This Time Is Different, Except It's the Same: Caroline Baum
(Commentary. Caroline Baum is a columnist for Bloomberg News.
The opinions expressed are her own.)
New York, Dec. 4 (Bloomberg) -- The New Economy was supposed
to have a new set of rules. Interest rates didn't matter.
Technology spending was compulsory, not cyclical. The economy's
top line was to have no impact on corporate America's bottom line.
Alas, it turns out that the New Economy doesn't dance to a
different drummer after all. Instead, it rumbas and cha-chas to
the same beat as the Old Economy, only at a different speed and
intensity.
Where are all the New Economy prophets now? In the first
quarter of 2000, when the Nasdaq Composite Index was trading in
the rarified atmosphere above 5,000, the tech gurus said higher
interest rates would have no impact on start-up companies. Why?
With so much venture capital in hot pursuit, the idea of borrowing
money the old-fashioned way -- paying a rate of interest for it --
was strictly for wimps.
Internet CEOs paraded through the Bloomberg newsroom, waxing
poetic about their business plans, touting a new metric, ``ROV''
(return on vision). A sock puppet was going to make pet-food sales
on the Internet a lucrative proposition for Pets.com Inc., which
closed up shop last month and went into voluntary receivership.
Vision? Yes. Return on it? Hardly.
Theory of Relativity
``The grocery business is the lowest margin business
extant,'' says Bob Barbera, chief economist at Hoenig & Co. in Rye
Brook, New York. ``With dog food, if you double bag it you lose
money.''
Then there was Garden.com, which had the misfortune of being
on the right side of the tulip trade some 360 years too late.
Don't forget Priceline.com, a name-your-own-price ticket
seller, which at its peak had a market capitalization of $17.4
billion and is now valued at $374 million. ``A reseller of plane
tickets had a market cap three times that of American Airlines,''
Barbera says.
During the frenzied technology rally in the fourth quarter of
1999 and first quarter of this year, reason was tossed aside in
favor of hype. The stable of technology analysts pooh-poohed the
idea that higher interest rates mattered when by all rights they
should matter even more for a company with no earnings. That's
because the present value of any future earnings stream falls when
the interest rate rises -- especially when there is no stream and
no earnings to discount.
Stages of Grieving
Denial begat anger begat bargaining. Okay, so maybe higher
interest rates do matter when it comes to valuing a stock price,
but tech spending would be untouched by higher interest rates. So
important was productivity-enhancing information technology to a
company's bottom line, in fact, that businesses would keep
investing even when demand in the economy at large slowed.
According to this line of thinking, technology spending is as
inelastic as gasoline and food purchases in the short run.
History doesn't support the premise that whatever the
technology in vogue at the moment, it can rise above the vagaries
of the business cycle. Rather, every slowdown has seen the
technology-heavy Nasdaq slide and demand slow.
Only grudgingly did the grieving process move through denial
to anger and bargaining. The economy could and would slow, along
with sales, but companies would produce strong profits by cutting
costs.
One by one, industry leaders in the area of computers,
semiconductors, fiber optics, networking and telecommunications
equipment reported or warned of slower revenue and profit growth
in the second half of this year and into next year. Bargaining
gave way to depression.
Guru-itis
Last summer, influential Morgan Stanley Internet analyst Mary
Meeker conceded that most online companies were overvalued, but 13
of the 15 companies she follows are rated ``outperform.''
On April 28, Merrill Lynch's Internet wunderkind, Henry
Blodget, predicted the share price of online retailer Amazon.com
would rise 60 percent in 12 months. While there are still five
months left to go, Amazon has fallen 50 percent since then.
Clearly acceptance is still a ways away.
Unlike some Old Economy companies like autos, technology is
unique unto itself in that the relationship between the rise in
stock prices and the rise in technology spending goes beyond
correlation, Barbera says. There's causation.
``When auto stocks go down, it's a forecast of weaker sales,
but the stock price doesn't influence a potential customer's
purchase,'' he says. ``With tech, lower stock prices aren't merely
a forecast of slower spending but the cause of it.''
With access to capital through initial public offerings or
junk bond sales denied or the price too costly, technology
companies have less to spend on -- what else? -- technology.
``They eat their own,'' Barbera says.
--Caroline Baum in the New York newsroom (212) 893-3369, or at
cabaum@bloomberg.net /sd |
