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

To: Stephen M. DeMoss who wrote (69404)	2/17/2001 3:02:05 PM
From: Sweet Ol	Read Replies (1) \| Respond to of 99985

The thing that has helped me get my mind around these market evaluation problems is to think about "what if I could buy the whole company and had to live off of its earnings". Keep that thought in mind when you are evaluating some of these companies with huge market caps relative to earnings or sales. For example, compare some "hot" company like JDSU with a company like Ford with a similar market cap (Approx. $50B). You have to compare the possibility that in the future the "hot" company with throw off as much cash as Ford (who is pretty predictable over a long time period). Using todays numbers, F earns $6B/yr and there is a pretty good likelihood that it will average that for 9 more years and pay out the $52B investment and continue to give you a tidy income for the rest of your life. JDSU is losing nearly $4B/yr. What is the probability that it will earn enough to pay out the $47B investment in the next 9 years? Or 20 years? Which one is most likely to take care of you in your old age? As more and more people begin to think like owners (e.g. Buffet) then you can see why some more of these great companies like the ones you mention are more likely to come down than to go up. Also, even Cisco had to face up to the law of diminishing returns. The bigger you are the harder it is to grow at a high percentage rate. It is one thing to grow a billion dollar company at 25-50% per year. But, how many trillion dollar markets are created each year to fuel a Cisco forever? This line of reasoning makes me think that eventually we are going to have major PE contractions in many companies. Now the question we all ask ourselves is, When will the market sentiment cause this to happen? When will the majority think that way versus just looking for continual price expansion? I don't know the answer to that question, but it seems to me that more people are starting to come to a similar conclusion. BWTHDIK Best to all, John

To: Stephen M. DeMoss who wrote (69404)	2/17/2001 6:53:40 PM
From: A.L. Reagan	Read Replies (6) \| Respond to of 99985

What's hard for me to fathom is the rate which quality stocks have given up their value. Take Glw. Why take GLW? What's easy to fathom is that we have huge overcapacity in the installed base of bandwidth, and dramatically falling prices that carriers can charge for bandwidth usage. The capital markets have realized that the "build it they will come" Says Law theorists didn't get it right. Further, the capital markets will not permit the carriers and SP's to act like lemmings over the cliff on the "they have no choice but to buy this stuff or their competitors will." You may recall that was last fall's stupid argument against the capex slowdown case. Part of the problem is last mile deployments, which have delayed bandwidth consumption from earlier forecasts on which long-haul networks were built. Another part of the problem is that the marginal propensity to consume incremental bandwidth isn't there yet in terms of earlier forecasts (e.g. "internet traffic will double every 100 days forever" - LOL). This is both in terms of the numbers of nodes on networks, and the bandwidth consumption per node. It may even get worse with the dot.com and zero.net washouts requiring end-users to, egads, pay up for the resources they consume. (It was probably easy a year ago to double consumption every 100 days of services that were effectively priced at nothing to end-users.) And, a third part of the problem is the idiots who threw money into CLEC's and that ilk and turned what would have been a manageable overcapacity issue into a glut. In the meantime, idiots like me saw the big party and threw money at the equipment suppliers to the first set of idiots. In the fiber world, it seems pretty clear the carriers need to generate traffic to fill the lit fiber, and then light the dark stuff b/4 the Cornings have another major field day. So the action switches from the "transcontinental railroad" to the short lines - i.e. the "edge". Fiber, as a transmission resource is relatively cheap. What isn't is the total cost of translating that from a cable spool to a functioning revenue-generating network. Just as the cost of steel rail is a relatively minor cost of building a railroad. So I am suggesting that the carriers will focus on deploying their existing long-haul fiber assets to generate cash flows b/4 they spend $$ they don't have to build more trans and intercontinental long-haul lines. On the consumer end, folks will end up, egads, having to pay for what they use. This will curtail demand at the margin, especially since it is clearly in the discretionary spending portion of household budgets. Having said that, I'd tend to agree with the (relatively) bullish pick on components and module suppliers like JDSU, whose widgets will be required to enhance carrier and SP's in-the-ground and undersea fiber assets, and I'd stay away from Corning, for a while. 2001 will be a year of consolidation for the carriers and SP's, and a year of rude awakenings for bandwidth consumers. Lastly, w/r/t the "V" blow-off bottom everybody from Fleck to his brother is looking for, this may be a chimera both because (a) everybody's been looking forward to it so much, it probably won't happen; (b) what we have seen the past 11 months has been a grinding unwinding of the leveraged bubble, which has been surprisingly orderly. To get those good panic sell-offs you need a state of surprise, coming off a big leveraged over-bought situation, followed by the realization that "hey, it ain't that bad." I'd agree with mr. beara that in this market, the ephemeral bottom will be in when a majority of players are exhausted and have given up all hope, and the gloom factor is dominant. That does not necessarily imply a panic sell-off as a condition precedent. Last rant is that the real bubble from which we are unwinding isn't the deflation in stock market valuations we are witnessing, but the related, and lesser, misallocation of actual capital (kind of a real money versus paper money distinction I am trying to make, the paper money element being close to a zero-sum game; the real money element being a misuse of society's resources). In rather typical fashion, the equity markets are leading indicators, and will turn around if and to the extent businesses correct the prior capital misallocations. The good news is that the corporate world has pretty much got the message; the bad news is that the capacity excesses are still out there. (It's capacity, both capital and labor, not inventory.) Back to lurking this very informative thread.