Well I have been trying to mull over this whole "new era" thing for a long time despite admittedly not wanting to believe it. As a trader, I have had to try to view both sides and figure out a what if scenario in case what many of us perceive as a bubble somehow proves to really be a "new market" containing a "new paradigm".
As I have studied the ever increasing new lows and scan the charts noting how brick and mortar companies are the ones leading the decline while companies with no earnings, accelerating growth ( while increasing losses in many cases) steadily climb, I have put together a few thoughts that may explain the moves however as I see it, it still points to an ugly end albeit an end farther out than expected.
Old DOW type stocks have already had their IPOs way back when and mainly raise needed cash the old fashioned way borrowing it from Banks. As the inflationary pressures start hitting our economy, future needs for cash get more expensive since rates are climbing. All the things we talk about here really do affect these companies/stock prices thus they lose value. Utility companies who's stock is bought by those wanting to capture dividends lose their luster since fixed dividends in an increasingly inflationary environment among higher interest rates also lose their luster since we can get CD's, treasuries etc that pay comparable rates eventually as rates increase.
Meanwhile the high flyers such as internets, techs that are holding tons of their own stock etc have executed or at least enjoyed a ponzi scheme where the market is willing to bid up their shares to higher and higher prices. These gains are well above the growth rate of inflation, interest rate climbs etc. Now higher interest rates don't affect these companies at all since they are swimming in cash from recent IPOs or else can sell off shares of their own stock as it appreciates 100% a year. 10% inflation is nothing compared to 100% gains in stock price since you are netting 90% gains on returns of investment.
For this reason, the tech street darlings can put forth great numbers quarter after quarter despite their real business not earning anything using return on equity as the fuel. The payment of employees through stock options also works to hold costs down since buying leaps waaay out of the money is a low cost expense compared to paying 100s of thousands to each employee out of pocket now and having to pay COLA (cost of living adjustments ) each year. As long as stock prices appreciate, employment costs are kept low, benefits are seen as great by the masses and earnings flow appears OK.
Now when they run out of stock, a market wide correction takes down all stock prices in a panic or the scam is finally discarded for real companies with earnings, the whole plan will fall onto itself. As employees realize that their entire future is in paper profits that are not in their control and that market corrections really do happen throughout history for no apparent reason, they will want real cash driving up costs of doing business. Cash for continuing operations will have to be raised the same as other companies actually paying interest for the money instead of getting it free etc. By then, investors will realize that brick and mortar companies will own the web just as much as the new comers since most people shopping at a brick and mortar store know that name and can put a .com after it easier than remembering some weird name they heard on the radio.
I also wonder how long some of the "new" era companies will be able to milk out their cash. As the cash supply runs out, I think there could be flip flop across the market. This could be the definitive time for traders. As the new era companies who constantly lose money run out of free cash, the "old companies" who have quietly been actually operating in the black will need to borrow less than the "new" companies thus they will have less interest expense and could be able to survive on their earnings alone to continue operations. Meanwhile the "new" companies will be required to borrow to continue and thus will have suddenly high costs of operation. They are essentially slashing their own throats right now without realizing it. The AOLs, AMZNs etc of the world will by then be considered "old" new era companies and their floats from stock splits will become too high to have monthly doubles in price. Note I firmly believe that this is one of the things that killed DELL's stock. Low float allows rapid gains in stock price as demand for growth companies is larger than supply. Too many splits and supply finally meets demand. Note GTW now has appreciated much faster than DELL due to lower float despite GTW being "second tier" compared to DELL. Anyway, as new "new" companies enter the arena, traders will chase these lower float IPOs for gains and abandon the higher float "new" era companies since we have been trained to not care about earnings and only about momentum. Secondary offering won't be accepted by the street and will eventually start driving prices lower instead of higher on the larger float new era stocks. Bezos will have to stand in line at the bank to get a loan just like everyone else and his stock price will look like XRX as he has to pay interest on this new cash and try to operate in the black so he can pay it back in an over heating economy he helped cause.
Now some will say that these are the leaders so they will have killed competition by then. I doubt it. In about 15 minutes, I can put up a web site myself and start selling books or whatever widget I choose on the web. AS the future unfolds and more and more people get savvy on the net, they will know how to search for best prices and since no additional driving is required, loyalties to any retailer are none existent. I know I compare AMZN, Buy.com, Borders and Barnes and Noble before purchasing anything. If it is close, I go with Barnes and Noble just because I want to see them in business versus AMZN since at times, I actually like to go in, sit in a comfortable chair and read a book while drinking some coffee.. <g>
My main point is. That new era will eventually become old era. Name recognition is already in the hands of the old era so leadership is an ongoing battle with the old guys in control already and loyalty no longer meaningful. Lowest price will win out weither new or old. Cost of capital will increase as new era matures and their setting the stage for the new paradigm will only increase their competition in the future. Just like everyone in the world, they will have to learn to operate in the black and as they do, they will lose market share to the latest new comer who can operate in the red using gains from their recent IPO to absorb losses. Meanwhile the "new loser" will have to get a loan at 25% interest and watch his stock fall through the floor until his internet server is shut down and the doors are locked. Meanwhile the "new company" that knocked him out will repeat the process.
AS investors see this unfolding, they will start weighting their portfolios with more companies operating in the black while using trading funds to play the new comers.
Just a theory in it's infancy and I am still tweaking and trying to figure out the wrinkles.
Good Luck,
Lee |
