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Strategies & Market Trends : The New Economy and its Winners -- Ignore unavailable to you. Want to Upgrade?

To: Sonny Blue who wrote (8552)	9/1/2001 11:55:28 AM
From: Bill Harmond	Respond to of 57684

What Summers brought to the table were some salient explanations of the divergence between the market and the economy. Two of his conclusions were as follows: "The long-run economic impact of the ongoing technological revolutions in data processing and data communications will be very large indeed." "The crash of the Nasdaq tells us next to nothing about the dimensions of the economic transformation that we are undergoing. It does, however, tell us that the new economy is more likely to be a source of downward pressure on margins than of large durable quasi-rents." If you'll excuse the econo-speak, there is some food for thought in those excerpts. The first makes the case in favor of a new economy. Speaking directly to the productivity issue, Summers made a straight-forward case for accelerating growth. He noted that you can divide the economy into two segments - the IT sector with its faster productivity growth, and everything else (the old economy) with slower productivity growth. By definition, total productivity growth will be the weighted average of productivity growth in these two sectors, and since the weight of the IT sector will continue to increase, productivity growth will accelerate. A simple, yet elegant, case for the new economy. Also interesting was the discussion about the message of the Nasdaq crash. What Summers is saying in the excerpt above is that the crash in tech stock valuations is not telling us that the new economy is a myth, but that its implications for corporate profits were greatly exaggerated. Even during the bubble days, it was noted that one result of the Internet and IT was a shift to more transparent pricing. More transparent pricing means more competitive pricing; more competitive pricing means downward pressure on profit margins; downward pressure on margins means lower corporate profits and hence lower stock prices. And what of those "large durable quasi-rents"? What Summers is saying here is that many had assumed that first-mover advantage in many new economy sectors was expected to create a sustainable barrier to entry. As it turned out, the barriers to entry have been remarkably low. Exodus (EXDS) is a classic example of a company awarded a huge valuation because its first-mover advantage was expected to be a source of those large durable quasi-rents. Instead, Exodus' business was easily mimicked by many a competitor. For an example of a rare case of a new economy company that does indeed enjoy a sustainable barrier to entry, see eBay (EBAY). What's the takeaway from this somewhat academic discussion? It is that investors must focus not on the macro-picture when investing in stocks, but instead on the micro-story: does the company enjoy a sustainable barrier to entry? This question was either not asked or was answered incorrectly in far too many cases. www2.briefing.com