Forum Archive Index - November 2000

["Ben Dutton" <bendutton@sharechat.co.nz>]

Thought I'd post yet another interesting piece of writing from Red Herring
magazine - enjoy!

Best Regards

Benjamin Dutton



The latest Personal Capital always appears at
                http://www.redherring.com/investor/

                  This installment lives at
http://www.redherring.com/investor/2000/1102/inv-pc110200.html

------------------------------------------------------------

PERSONAL CAPITAL: Let's hear it for the liquidity crisis!

WASHINGTON, D.C. -- Here at the Next Generation Networking
(NGN) show, a conference that brings together the leading
entrepreneurs, financiers, and engineers in data networking,
the mood was noticeably subdued. Stock market jokes
permeated the sessions, and were followed by nervous
laughter.

Shares of leading technology companies have fallen between
25 percent and 50 percent in the past month, and this impact
is being felt throughout the technology landscape, all the
way down to the venture market.

Is the mood unduly pessimistic? It's starting to look that
way. It may take one more blood-curdling plunge to wring out
the worst of all our fears, but things are repairing
themselves. The next month is crucial: the curmudgeons and
bears are out in full force, which is usually an indication
that the sell-off is bottoming out.

There are several theories that attempt to explain the
recent sell-off -- and I think all of them are valid -- but
the influences of each are waning. Let's take a look at some
of them:

REASONS FOR THE FALL
1. Mutual fund housecleaning. Since many mutual funds had
miserable years, they are now cleaning up their books by
either selling their losers for tax reasons or cashing in on
stocks that have already enjoyed sizable gains. Commonly,
such activity wanes after October 31, when most mutual funds
cease their tax-related selling.

2. Over-valuation of technology shares in a slowing economy.
This theory has much validity. Valuations were, and still
are, at historically high levels. But leading-edge
technology has spurred growth, not limited it. Investors
were simply chasing the growth created by the Internet. The
overall health of the economy is quite strong, and it
appears likely that the Fed is probably done raising
interest rates for a while, now that it has accomplished its
goal of slowing economic growth to more manageable levels.

3. The greater fool theory. The majority of technology IPOs
are in fact early-stage companies that have been forced into
the market by greedy investment bankers seeking to take
advantage of the growing public mania for technology
investing. This indeed created a speculative "bubble" in
companies with poor business models. But once the weaker
companies are weeded out and the IPO window tightens, the
stronger companies will be left standing and become more
attractive in the market.

4. The liquidity crisis theory. This theory points out that
there is more capital flowing into the stock market than at
any time in history. At the same time, there are not enough
top-tier publicly traded technology companies to keep up
with the flow of capital. Essentially, a lot of the money in
the market is invested in a small pool of stocks. Thus, the
prices of these stocks are more volatile due to a lack of
liquidity (the ability to buy and sell shares on the
market).

VALUE VS. GROWTH
Of all these, I think the liquidity crisis theory is the
most interesting. In fact it soon could become our friend.
Technology valuations have been influenced by the liquidity
crunch. People need to put their money somewhere and the
recent past has taught them that investments in Coca Cola
(NYSE: KO), Xerox (NYSE: XRX), and Procter & Gamble (NYSE:
PG) have turned out miserably. So they bought technology
shares.

This argument was made quite lucidly by George Kelly,
managing director of Morgan Stanley Dean Witter, here at the
NGN show this week. Mr. Kelly pointed out that in the
competitive mutual fund industry, portfolio managers must
invest aggressively in growth to beat their fellow fund
managers. So, because a few select investment brains are
chasing a limited number of opportunities, the leaders get
bid up to astronomical valuations. The mutual funds are
sitting on a lot of cash, which is growing as mutual fund
inflows reach record levels.

Granted, Mr. Kelly has an axe to grind. Morgan Stanley Dean
Witter can crank out more IPOs in a healthy stock market.
But the investment bankers provide a role by populating the
market with fresh companies. That's when the market gets to
work, and runs the new companies through Nasdaq's super-
volatile filter. The selection process has become more
pronounced because of the liquidity crisis.

FOLLOW THE MONEY
As I said, this money has to go somewhere. Is it really
going to go into Coca Cola and Procter & Gamble? Based on
their stock performance over the last few months, that seems
to be the case. Since the beginning of September, Coke's
stock has gained 14 percent while P&G is up 16 percent.
During the same time period, the Nasdaq is down 20 percent.

But when you look at how these and other value stocks have
performed over the last five years compared to technology
stocks, and what the expected earnings growth rates for
value companies are compared to technology companies, I
think the aggressive money will continue to chase
hypergrowth tech stocks. Specifically, the best technology
companies will continue to trade at a premium, because the
second-tier players are being filtered out of this market.

Many of the bears appear to be struck with a nostalgia for
the past: "Ah, remember when America was great and all you
had to do was invest in Coca Cola and Procter & Gamble,"
they seem to be wistfully sighing as they advocate a full-
scale return to value investing.

But this argument is fundamentally wrong. The reason that
value investing has largely failed is that many of these so-
called "value" companies are simply falling apart. Their
growth has stalled as the economy moves to new areas of
development. You need to combine value with growth. And
there is no doubt that the growth in the global economy is
now fueled by technology. The sea changes of the past five
years, which include the rise of the Internet, the explosion
of venture capital, and the spread of online trading and
commerce, have changed the world forever.

It's a new era of creative destruction. We aren't going back
to the 1980s. We're not going back to the 1960s or even to
1929. We're moving forward.

- R. Scott Raynovich
  rayno@lightreading.com

* R. Scott Raynovich, former investment editor of
Redherring.com, is executive editor of Light Reading
(http://www.lightreading.com), a global site for optical
networking. He has covered technology markets for more than
seven years. *

------------------------------------------------------------

RELATED LINKS
* New age value.
  http://www.redherring.com/investor/2000/0921/inv-pc092100.html

* Bulls vs. bears.
  http://www.redherring.com/investor/2000/0420/inv-pc042000.html

------------------------------------------------------------

Discuss today's column in the Personal Capital column discussion:
http://boards.redherring.com/WebX?13@^2342@.ee6c58e

or check out forums, video, and events at the Discussions
home page:
http://www.redherring.com/discussions/

------------------------------------------------------------

FREE email newsletters from Redherring.com!

Want insight into the hot IPO market, long-term investing
strategies, future technologies, stocks to watch, venture
capital funding, and more? Get FREE email newsletters in
your inbox from Redherring.com, with the insight, analysis,
and opinion to help you make more strategic business and
personal investing decisions. Subscribe today.

http://www.redherring.com/jump/om/i/business/rhcom/global/subscribe/47.html

------------------------------------------------------------

SPECIAL OFFER on RED HERRING magazine!

Stay on the cutting edge of technology -- subscribe to Red
Herring. By taking advantage of this special offer, you'll
pay only $39 for a total of 24 issues and SAVE 67 percent
off the cover price! New subscribers only, please.

https://www.redherring.com/service/circ/subs_WT.html

------------------------------------------------------------

ADVERTISING INFORMATION

For information on advertising in Redherring.com
newsletters, contact:

West Coast, Asia-Pacific, Latin America
Brook Fraire (brook.fraire@redherring.com)

East Coast, Europe
Kristin Bolesky (kristin.bolesky@redherring.com)

------------------------------------------------------------



----------------------------------------------------------------------------
http://www.sharechat.co.nz/          New Zealand's home for market investors
http://www.netbroker.co.nz/        Trade on Credit, Low Brokerage. Join now.
----------------------------------------------------------------------------
To remove yourself from this list, please use the form at
http://www.sharechat.co.nz/forum.shtml.