Bubble Boy.

I Find Karma (adam@cs.caltech.edu)
Sat, 8 May 1999 15:42:14 -0700 (PDT)

Background for Rimpinths -- this is being sent to a public mailing
list called FoRK, or Friends of Rohit Khare:


Background for FoRKers -- like many of you, Rimpinths sees Dow 11,000
and thinks "mania in which the fundamentals of stocks are completely
detached from reality." He's put together some fascinating pages
describing 8 of the biggest current stock bubbles -- Microsoft, Intel,
Cisco, Dell, Lucent, America Online, Yahoo!, and Amazon.Com -- and how
far from fundamentals these eight companies have come:


Looking at the aggregate market cap of these eight companies over the
last two years is like looking at a car crash in slow motion -- between
April 1997 and April 1999 the aggregate market cap more than tripled
from $400 billion to $1.3 trillion:


Yesterday Rohit gave me a book on the delusions of crowds, and how these
things feed on themselves until they crescendo and burst (Tulips in
1637, the Mississippi and South Seas bubbles in the 1700s, the U.S.
stock market crash of 1929, the Japanese real estate bubble of the
1980s... history repeats the lesson over and over and over).

It is truly frightening. No one knows how long these things will last,
but the bubble always deflates with mind-numbing speed once the crowd
realizes the game is over.

Rimpinths himself has gone out of his way to short Microsoft, Intel,
Cisco, and Dell, and looking at the open "short interest" of these
companies as of April, he's not the only one:


In order, Dell, Intel, Microsoft, Worldcom, and Cisco are the five
most shorted stocks out there right now. Now, the case can be made that
these "pillars of the Nasdaq" are just way, way off fundamentals:


but that doesn't stop people from buying them. Remember also that the
S&P 500 and the Nasdaq-100 -- two indices into which money continues to
pour -- are market-cap weighted, which means buying into these indices
is tantamount to buying generous portions of those biggest companies.

And then there's the Internet bubble, which isn't off from fundamentals


Although when you listen to Jeffrey Bezos pitch it, it's not like the
people running these companies have a better picture of reality than the
manic investors rushing to fund these ventures:


To quote the New York Times, "You think it's easy navigating a $20
billion company that has never made a dime?" Tongue in cheek, but it's
absolutely true. Priceline.Com becomes a $20something billion company
overnight and Forbes is extolling the 150 business process patents of
Jay Walker in a cover story as if he's some super genius.

I'd say he's a *super* genius. *I* am going to make more money this year
than Priceline.Com, Amazon, @Home, eBay, and Yahoo combined -- and yet
my aggregate net worth is mmmmmmaybe in the hundreds and their aggregate
net worth is approximately $100 billion. They have literally figured
out a way to make money out of pieces of paper. I'm downright tempted
to start my own damn Internet company... www.ifindkarma.com has a nice
ring to it, don't you think? I could model myself after "HeyIdiot.Com":


To quote: "HEYIDIOT.COM is tightly focused on selling just one product.
Elegantly enough, that product is the stock of HEYIDIOT.COM, which will
be offered to you for sale on-line at our web site of the same name.
Buying the stock is simple, you can buy as much stock as you want with
the only rule being that each new purchase must be executed at a
successively higher price. Just click here to make money and you too
will join the millions of folks making millions on the Internet."

Ah, times are good. What was the idea for 90Cents.Com -- we sell dollar
bills for 90 cents apiece and make up the difference from the money we
take in advertising (the Buy.Com model) and/or stock price appreciation
(the Amazon.Com model). If we're lucky we'll get a listing on the Dow
Jones Internet Index to "legitimize" our business:


So how do we know there's a stock market mania going on? Pictures
don't lie:


Heck, The Onion even has one of those ever-so-helpful infographics
explaining why e-trading is becoming so popular:


Meanwhile, the mainstream press has given up on any intelligent
discussion of company fundamentals as fearless "new school" investors
make money as if this were easy. Evidently the financial media has
bought into the mania because, thanks to the mania, they're more
popular than ever (ka-ching!).

The long bond rises past 5.8% on Friday and the stock market doesn't
even bat an eye -- if you weren't paying attention, you missed the Dow
Jones Industrial average closing at an all time high of 11,031
yesterday. What the f? Is it all of this cheap capital available in
Europe (3% interest rates) and Asia (1% interest rates) that eventually
makes its way to the U.S. large cap and Internut stocks because those
are the only companies foreign investors have heard of? The Dow has
pretty much been climbing at a 45 degree angle since six weeks ago. The
Dow is now outperforming the S&P 500 and the Naz-100 for 1999.

Something didn't sit well with me about yesterday's employment report,
either. Last month's unemployment rate was 4.3 percent -- statistically
indistinguishable from its 30-year low of 4.2 percent in March. And yet
we're expected to believe that inflation is nonexistant? How can that
be? Someone's doing a smoke and mirrors here. Rimpinths thinks the
answer is in the misuse of the Consumer Price Index as a gauge of
inflation, and he may be right. The raising of the price of a barrel of
crude from 11 in March to 18 this week also seems artificial -- when we
all know it *could* drop to the single digits without batting an eye.
People who invested in oil in March think they're geniuses -- just wait
till the bottom falls out from under that market again...


There are so many macroeconomic traps -- from our huge trade deficit to
deflationary currency pressures around the world -- that one wonders if
the only explanation for the U.S. markets rallying right now is...
mania. More people are invested in the stock market now than at any
point in history. Usually a bad sign.

I've watched as FoRKer after FoRKer with any economic experience at all
started pulling money out of the markets this year. Something's gotta
give, right?

Or does it?

How long can all this continue? Rimpinths seems to think The Big One is
coming, and it's coming this year:


Personally, I'm not sure I could call an end to this mania. I pulled
some money out of the markets, and I have some money in the markets, but
it's not a whole lot of money in any case (I'm a student who's never
actually made real money). On the other hand, there are some people who
could be headed on a path for financial ruin if the markets treat them

Alan Greenspan says we won't know it's a bubble until after the fact.
If the crowd knew for sure that this was going to end badly, the crowd
would have started taking its money out long ago.

Where do we go from here? Beats me. I don't think ANYONE saw Dow
11,000 coming just 24 trading days after Dow 10,000. And if I stopped
to think hard about it, it would probably scare me senseless. As it is,
I'm just not sure. I guess this is what makes it so hard -- I have no
crystal ball.

When Rohit and I did the calculation to determine how many years it
would take eBay (even assuming hypergrowth) to earn its $22 billion
market cap, we were shocked. When we realized that Microsoft was now
worth $400 billion on paper, we were mystified. When we realized that
Amazon has no plans for profitability any time in the foreseeable
future, we were horrified. And now? We've become comfortably numb,
watching AT&T slurp up MediaOne just a month or two after closing the
TCI merger -- making AT&T all of a sudden the largest cable company in
the country. Who saw that one coming? Who saw ANY of this coming?

Watching with awe to see what the crowds will do next.


Bypasses are devices that allow some people to dash from point A to
point B very fast while other people dash from point B to point A very
fast. People living at point C, being a point directly in between, are
often given to wonder what's so great about point A that so many people
from point B are so keen to get there and what's so great about point B
that so many people from point A are so keen to get there. They often
wish that people would just once and for all work out where the hell
they wanted to be.
-- Douglas Adams, "The Hitchhiker's Guide to the Galaxy"