feckless feeding of the
"gold rush" frenzy that has swept over the investment scene is right on the
money. Tout TV and the infernally bullish babble that passes for reporting
and analysis on the Internet are obvious cases in point.
But print is equally at fault in inflaming
"gold rush" fever. We were reminded
of that unhappy truth by colleague
Lauren Rublin, who pointed out the
epidemic of covers celebrating the rich,
virtually all of whom reached that
blessed state through the grace of their
investment acumen or the accuracy of
their darts.
Lauren notes, for example, that
Fortune's current cover is a lush paean
to the Young & Rich -- the 40 wealthiest Americans under the age of 40
(soon to be followed, we've no doubt, by covers hailing the 30 wealthiest
Americans under the age of 30, the 20 wealthiest Americans under the age of
20 and so on; the ultimate cover in the sequence will feature the one
wealthiest American under the age of 1).
Forbes weighs in with its cover promoting the Forbes 400 -- the 400 richest
Americans, the granddaddy of all the rich lists but one that somehow never
seems to be able to include anyone, no matter how qualified, named Forbes.
Not to be outdone, Business Week served up a cover featuring "the e.biz
25" -- a collection of e-zillionaires.
Our own beloved Barron's just last week joined the guilty chorus with a
cover that asked, "Are you rich yet?" (A poll by Lauren of the staff discloses
the shocking fact that not one answered that question in the affirmative;
several were still hopeful, though.)
Lauren also reports that the "gold rush" syndrome has spread beyond the
confines of the financial press to so-called general-interest publications like
Time. Indeed, Time discovered there's a fabulous lode of rich people in
Silicon Valley, and the magazine promptly marshaled its vast resources to
chronicle that sensational scoop, emblazing its cover with the legend "Get
Rich.Com."
And even the Atlantic Monthly, whose pages are usually given over to
subjects of cultural and literary import, had a cover featuring, of all things, the
Dow Jones Industrial Average and, more particularly, the likely prospect of
its ascension to 36,000. The accompanying piece was an excerpt from the
now-infamous tract by a couple of cockeyed optimists explaining (or
something) why the Dow is destined to reach that elevated level.
All of this is very ominous, both for rich people and the market. On that
score, we're firmly convinced that what really made Mr. Ballmer drop the
bomb was the cumulative pressure of those magazine covers.
Last week, in a discussion of IQ levels, we confused two Connecticut
cities, New London and New Haven. The gist of the reference was the
refusal of the police force to hire candidates with high IQs. That practice is
employed by New London, not, as we suggested, New Haven. And it is
New London, not New Haven, whose police force has no intelligence unit
and which uses dum-dum bullets.
Our sincere apologies to New Haven, and our profound condolences to
New London. We also must remember next time we're in New Haven to
take great care not to jaywalk, litter or otherwise commit a capital crime. |
