Re: Cisco Briefly Tops Microsoft in Value

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Date: Thu Mar 23 2000 - 18:26:56 PST

In a message dated Thu, 23 Mar 2000 4:00:34 PM Eastern Standard Time, Adam Rifkin -4K <> writes:

> > I don't get it, do you expect people to just wake up
> > one day and say "We don't want stock prices to go up
> > anymore." They will want to believe that they can get
> > rich quick forever. It's all a matter of when the
> > money is going to run out. With five rate increases
> > and the countdown to bankruptcy for many Net companies
> > (I'm sure you saw the Barron's article), the money has
> > to run out eventually.
> Eventually, yes. But soon? Maybe not.
> First, almost every time someone who's been granted employee
> options or has owned a stock cashes out, they immediately look
> for where they can "put that money to work".

Do you mean put that money to work in another Internet money pit? Or how about by buying the Pro Bowlers League? Did you catch that story today? Apparently, some rich guys from RealNetworks, Starwave, and M$ decided that they liked bowling so much that they bought the Pro Bowlers League. Reminds of the Japanese who bought up American movie studios at the peak of their bubble.

> Second, there's the richest people in the world, who are
> incented to keep the confidence game going as long as possible.

No argument there. Everybody wants to keep this game going as long as possible.

> Government interests are equally aligned since capital gains
> taxes are helping out budgets significantly.

Banks, corporations, speculators, investors, the government... everybody is making a lot of money from this bubble and they all want to keep it going. If bubbles could be fed by people's desires, this thing would never end. However, bubbles need capital, and unlike desires, capital is finite.

> Third, there's demographics. Baby boomers want to fund their
> retirements, so they're socking as much as they can into 401ks,
> pension plans, IRAs, and savings. They will continue to be in
> their peak earnings years -- kids' colleges paid, mortgages
> paid, at the height of their careers -- for the next decade.
> Where do you think most of that money will end up?

I just don't buy this argument. I've read both of Dent's books, and I think his arguments are interesting, but I find it mind-boggling that nowhere does he explain why the personal savings rate has been declining for the past decade. And of all the Dentophiles I've asked, no one can explain how Dent's theories fit in with the negative savings rate. (Oops, wait, it's now positive. I forget that the government conveniently implemented a new way of counting savings a few months after the savings rate turned negative.) If this is the peak earnings years for boomers, then why has spending been growing faster than income for the past few years?

Here's an interesting take on the demographic theories, which is unfortunately not very nicely organized:

> And fourth, there's the pipeline. A thousand venture capital
> funds, with ten thousand "vanity venture funds" set to launch
> in the next year or two. Everyone associated with the venture
> industry has a vested interest in keeping it going, too.

And why are there so many VC funds? Because the returns on venture capital are so obscene right now. Not the profits from the start-ups themselves. which are typically miniscule or non-existent, but rather the profits from bringing these companies public. So your argument basically boils down to this -- the market bubble will keep getting bigger because the market bubble keeps getting bigger.

> Can't predict when it will end, I agree with you completely.
> And can't cry when it ends, either.
> But we can at least enjoy it while it lasts; this is a once in
> a lifetime thing to enjoy, so let's make the most of it.

It is definitely a once in a lifetime opportunity, and I wish I would've made the most of it. Unfortunately, I just ended a tour in the Peace Corps when the bubble was getting started. When I finally had scrapped up enough money to play the market, I was sure I was too late. That was about two years ago. Some investors will always think that it's never too late, while I will always think it has to be too late by now.

> And heck, it might very well last another decade, for all we know.

I know what you've written about Tulipomania lasting for decades, but that's very misleading. The manic phase of a bubble never lasts for more than a few years I could argue that this bubble has been building up since 1982, or that the now deflated Japanese bubble got started in the early 1970's. But the party doesn't get really started until the final few years of the bubble. Galbraith says that the bubble of the late 1920's didn't begin in earnest until 1928. I'd say this one didn't really start rocking until 1997 at the earliest. That's not to stay that stocks haven't been overvalued for much longer, but it's only been the past couple of years that things have gotten really out of control, and itís only for a few years that things can remain out of control, as has been the case with every other bubble throughout history.

> > At the close today, I'm sure the RimpyPort will have
> > finally fallen the full 100%. Just got margin from
> > Datek today and now I have to decide whether to fold
> > my hand or buy a few more chips. I should've called
> > it the MoneyPit instead of the RimpyPort.
> Sorry about that, buddy. Short interest in the Nasdaq has swelled
> tremendously in the past three months, and that in turn fuels further
> rallies as shorts are forced to cover at higher prices -- I myself got
> the wind knocked out of me when I read Oracle's 10-Q citing a "mere" 13%
> revenue growth and looked at a stock price that had quintupled in the
> last year and said, "No way it goes higher" and bought some puts. Since
> then, of course, it has almost doubled again, and my puts are a nice
> realized loss to offset some gains I have recently taken.

I left a couple of words out there, s/b "Just got a margin call...". (And for any armchair psychologists, I'd love to know why I keep leaving words out of sentences when I write, other than the obvious answer that I think faster than I type. I rarely see anyone else do this, but I do it with amazing frequency, probably once per paragraph. I try to proofread everything I read, but my mind just fills in the blanks and I don't even notice it.)

Anyway, the RimpyPort a/k/a the MoneyPit hasn't been doing too well. I have to get home to check it, but I'm sure it's a total loss after MSFT and CSCO's jumps today. My logic when I choose to short the tech gorillas is that they were already so big in terms of market capitalization, that I could safely sit back and not worry about these companies doubling in value before the bubble came to an end. I think CSCO was a $200 billion company with a 75-80 P/E ratio when I shorted it; now it's a $500+ company with a 200 P/E ratio. How in the world can a $500 billion company have a P/E ratio of 200??? I can understand the Net start-ups with their insane P/E's, but a $500 billion company? Incredible!

Consider what has happened to the RimpyPort this week and it pretty much summarizes the year it has had.

First, some idiot analyst comes out with a higher price target for INTC. Here's the press release:

> NEW YORK, March 21 (Reuters) - WitSoundview said
> Tuesday that semiconductor analyst Scott Randall
> raised his price target on chipmaker Intel Corp.
> to $160 from $125 and reiterated his strong buy
> on the company.
> -- said his earnings estimates remained unchanged
> at $2.90 for fiscal 2000 and $3.40 for 2001.

Can you believe this crap? If earnings aren't going up, why should he raise the price target? Analysts have become nothing more than cheerleaders.

And then CSCO splits. You take one piece of paper and divide it in two, and another $50 billion in market capitalization is create out of thin air, as if splitting a stock was akin to opening an Easter egg. Of course, everybody knows that the splits don't mean anything. Just smile and play along!

And finally we get a rumor that MSFT may be reaching a settlement, so it adds another $50 billion in market capitalization. MSFT earned a little under $9 billion in the last year, so $50 billion is about five years of profits. What were people expecting, that the government was going to shut down MSFT for five years, and now they don't have to worry about that anymore? It just doesn't make any sense to add another $50 billion to MSFT's market cap.

But, alas, I could argue against the senselessness of it all until I'm blue in the face, but it's not going to stop a mad crowd that is determined to make every piece of paper worth twice as much next week as it is this week. Nobody wants this thing to end, so it will go on until it has sucked up every last free nickel from every man, woman, and child in the world. And then it will come to an abrupt end, and every man, woman, and child in the world will want to know what happened to all their nickels.

In one of the ultimate signs of the top (and probably the 137th one that I've called), I just found out today that a good friend of mine has been posting at the Motley Fools. When you think of people who love crazy, whacked out conspiracy theories, this guy would be it. Secret wars, the Trilateral Commission, mind-controlling corporations, you name it, and this guy has probably believed in it and tried to warn others about it at one time or another. So I'm excited to see what he's been posting at the Motley Fools, and this is what I find:

> At last check this stock was at an oversold 16 1/2, a
> steal.
> If anyone is listening, it's a good time to buy.

Completely shocked at what I'm reading, I write the following e-mail to him and my friend Matt:

> The most ironic thing about _____ getting sucked into
> this mania is that this is the possibly the biggest
> conspiracy in the history of the world. For once, you
> could say that the government, the banks, the press,
> and top corporate official are all in on some grand
> conspiracy to make things seem better than they are.
> You could also say that 99% of the
> population is just a bunch of lemmings that doesn't
> understand what is "really" going on and they are just
> following the crowds. And even though you sound like
> the crazy one if you speak out against it, it's
> actually everybody else that's crazy. However, unlike
> all the other conspiracy theories, you'd actually be
> right this time.

His response?

> Well if you bought at 16 1/2 you did pretty well..

Yep, it's a mania.


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