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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: yard_man who wrote (41281)	2/24/2000 11:17:00 PM
From: Les H	Read Replies (3) \| Respond to of 99985

Failures, not policy, seen as the bubble burster By Tony Boyd, Global Markets Editor afr.com.au When the US Federal Reserve Board chairman, Dr Alan Greenspan, denied this week that monetary policy was directly targeting asset prices, the tech-heavy Nasdaq Index posted its biggest one-day point gain in history. Although Dr Greenspan's comments were ambiguous, the Nasdaq reaction gave the impression that believers in the new economy had been worried about interest rates. But history shows that monetary policy has rarely been successful in pricking speculative bubbles, according to Mr Diego Espinosa, a portfolio manager of global equities for Scudder Kemper Investments. "When you raise interest rates, it does not necessarily affect or impact upon the speculative frenzy," he said. "The reason is that retail investors are momentum-driven investors and they are not buying these stocks on the basis of risk-adjusted rates of return valuation. "If you are Greenspan and you raise interest rates, you may have the unintended consequence of damaging `old-economy' stocks because they are sensitive to interest rates and in so damaging them you just create more fuel for the speculative fire in `new-economy' stocks." Mr Espinosa, who visited Australia from New York this week, said that what was likely to prick the speculative bubble was "the failure of a number of companies that are involved with the internet". "When I say failure I mean anything from heavily disappointing on the earnings front to going bankrupt," he said. "That's what shatters confidence, not 25 or 75 or even a 100-basis points increase in interest rates. "Internet companies have very high cash burn rates and they are engaged in activities which are marginal in terms of their longer-term success and they need more money in order to keep doing these things so they are going to come back and ask us for more money. "We have a spate of secondary equity issues that are coming in the next year or so from companies that went public over the past few years and I don't believe those issues are going to be well received." Mr Espinosa said many internet companies did not have very convincing business plans and there was no inherent reason why fund managers would stump up for secondary issues. "If some of these secondary issues are not successful in being placed, it's likely companies will be instantly bankrupt," he said. "If that happens to a few marginal companies, it could start to snowball to a few more reputable companies and that would have an impact, not only on the psychology surrounding internet stocks, but also on the psychology surrounding providers of internet infrastructure." Mr Espinosa likened the internet bubble to the speculative railroad frenzy of the 1800s in the US and Europe. "Speculative bubbles are good things because they redeploy capital very quickly from parts of the economy that don't have very high rates of return and aren't growing to parts of the economy that have very high rates of return and are growing," he said. "Without a speculative frenzy it would take much longer to achieve that redeployment of capital. "In the UK and the US in the 1800s, when the retail equity investors went overboard in their enthusiasm for railroad stocks, companies would petition parliament for a franchise and as soon as they had franchise launch an IPO. "At the end of the day, we are going to have a fantastic internet infrastructure. That is going to benefit consumers and workers by driving down the prices of the products that they purchase, but it's going to eventually hurt the people who hold the stock because a lot of these companies will never make any money." Although Scudder, which is part of the Zurich Financial Group, believes there is a speculative bubble in the internet, it has achieved better than benchmark returns in recent years by focusing on companies that have been beneficiaries of the internet boom. These stocks include consumer device makers such as Apple, Sony, Sharp and Matsushita as well as internet and technology service companies including IBM, EDS and Fujitsu. But Mr Espinosa said the greatest potential for the internet was from existing old economy corporations. "We really have not seen the full development of internet services being deployed and the reason why I say that is that where this is really going to come from is from existing companies," he said. "At the end of the day, the internet services offered by the existing companies will dwarf those offered by the new company IPOs."