Forget about earnings and expectations, Internet stocks and stock prices in general are driven by supply and demand. Everybody wants a piece of the Internet boom and there aren't just enough Internet stocks to go around. Unlike the auto industry and the emerging bio-technology industry, Internet companies do not require a whole lot of capital. As a result, the number of outstanding shares is small for Internet companies. As long as the supply and demand situation remains, Internet stocks are likely to be driven up and up. Of course, it will take the company ten, twenty years to fulfill our expectations, but the unbelievable PE of Internet stocks should remain high.
The other driver of Internet stock prices is actually the short seller. Consider this scenario. There is only 20 million free floats around; short seller are shorting 7 million shares, and daily turnover of this stock is 7 million shares. Some of shorts are bound to be called when ownership changes. The fund managers who own over half of the floats know this so they consistently squeeze the shorts and easily drive up the price.
As I learned from the Hong Kong market, even hopeless shares can be driven up by short squeezes, and this happened to all 33 Hang Seng index stocks. In August, the Hong Kong government bought from 4% to 13% of the issued shares. For some of the Hang Seng index stocks, only 50% to 25% of the issued shares are free floats. Combined with tough measures against short seller, the Hong Kong stock market rebounded 40% from the bottom. Although everyone knows that Hong Kong is in deep recession, this "fundamental" cannot stop the stock market from rising. The most fundamental model of price is driven by supply and demand. Earnings, expectations, dividends are all further abstractions from reality than supply and demand.
I also learned that short sellers tend to have the weaker hand. The maximum loss of an un-leveraged long position is only the amount invested and the maximum loss of an un-leveraged short position may be unlimited. Take Amazon.com for an example, the maximum loss of a long position from the beginning of this year is $25 and the maximum loss of a short position from the same start day may be $258. This is only the obvious part of the weaker hand story. If a speculator loses money on a long position, he can ignored the losses for many years. But a losing short position must be bought back someday. Furthermore, only shorts can be squeezed. When was the last time you hear a "long squeeze?" Short sellers are at a natural disadvantage because the stronger hand wins most of the time.
Although I have been a short seller in this market, I have just given up for a few months now. The big fall of the Internet stock will come someday as all bubbles will eventually burst. However, there can be only so many who can profit from that one eventual big fall of the Internet stock. If enough number of people are shorting this stock, it will keep going up. So good luck to you all! |
