>>Have you thought about becoming a comedian?<<
Glenn, who do you think is funnier? SG Cowen or me?
From todays San Diego union-trib.
>>February 7, 1999
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With price-earnings multiples in the stratosphere and dividend yields in the basement -- and Internet issues in far outer space -- it's almost axiomatic to say that stock prices are detached from economic reality.
Even some bulls concede that, although they will say that fundamentals no longer matter much: It's now a supply/demand game at a time when playing stocks has become a cult.
People gobble up stocks, which they think can never go down, while corporations reduce the supply of them through mergers and buybacks. Meanwhile, the federal government and Federal Reserve have macroeconomic and political reasons to manipulate monetary policy to support stocks.
Still, some bulls will argue, fundamentals do matter in one sense: The market is just moving ahead of earnings that the high-flying stocks will achieve in three or four years.
This year, such arguments might well prevail again. Just as in summer of last year, the market today is technically fragile and vulnerable to an exogenous shock -- but it looks as if the Fed will pump up the bubble again on any major sell-off, as it did last year.
Long range, though, there are disquieting implications of this disconnect between stock prices and underlying fundamentals.
Timothy Vick of Today's Value Investor in Hammond, Ind., recently heard from a normally cautious older woman who wanted to jump into an Internet stock after it had soared from $18 to $300.
Vick went to his library. He looked up what the late, great securities analyst, Benjamin Graham, had said about the 1929 crash.
In 1934, Graham wrote:
"During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude toward the investment merits of common stocks. The earnings record took on an entirely novel complexion. The new theory or principle may be summed up in one sentence: 'The value of a common stock depends entirely upon what it will earn in the future.' "
At the same time, the public accepted the gospel that diversified lists of stocks inevitably will rise stoutly through time.
"Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price," wrote Graham, who spent his last years in La Jolla. "Hence, all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell."
The rest is ugly history. Recently, Federal Reserve Chairman Alan Greenspan, speaking of President Clinton's Social Security proposal, said that throwing $700 billion into stocks would only raise stock prices without any corresponding increase in fundamentals, or corporate earnings and dividends. Thus, it wouldn't add to national savings.
"It is only through increases in these corporate fundamentals that true wealth is created," says Peter Donovan, president of Wright Investors' Service in Bridgeport, Conn. "Failing that, stocks really aren't much different than Ponzi schemes."
Yet, more and more Wall Streeters are tossing out fundamentals, riding along on momentum. Just like the market itself, they focus on a handful of so-called growth stocks (priced on expected 2002 earnings), and the Internet fruitcakes.
Charles Allmon, publisher of the newsletter Growth Stock Outlook, was shocked to learn that a prominent Wall Street analyst recently remarked: "Price-earnings multiples don't trouble me too much, because they apparently don't trouble investors."
That is what Graham was talking about.
In 1841, Charles MacKay, in his classic "Extraordinary Popular Delusions and the Madness of Crowds," described a prominent banker who bought shares in the South Sea bubble of 1721, knowing the price was wildly excessive. "When the rest of the world are mad, we must imitate them in some measure," quoth the banker.
That same book contains words of caution for today's Internet speculators.
It's one thing to buy extremely overpriced stock of a company with a future, such as America Online. It's quite another to buy stock of a company that hypes its Web site and/or changes its name just to lift its stock. Or to buy a new issue of a stock that was set up merely to capitalize on the craze.
Of the innumerable joint-stock companies created to cash in on the South Sea bubble, MacKay wrote: "They were established merely with a view of raising the shares in the market. The projectors took the first opportunity of a rise in the market to sell out, and next morning the scheme was at an end."
Under today's laws, it generally takes longer for stock promoters to bail out of their hoaxes. But, then, what are offshore banks for, anyway?
Today, the policy in Washington, D.C., is to keep the market bubble pumped up so that American consumers can spend the world out of its doldrums.
However, I can't believe that Greenspan, who has read history, is pleased that last year's three interest rate slashes, and the continued ballooning of the money supply, have served to inflate an Internet stocks bubble that might soon burst.
"Speculative manias gather speed through expansion of money and credit," wrote Charles P. Kindleberger in his book "Manias, Panics, and Crashes."
Even the tulip mania of Holland in 1634 "was fattened on personal credit." People sold their homes and borrowed money to buy tulip bulbs for the equivalent of $75,000 -- just as today, with people quitting their jobs and piling up debt to trade Internet stocks over the Internet.
It may be some solace that in the spring of 1720, Isaac Newton sold his South Sea shares for a 100 percent profit, remarking: "I can calculate the motions of the heavenly bodies, but not the madness of people."
Later, Newton went back into the market and got wiped out.<< |
