Henry C.K. Liu hliu at
Sun Apr 4 10:36:19 PDT 1999

Doug Henwood wrote:

> [Quoting perma-bear James Grant makes me almost as queasy as evoking 1929,
> given how (engagingly) wrong he's been over the last 15 years. But this stuff
> is truly nuts.]

With every additioanl year that Bears have been wrong, it increase the chances of being right.

> by James Grant
> [Grant's Interest Rate Observer, March 26, 1999]
> "To own a company like AOL," a portfolio manager recently advised The Wall
> Street Journal, "you had to throw out traditional measures of valuing
> companies. We had to say we have to own what we think is the dominant
> franchise in the Internet. It was a space that as a money manager you simply
> have to be in."
> Here's a new theory of investment psychology: the compulsion to join a mass
> movement leads not to tears, but to profits. Needless to say, the author of
> this hypothesis did not express his motives in terms of personal
> capitulation. Rather, he mused on history. As a matter of course, he stated
> (he will thank us some day for not naming him), revolutionary technologies
> command unprecedented valuations. Railroads in the nineteenth century and
> radio in the twentieth were the examples he vouchsafed for the Journal's
> readers.
> We have some different examples for the readers of Grant's, who by now may be
> wondering why the front page of this interest-rate journal is not devoted to
> the AT&T bond issue, the biggest corporate debt offering of all time. The
> answer (on which we elaborate elsewhere in this issue) is that the stock
> market these days is bigger than the bond market and, indeed, almost
> everything else under the sun. As the great bull market goes, so goes (at
> least for the short term) the U.S. economy.

In fact, the bond market is used to keep to stock market at over-valued levels. Look at Amazon. Its billion dollar convertaible bond issue was based on the strategy of maintaining or pushing up its market capitalization value. The same goes for the AT&T bond deal.

> Concerning the theory advanced 'in the Journal, a preview: it's a quarter
> true, or at best three eighths. True, revolutionary technologies and
> structures tend to command ultra-high valuations. But, as far as we have been
> able to discover, never were companies holding revolutionary promise valued
> at anything like today's multiples. Andrew Carnegie, no mean capitalist,
> accepted a price for his steel company equivalent to 12 times earnings In
> 1901 (a time of 2% government bond yields, by the way), during the creation
> of the United States Steel Corp., the greatest amalgamation LIP to that time.
> Maybe he sold too cheap-it was thought that J.P. Morgan would have paid t4
> times but nobody was prepared to entertain 3,324 times, as eBay is valued
> today. The 1999 big-cap U.S. stock market is the all-time valuation Outlier.

Very pertinent point. Hope is not fantasy.

> Joshua Kahn, deputy staff historian at Grants, went to the library to get the
> facts. He investigated Radio Corp. of America in the t920s (not forgetting
> the Meehan pool, the manipulative actions of which anticipated the Internet
> chat room), Xerox Corp. in the 1960s and Apple Computer in the 1980s. As for
> RCA, he discovered, the top p/e multiple it commanded in the
> Coolidge boom was 73, in 1929. In 1922, the first year of considerable
> earnings growth, it was quoted at 22 times; in 1925, it fetched 59 times.
> "RCA paid no common stock dividends," according to The Crash and its
> Aftermath, by Barrie A. Wigmore, "it was highly leveraged with less than 40%
> of its capital structure in the form of common equity, it was expanding
> rapidly through acquisitions, and it had pronounced promotional tendencies.
> RCA was the darling of the 1929 stock market with the biggest trading volume
> on the NYSE...."
> With the introduction of the drycopying 914 Xerox copier in 1960, a great
> growth stock was born. Forbes looked back at the phenomenon in 1965: "In
> 1960, sales spurted 17%, net income 25%. And then, whoosh! Sales jumped 66%
> in 1961 to $61 million, nearly doubled the next year, climbed a further 53%
> in 1963, did the same in 1964 and will be up about 50% this year." In five
> years, Xerox's sales jumped to $400 million from $37 million, while its
> profits leapt to $2.75 a share from 13 cents a share. Those earnings were
> exuberantly capitalized - as the table on page two points up, the stock
> commanded triple-digit p/e multiples in the early, revolutionary portion of
> the decade and lower multiples as the technology matured. By 1975, a plain
> and dowdy copier company was valued at 21 times trailing net income.
> As for Apple, relates Kahn, "it was, like RCA and Xerox before it, awarded
> magnificent valuations when it burst onto the public market with its
> revolutionary product, the Apple 11 personal computer, in 1980. In 1981,
> Apple's stock reached a high of 34 112, sending its p/e ratio to 49 times
> (144 times on a trailing basis) and its p/b ratio to 11 times. As Apple grew
> by 50%, 60% and even as much as 70% in the early 1980s, its p/e remained
> above 30 times." By late in the 1980s, Apple's multiple had dwindled as the
> PC market shifted.
> Which brings us to 1999 and to the "(Investment) space that, as a money
> manager, you simply have to be in." Unique to this technological revolution
> is that the revolutionary product is not demonstrably profitable.
> is famously earningsfree, and Yahoo! and eBay command multiples of
> price to sales far greater than any p/e ratio accorded RCA, Xerox or Apple in
> their prime.
> "These valuations," says Fred Hickey, owner and editor of The High Tech
> Strategist, "have never been seen before.... Look at America Online.... It
> has nearly $150 billion of market cap now, including the Netscape shares.
> We've never seen anything like that. It doesn't have any book value
> whatsoever....
> "There's never, ever, ever, ever, ever been anything like this - ever,"
> Hickey emphatically continues. "No technology. Never. In 1990, when Microsoft
> and Intel were monopolies and the PC market was less mature, the market caps
> at those market lows were $5 billion for Intel and Microsoft."
> In other words, Hickey observes, AOL - the company whose space you have to
> occupy "as a money manager" is priced at the equivalent of some 15 times the
> combined market valuations of Intel and Microsoft as recently as 1990.
> What's different about this technological revolution, perhaps, is that it has
> revolutionized speculation as well as commerce. We say, bring on the
> counterrevolution!

No, better to capture the revolution. Transfer the astronomical p/e ratios to labor as well. The economic basis of this appraoch is that economic power has shifted from production to consumption, from capital to cashflow. Look at Dell: it has no parts factories, no inventory, enjoys a generous float on customers money in the name of custom assembly and incredible p/e ratios. Its power over suppliers resides on its sales orders. Consumers need income to consume. Soon economists will see that high wages and high consumption are patriotic. Moore's law of declining cost of computing power is the basis for an economy of abundance rather than scarcity, in which the consumer is the most valuable player and must be provided with an uninterrupted and rising life-time cash flow, for the sake of the expanding economy. Those who do not buy will not get paid! Domestic quarrels will focuses on one spouse spending too little, such as spending too much time on the internet on poltical discussions with strangers and refusing to have a "life".


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