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Strategies & Market Trends : Roger's 1998 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Bill Wexler who wrote (4323)	3/6/1998 10:12:00 PM
From: Tom Hua	Respond to of 18691

except CPQ and INTC, which will close lower of course. Yahoo will close at 125 after announcing a new strategic alliance with cybersocks - the online sock merchant. Bill, apparently DJ News Service picked up your predictions for the following story. Regards, Tom Internet Stks Still Climbing As Investors Shift Tech Hldgs AP-Dow Jones News Service NEW YORK -- Internet stocks were still on fire Friday, as high-tech investors continued to reshuffle their holdings, moving their money into Web-related companies from computer-hardware stocks. 'Despite Intel Corp.'s (INTC) disappointment, investors are still looking for ways to play in the highest growth industries,' said analyst Paul Noglows of Hambrecht & Quist Inc. 'Money isn't leaving the tech sector, it's just shifting (into Internet stocks).' The appeal of such shares lies in the growth opportunities associated with advertising and commerce on the Web, he added. Analysts agreed Thursday - the day after semiconductor industry giant Intel warned that its first-quarter earnings will fall short of expectations because of weakening near-term PC demand - that shareholders may be looking to invest in a technology sector other than hardware. Yahoo! Inc. (YHOO) traded as high as 81 3/4, eclipsing its previous 52-week high of 75 5/8 set Thursday. The stock closed up 5 1/4, or 7%, at 80 9/16, with 3.3 million Nasdaq shares changing hands, compared with average daily turnover of 1.4 million. Other Internet search engine companies continued to chug upward. Lycos Inc. (LCOS) edged up 1 1/4, or 3%, to 43 3/8; Excite Inc. (XCIT) rose 2, or 4.3%, to 48 7/16; and Infoseek Corp. (SEEK) gained 27/32, or 4.8%, at 18 3/8. Online book retailer, Amazon.Com Inc. (AMZN), saw an increase of 1 3/4, or 2.3%, to 76 3/4; SportsLine USA Inc. (SPLN) surged 3 13/32, or 12.5%, to 30 11/16; and Onsale Inc. (ONSL) rose 13/16, or 2.9%, to 28 11/16. America Online Inc. (AOL) climbed 5 3/8, or 4.6%, to 121 1/2, and At Home Corp. (ATHM) soared 5 3/4, or 19% higher, to 36.

To: Bill Wexler who wrote (4323)	3/6/1998 10:46:00 PM
From: Pancho Villa	Read Replies (2) \| Respond to of 18691

>Analysts are now starting to get concerned about the earnings slowdown and the high, speculative multiple< On a serious note: have I become like those guys that have been bearish since 1980? IMO 98 earnings and 99 on earnings growth prospects will be revised downwards significantly within the next 6 months. This should generate a significant correction. Unless leople start looking at 2000 and beyond! Arew you familiar with any of the academic explanations for the 87 crash? The argument goes as follows. Share prices are supposed to reflect the present value of future earnings [free cash flows to be more accurate] for a company with free cash flows F per share for the current year growing at a compounded annual rate g the current price per share P given the risk adjusted return on equity demanded by investors is r we have that: P = F/(r-g) historically r has been at a roughly 8% premium over the three month T bill. This premium changes with time as investors attitudes towards risk change. at this point in time the premium is probably less than 8% as people seem so willing to buy stocks, the r=5% + 8%=13% now if we divide both sides of the equation above by F we get. P/F=1/(r-g) if we consider F to be earnings per share instead of cash flow we can consider P/F to be a PE ratio (not a crazy thing to do some people substitude D for dividends in it). We can then apply this expression for the PE multiple to for example the S&P 500. I believe the current forecast for S&P earnings growth is around 8% so with r=13 and g=8 we get: P/F=1/(.13-.08)= 1/.05 =20X which seems to indicate, with the market selling at 25X that the market is about 25/20100=25% overpriced. Let's say we insist the market is now fairly priced (this I doubt). One way of justifying this statement is by the previous argument (i.e., the premium over the 3 month T bill rate demanded by equity investors is now lower since the world is now now a safer place, Greenspan has deleted the world economic cycle from our diccionaries, Russian will not bomb us etc.) let's say this premium is just 7%. Then we get r = 5% + 7% = 12% and P/F = 1/(.12 - .08) = 25X Everyone happy now I assume. Now lets say the developments in Asia [we can no longer export our growth so easily to people borrowing like crazy from our banks] and the fact that we are so late in the economic cycle pushes earnings expectations down. Not for 98 let's leave those alone. Suppose 98 earnings are met but the future earnings growth is now seen as being only 6%. This is not an overly bearish forecast. Please notice that this number is still double the healthy growth rate of 3% expected for the ecomony!(i.e., earnings will still grow ahead of GNP) I hope you agree that a downward revision in earnings expectations to 6% is probably even conservative. So with r at only 12 and g at 6% we get: P/F = 1/(.12 - .06) = 1/.06 = 17X which implies a (1 - 17/25) 100 = 32% market correction. This is the argument some wise guys used to explain Black Monday in October 87. can this happen again? Now suppose r is not really 12 but 11%. The Pancho

To: Bill Wexler who wrote (4323)	3/8/1998 9:39:00 AM
From: Bob Trocchi	Respond to of 18691

Bill... >>Analysts are now starting to get concerned about the earnings slowdown and the high, speculative multiple.<< Being serious for a minute and I agree it is very hard in this market, IMO, I believe two things can topple this market. 1. MSFT issuing an earnings warning 2. Gov't expanding their investigation or ruling against MSFT in some way. If both happen together IMO this will tank the market. I am sure there are a lot of other things that will topple it as well but nothing seems to work today. Bob T.