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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Randy Ellingson who wrote (74865)	8/20/1999 5:31:00 PM
From: Eric Wells	Read Replies (2) \| Respond to of 164684

Randy - thanks for your message. We obviously disagree on some fundamental points. There are many characteristics of our current market that I believe indicate that we might be in a bubble - some of these include: 1. Many Stock prices are based on pure speculation. Past bubbles have been driven by investors that have overly optimistic predictions on the financial returns of new technologies. With our current market, we've thrown away traditional measures of company valuation - the feeling is that the potential return businesses can attain from the internet is so much more significant than non-internet models of business that the traditional valuation models no longer apply. I don't believe this. But you have to believe this if you accept the current market valuations of AMZN, EBAY and YHOO - and a lot of other internet stocks. I would be more inclined to believe in the "new models of valuation" if there was some evidence to support them - but there is none. If anything, one could argue that the internet provides a medium that allows for intense competition and very low customer switching costs - this presents a scenario where internet firms have to spend more money on marketing and advertising for a smaller profit margin. I ask you - what are your revenue and profit targets for Amazon? As an AMZN stockowner, when do you expect the company to be profitable - and how profitable do you expect the company to be? Are you not concerned about these issues? I believe there is little justification for the current prices of EBAY, AMZN and YHOO - and there's even less justification for other internet stocks (PCLN, UBID, CMGI, RNWK, NSOL, LCOS etc.). Investors keep looking to the future - they keep saying "these companies will generate enough profits in the future to justify their market valuations". But when does the future get here? I'd rather it get here today. 2. I believe that some significant portion of our economy is currently being driven by stock market returns (or assumed returns) - that people are spending more money because they have made more money on the stock market - and that people are borrowing more money to spend (rather than selling their stocks). And in the worst case, people are borrowing money to buy stocks. There is evidence to support this - we have a negative savings rate, and personal and corporate debt are at all time highs. This is very characteristic of a bubble economy. If one accepts that this is actually happening, then one has to accept the fact that it cannot go on forever - the circular nature of such a system cannot support itself indefinitely. There is a chance that the circular flow of capital will slow on its own - or from prompting from the Fed. But history shows that bubble economies tend to burst, rather than slow down. In short it's hard to temper investor greed and enthusiasm at the prospect of getting rich - usually the only way that such mass speculative behavior on the part of investors will change is through the intense pain of losing a lot of money. Prior to October 29, 1929, a good percentage of the US populace loved stocks - everyone wanted to get in - but after October 29, 1929, there was a true revulsion for stocks - people actually looked down upon the stock market - this was a direct result of the pain produced through immense financial loss. 3. Many people have become extremely wealthy over the past two years through investing in internet stocks - this is especially true for insiders at internet companies. I'm a firm believer in the notion that "there is no such thing as easy money." If you have a lot of people making a lot of money for doing little more than being in the right place at the right time, then something is wrong. Some would argue that people have become wealthy by taking the risk of buying stocks of new companies, and their subsequent wealth is their reward for that risk. There is truth to that argument. But when it comes to companies like Priceline, Xoom.com, Ubid, MP3 and numerous others - this argument falls apart - there's not much technologically innovative about some of these companies - yet their founders have become tremendously wealthy. I would ask you to go back and read accounts of the gold and silver rushes in California and Nevada during the 19th century (Roughing It by Mark Twain provides an interesting account of the Silver Rush), and you would read about an environment very similar to our current one - where you had hundreds of mines go public, their stock prices soar on speculation of major gold discoveries - but many of the mines turned out to be fraudulent, and most failed with no profit, their stock worthless. I do believe that our markets are becoming increasingly like casinos. Why? I see numerous people investing in stocks based solely on greed - they are motivated by seeing others who have made money on the stocks. There's no concern for fundamentals - many people who invest know little or nothing about the companies in which they are investing - its all about trying to guess whether the price will go up or down on a certain day. This is gambling - it's a toss of the dice. Do you disagree? I'm not going to go so far as to say that we are in a bubble (and if I have made this specific claim in some of my past posts, I apologize - but I don't believe I have). I will say, however, that we are currently looking at many factors in our economy and our markets that are indicative of a bubble. When a stock like EBAY nearly doubles in 10 days for no apparent reason other than "well, it's been down lately", I tend to see indications of a bubble. Thanks - and I welcome your comments. -Eric Wells