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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Richard Nehrboss who wrote (63852)	7/2/1999 4:58:00 AM
From: Sid Turtlman	Read Replies (1) \| Respond to of 132070

Richard: "all the IPO's etc have not added net supply to the market (given mergers, buybacks, etc.... it was comforting given I'm too long this market.)" That is comforting at the supply and demand for stocks level, but is very disquieting when thought about differently: I've contended for some time that economists have misdefined the "wealth affect", thinking of it as the extent to which people, feeling rich because their stocks are up, go out and spend more money than otherwise. Yes, a lot of the recent strength in demand in the economy has come from this version of the wealth effect, involving extra spending by both the stock investor, who buys a new car, and the auto worker, who may not own any stock but is now getting lots of overtime. But there is another aspect of a booming stock market that is almost never mentioned, but has much more impact, and that is the money raised by IPOs and additional stock offerings by companies already public. In a hot market there are a lot of stock offerings; in a bad market there are hardly any. For example, in 1974, a bear market year if ever there was one, I don't think there were more than a dozen or so stock offerings all year. A stock offering does two things simultaneously: 1) It gives a company money to spend: that lets it hire engineers, buy computers, etc. That part is good for the economy. To give you an idea of its impact, offerings have been running at about 2% of GDP for about five years now. Since that money gets raised to be gets spent, you could say that the strong stock market has generated NEARLY ALL the growth in the economy. Put another way, had the DJIA been stuck at half the current level for the last five years due to negative investor psychology, we would have had a fraction of the stock offerings. As a result, unemployment, etc., would still look today a lot like it did in the early 1990's recession. That is the real wealth effect, not just happy investors buying new cars. 2) It increases capacity: when companies made things you could see this clearly in the form of newly financed factories going up, but capacity also rises when yet another e-commerce software company goes public. Since, in the end, profit margins are a function of supply and demand, a huge stock offering boom will, after a lag, destroy profits. This part is bad for the economy. It hasn't kicked in yet, but will. While IPOs and other offerings add to the economy's supply, acquisitions do NOT reduce capacity. The acquiree still exists, just under different ownership. In other words, we have been building huge overcapacity in the economy, but people don't see it both because it is not physical factories and because the process of creating the supply also has created extra demand. Let there be a bear market for whatever reason, and the tide of extra demand will disappear, creating a game of musical chairs in which too many companies exist to survive. You also said that if the market fell in half it would have a reasonable P/E based on 1999 estimated EPS. That may be, but if the market fell in half, a combination of the traditionally defined wealth effect working in reverse, and my definition in which companies can no longer go to the markets to cover their expansion or red ink, and must therefore slash prices and expenses, will cause earnings to fall much more than in half. The more the market goes down, the more P/E's based on expected earnings will go up.

To: Richard Nehrboss who wrote (63852)	7/2/1999 9:38:00 AM
From: Mike M2	Read Replies (2) \| Respond to of 132070

Richard, I use trailing earnings last I looked the PE on S&P 500 was about 34 ( help if someone has an exact #) . Projected earnings are balderdash ( thanks Jim rogers-g-) in this market I seem to recall forecasts of double -digit earnings growth in 1997 for 1998 -it didn't happen and it won't happen this year! Reported earnings were down 2-3% Wall St likes to look at operating earnings and forget about recurring non recurring writedowns and INTEREST EXPENSE . forget about interest expense gee how long would you stay in business if you don't pay your creditors-g-. I think there is little disagreement that the wealth effect of the stock market has a substantial impact on the economy WHEN not IF When the market declines it will adversely impact earnings. BTW my figures show S&P 500 reported profits of $ 37.71 for 1Q99 down from $ $ 39.72 in 1 Q98 . Wall streets $ 47 dream ain't gonna happen. more later HO HO HO Mike