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Pastimes : The Big Picture - Economics and Investing
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To: Sid Turtlman who wrote (1)4/11/1998 10:46:00 PM
From: FACTUAL  Read Replies (1) of 686
 
It is perhaps more appropriate now to look at market capitalizations with regard to world GNP as markets globalize. Today if you wanted to start a business anywhere in the world you have to buy computers ( with cheques being sent to Microsoft and Intel ) connect to the Internet ( cheque to Cisco ), give cell phones to your employees ( cheques to Motorola ) etc. US companies are in the nervous system of global commerce and have a lock due to technology or brand name. Accordingly there is no reason why the US GNP cannot grow even at 7 to 8% as it grabs the most profitable pieces of increasing global GNP. Furthermore, market capitalizations grow due to a sharply reduced after tax discounted rate as the security of the lock is very high ( imagine trying to dislodge Coca Cola or Microsoft)as well as higher revenues due to global industrialization. Profits seem to increase faster than sales as what is now being sold has increasingly higher gross margins as software ( including the advice industry) replaces hardware and the increasing returns economics of networking ( not neccesarily in the technical sense but as in being connected to a global society and thus a hit becomes a mega hit as everyone starts to do the same thing) standards. In this light the average P/E of enterprise software companies like SAP, BAAN, Peoplesoft etc even at a hundred could be a buy as long as you buy the concept of network externalities and path dependecies resulting in increasing returns. From an individual investors point of view, Microsoft at a PE of 60 then is a buy (particularly with the NT upgrade cycle ) and Adobe at a PE of 20 is a value play!Thanks for a stimulating discussion and apologies for spelling derived from a british education.
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