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The Internet bubble Still deflating WTF? The Internet Bubble contends that all the whoop-tee-do stocks you have been in love with were overpriced. So, shortly after the first major deflation in the Internet stock, he was like WTF? At the peak of the market for Internet stocks in January of this year, the 400 -plus public Internet companies were worth a steep $ 1. 5 trillion combined. As of a new calculation done in mid-July, they are now worth about $ 970 billion, a decline of more than 30 percent. At their low at the end of last May, the combined market cap of the portfolio was as low as $ 750 billion.
During this lull, when the Nasdaq bottomed out near 3, 000, the market had Steve Jurvetson in a headlock. Anthony B. Perkins, who warned seven months (6 / 28 / 00) ago in his book The Internet Bubble that Internet stocks were overpriced, said the stunning decline in technology stocks has created investment opportunities. The Internet sector was valued at $ 1. 5 trillion, based on only $ 29 billion in revenue and $ 3 billion in profits, said Perkins, chief executive of Red Herring Communications. Weve seen that mountain of market capital melt down in half. Now its back to reality.
Because were only in year six of a 30 -year tech boom, investors need to look through the wreckage and identify some cool companies that will survive, Perkins told the Bloomberg Forum. These are great companies that are going to be highly profitable in the future, Perkins said, even income arent profitable yet. The washout in Internet stocks slowed Wall Streets love affair with initial public offerings of profitless companies and taught inexperienced venture capitalists that they cant always expect a 300 percent profit on their portfolios, he said. THE ECONOMY DIDNT GO BUST AFTER THE INTERNET BUBBLE BURST = Remember those dire warnings about the Internet bubble? Millions of investors, gripped by a mass speculative mania, had driven dot-com equity valuations to ridiculous, perhaps unprecedented, heights of fancy. When the dot-com bubble burst, the investment Calvinists warned, the market collapse would take both the New and the Old Economy down with it.
Well, it sure looks like the Internet balloon has popped. Employees at dot-com startups hold worthless stock options. But where is the economic crash? Consider this: The big debate on Wall Street is whether the Feds yearlong campaign of monetary tightening has successfully slowed the economy. Why didnt the Internet crash take the economy with it? For one thing, the talk about an emotionally driven, vastly overvalued stock market was greatly exaggerated.
Yes, investors got wildly enthusiastic about many a dot-com business model or an entrepreneurs virtual vision. But the theory that millions of investors from around the world have been systematically stupid for the past six years is simply untenable. Indeed, the current economic expansion is remarkable not only for its record length but for how rapid high-tech innovation is boosting business efficiency and keeping prices relatively stable. = Our advice to Internet investors is simple: If you hold any of these stocks it is time to sell. For several years the stock market has made major gains, adding up to what has probably been the greatest bull market in all of history. Setbacks that appeared threatening, such as those which occurred in April of 1997 and August/September of 1998, have proved temporary and have served merely as renewed buying opportunities. With each renewal of the upward trend, the conviction has grown that if one buys a diversified list of good stocks (and even many that are not so good), one simply cannot lose in the stock market, except temporarily.
Indeed, the persistence and size of the gains has drawn a growing number of new players into the market the point where it is now common to hear stories about doctors, lawyers, accountants, and people in practically all other walks of life cutting back on their normal activities in order to devote time to day trading on the internet. Clearly, something is wrong. It simply cannot be that we can have a society in which everybody lives by day trading in the stock market... Yet such an absurd outcome of practically everyone being able to live by means of buying stocks cheap and selling them dear is what is implied by an indefinite continuation of the bull market. As a result, it is inescapable that the bull market must end. Something must occur that will destroy the conviction that the stock market is an easy source of gains.
That something, of course, will be a major and prolonged drop in the market, in which much of the gains that have been made in the last few years will be wiped out and in which millions of investors will rue the day that they began playing the stock market. What is directly and immediately responsible for the current bull market is a sustained and rapid increase in the demand for stocks. This increase in demand in turn has been the result of the repeated pouring into the market of large sums of new and additional money, created by the banking system under the umbrella of the Federal Reserve System and related government intervention. What this means is that stock prices have been rising on the foundation of nothing more than an increase in the quantity of money. In essence, their rise is no different in principle than the rise in the prices of goods and services in San Francisco during the California gold rush. Then, new and additional gold money was being dug out of the ground in large quantities in the surrounding area and spent largely in San Francisco, with the result that at one point a single fresh egg sold for a whole gold dollar.
Today, the new and additional money is paper, i. e. , checkbook money, which is being rapidly created virtually out of thin air and is being spent mainly in the stock market, with the result of comparably high and, almost certainly, comparably fleeting valuations of many securities. The rise in the stock market in the last few years, however, is not the result of any increase in the ability to save and accumulate capital. On the contrary, personal saving has been very low and has been declining even further in recent years from an insignificant 2. 5 % of personal income in 1996, to 1. 8 % in 1997, to a barely existing. 4 % in 1998.
Most recently, in the Spring of 1999, it has declined into actual negative territory. Similarly, no sudden vast burst of foreign investment in the United States can explain the stock market boom. Indeed, the increase in foreign private assets in the United States was substantially less in 1998 than in 1997. The only thing that explains the current stock market boom is the creation of new and additional money. New and additional money, created virtually out of thin air, has been entering the stock market in the financing of corporate mergers and acquisitions and of stock repurchases by corporations. Its consequent driving up of stock prices and concomitant creation of a sense of general enrichment is what is largely responsible for the decline in personal saving, inasmuch as it encourages people to consume in the belief that they are now substantially richer than they were before.
How far the stock market will fall cannot be scientifically predicted except to say that in the nature of things the fall must be great enough to destroy the conviction that the Internet stock market is an easy source of gains. The end of the stock-market boom is something earnestly to be desired. This is because its continuation entails a growing state of mania, in which fortunes are created without any rational cause, merely by virtue of the pressure of a flood of money seeking outlet in channels no more real than empty hopes and dreams, and in which increasing numbers of otherwise highly intelligent and perfectly sane people are lured into sacrificing the serious work of their chosen occupations to the pursuit of such causeless and ultimately ephemeral wealth.
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