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Valuation Is in the Eye of the Stockholder
Aaron Task's story on stock valuations was great work, but he neverconsidered some serious points:
1) We're NOT in a recession, so the P/E of the Dow cannot be properlycompared to periods of recession (all the dates in the articles). Ifanything, many of the Dow components are experiencing the best of allworlds and PEAK earnings (C, HD, GM, etc, etc). And are the tech companies in a recession, or are they just adjusting to a more NORMAL, post Y2Kenvironment?
2) Many think Citigroup is undervalued at 12x earnings. However, couldthese earnings be PEAK earnings? Consider this: C was trading at $10 in1996 (incidentally when Greenspan called the markets irrationallyexuberant). Assume that C grows earnings by 12% each year and the stockprice responds accordingly. This means that the current stock price shouldbe around $22 or about 35% lower than now. The recent stock market swoonbrought C down to $24, close to fair value. No panic, no capitulation, nofear -- just good-old logic and common sense.
-- Tom Peters, chief investment officer, Stonehedge Capital Management (received 07/31/02)
P's, but No E's
How come people keep talking about P/E? Lots of tech companies don't haveE's. A fair amount of the others have fake E's. Only the P's are real. GDPnumbers keep revising (e.g. GDP in 1st Q). The stocks are the riches' games. Iguess nothing but the debt numbers is real.
Qingwen Bao (received 07/31/02)
Say What You 'Mean'
Once again, Aaron Task's common sense approach is right on -- probably. It's easy for various people to say that "today is different" for P/E's and whatever else comes to mind. There is a point to consider, however.
At various low points in the past, it would have been equally easy to say "today is different," and somebody probably did, too.
As Task pointed out, the data given are averages, and there's the old business of regression to the mean, or something. So, an average P/E of 14 is probably reasonable, and the larger the deviation from the mean, the more likely, it seems to me, that there will be a return to or near the mean.
Walter Pharr (received 07/31/02)
Disregard P/E's at Your Peril
To disregard P/E ratios as a measure of a market's relative value borders onthe idiotic; to use it as the sole arbiter would be equally foolish. It iscertainly true that changes take place over time, and that circumstancesvary, in such a way that different moments in the markets are never directlycomparable.
Steve Galbraith's essay this morning discusses changes in theS&P's makeup, for example, with many more companies currently who are farmore reliant on intellectual capital rather than on plant and equipment asthe source of their earnings power, and that the earnings of these companiesare in a sense penalized as compared to old style industrials, given thatthey expense their R&D, while the GMs of the world amortize their capex.
But in spite of examples like this, P/E ratios across time have to beconsidered a prime, perhaps the prime, measure of a market's relative value.
The market looks pretty expensive to me by a lot of differentmeasures. Even if they're all somewhat imperfect, I'm willing to accept apreponderance of the evidence argument, and although I'm finding cheapstocks, I can't see the indexes doing much climbing.
-- Scott L. Frew (received 07/31/02)
The Five Dumbest Things on Wall Street This Week
You seem less than impressed by the launch of
mMode service. With all due respect, I think you misunderstand the intent of this new service and the advertising we used to launch it.
What we unveiled with mMode is not simply the fact that you can use awireless device to play games, read news, chat and shop, to name just someof the possibilities. Clearly, you can do these things. However, ourresearch suggests that the vast majority of consumers still think all theycan do with their wireless phone is place and receive calls. With mMode,we have created a service that is radically easy to use -- nearly as intuitiveas calling someone. That ease of use is the really cool part of mMode.
The purpose of our advertising was simple: to show people what they can dowith mMode and how easy it is to do so. You have no doubt noticed that wedon't mention the Internet once in the ads. That is so people can focus onwhat mMode can bring them rather than on where information happens toreside in a complex cyber universe.
By the way, mMode is "leaps and bounds ahead of PocketNet" -- my quote --because it is faster, easier to use, has a richer array of content and isalways on. For example, if you are using mMode to read email and someonecalls you, you can take the call without having to get out of the service'sdata mode.
You seem to like the poetry of Robert Frost. I do as well. mMode is a lotlike a Robert Frost poem. Its seemingly simple surface disguises dazzlingcomplexity. With mMode, AT&T Wireless has taken the road less traveled.And that will make all the difference, as Frost might have put it.
VP - Brand and Marketing Media Relations,
Taking an Annual Look at Excuses
Enough With the Excuses
I won't waste any time with excuses for performance, but if you had taken the time to look at the Annual Report for 2001, you would have found some very frank and clear explanations for the results for the year. Just like the explanation for 2000 would have been found in the Annual Report for 2000. Not in a midyear report. That doesn't make the numbers any better,I know, but at least it's not "lame excuses or endless blather." I, too,can be frustrated by an industry that can't ever admit to being wrong -- butI suppose that's not just endemic to the fund world, is it?
As to any manager using the explanation "I stink," shame on you. I thoughtyou were a more intelligent observer. If a manager has a fantastic year should he say, "I'm brilliant?" Of course not. Most managers who have a great runare not nearly as smart as you J-folks make them out to be; neither are theyas stupid as you paint when they do poorly. But I guess realisticallycovering real life doesn't make for very zippy copy.
I wish I could point to better results in the past two years. I can't.But it is true that it appears the low was put in last April, as I wrote.And it is true that I candidly addressed results in my annual report, whereit should be addressed. If you'd like a copy, just ask. You might stillthink I'm an idiot, but at least an honest and candid one. One thattries to write reports that help investors to a better understanding oftheir investments.
I don't want to make too big a deal of this. I'd just as soon laylow in my foxhole until the
gets back north of 3000. See you then.
Five Dumbest Things on Wall Street This Week
I just read your "The Five Dumbest Things on Wall Street This Week" about
and our CEO. It's obvious you are not a fan of him and his policies. But not all employees feel the same way. As far as the cash-for-coffee policy you refer to, have you any idea how much money WorldCom was spending on coffee, companywide, per year? Maybe if you saw those figures it wouldn't sound like such a bad idea. How about noncoffee drinkers? Was the company paying for their tea, hot chocolate or orange juice? No! It's a cost-saving measure, and a lot of us don't mind at all. If it saved a couple of jobs, that's great. Coffee is not a priority. Having a job and providing for one's family is.
As far as the long-distance credit goes, that was never a major issue. That $25 credit is not going to make or break anyone. It was nice but the majority of us are happy to have jobs right now. As far as the employees who "weren't happy" with MCI's service and wanted to switch to
, so be it. Freedom of choice. That sounds like a disgruntled employee voicing
his or her frustration, which is understandable.
Your article was about dogging Mr. Ebbers and the company. You are entitled to your opinion, but so am I. WorldCom provides my family with a decent salary and benefits. I still have a job during these crazy times our economy is going through. Many of us feel this way. Maybe you should be big enough to print that in one of your articles about WorldCom.
While some are obviously unhappy, not everyone objects to the cost-cutting moves. I am one of the folks in the trenches and along with many others don't find the move particularly objectionable. Quite frankly I'm happy to be working at a site that hasn't laid off a single worker during the downturn -- in an industry that by any measure is at the top of the depressed list.
Having lost a job in the last recession, I can assure you that "no coffee" is preferable. From where I sit, the company is doing everything it can to keep people on the job, which is refreshing, given the ease with which companies cut these days. What I don't want to hear from management is, "We can continue to provide employees with all the same perks and benefits we've always enjoyed, we'll just be providing them to fewer of you than before."
Looking High and Low
The Five Dumbest Things on Wall Street This Week
I would like to add to your article, "The Five Dumbest Things on Wall Street This Week," the fact that back in June 2001, you had to go the same 4,800-mile distance to find someone predicting that
stock would go down to $5 -- which it did three months later. I am doing this to remove any potential illusions that we might be in any way affiliated with Nortel.
As an independent research house, we simply couldn't afford such a thing. When it was time to be negative on Nortel, I was. I feel that the time has come now to be more positive -- although following the latest quarterly call on the company, I lowered my short-term rating by one notch, so I am more positive. The operational improvements, the new products, the new S&M focus and the new top management make Nortel completely different from what it was just six months ago, when all of these new things were just ideas and there was no guarantee that they would be implemented.
I agree with you that it is probably a major decision for First Call customers to choose to read the report written by someone in a country the location of which they very well might not know, instead of reading a report from someone on Wall Street who is a widely regarded and respected analyst. This is why we are very happy when even one customer makes such a choice. This would only be possible if KR was indeed perceived as a provider of opinions that are both well-informed and objective.
We consider our popularity among First Call customers as a good indication in that respect. As documented by
, First Call ranked me as the 15th most widely read analyst on its service in Q2 of last year.
On a separate note, I might add my personal impression that it would have been good if you had stopped short of making implicit comparisons concerning Bulgaria in your article. This is precisely the type of uninformed comparison that we couldn't afford to present to our customers. I believe you yourself would agree that respect to the quality of your own audience alone should cause you to think twice about adding such out-of-context remarks in your articles.
Amazon Gobbling Up Post-Turkey Day Business
I tend to agree with much of what you write, but not this time. One area of disagreement is in the following sentence you wrote about
: "This holiday season is a crucial one for Amazon, as investors debate the sufficiency of Jeff Bezos' cash cushion, the timetable for the company to become cash-flow positive, and its ability to fight off real-world giants like
The chart that accompanied this statement detailed online traffic showing Amazon well out in front, with Target coming in third. The thing is, Target.com isn't really a competitor of Amazon. They run it for Target. Every time someone buys something from Target.com, Amazon makes money. My view of Amazon is that in the near future it will run its own site and those of many of their nearest "competitors." Basically, a mall where the landlord owns or operates all of the stores.
For the record, I own a handful of Amazon shares, bought recently at $7.50.
Covering the Converts
Cool Convertibles for the Racy Tech Crowd
I loved your article on convertible bonds.
I have been a long-term reader of
-- since January 1997. I am anindividual investor. During the year 2000, I began cashing in a substantialportion of my all-equity portfolio and invested the proceeds into bonds.With a portion of my bond portfolio, I bought busted converts.ConvertBond.com has a list of them and is a great site.
With many, I have had fantastic success. As your article points out, one must evaluate the companies' balance sheet and cash flow to estimate thelikelihood of the company surviving until the debt comes due. Also, I lookfor companies that might be bought before they go bankrupt. My upside hasnot been the conversion to stock, but the move from a heavy discount toparity.Some examples are:
-- bought Oct. 31, 2000, at 27, within 4 or 5 months the price went up to the high 90s after the company restructured its debt. The bond maturesin 2002.
Digital Island -- bought December 2000 for 33 and cashed out at parity in August after it was acquired.
Among the other converts in my portfolio that I still believe are good buys:
-- 4.75% of 2009, Price $41.5 YTM 20.8%.
Level 3 Communications
-- 6% of 2009, Price $36.2 YTM 24.9%. A couple of months ago, you could buy these in the low 20s, but since then the company has been buying back debt including these bonds at close to 30cents on the dollar.
This brings us to another interesting angle to the story. These companieswith busted converts issued debt at parity are now buying that debt back at20 to 30 cents on the dollar. After those buybacks, I have seen prices risebeyond what the company offered. Rite Aid offered 75-80 cents on the dollaron the converts above before it got close to parity.
is offering to buy back its busted converts at 29.5 cents. Thecompany has lots of cash on its books from when it issued this convert. Ido not know about the business model of this company, but if it can issuedebt at parity and buy it back at 30 cents on the dollar, that seems like agood way to make money.
Keep up the good work.
Finding the Beat
Stocks Marching to Dismal Scientists' Beat
The historical GDP numbers you cite are not meaningful in the contextyou use them. GDP/GNP has been rebased, redefined and revised numeroustimes since 1990. The results as they looked at the end of 1991 -- whichare consistent with the forecasts done at the time-- showed real GNP down1.6% in '90 Q4, down 2.8% in '91 Q1, and down 0.5% in '91 Q2. Forecastersslightly overestimated the downside in the last quarter of therecession.
A Sobering Look
Martini Chat: A War Expert Discusses Afghanistan
That was an excellent and timely Middle East geopolitical analysis. Dr. Zonis did not mince words when asked pointed questions about the current "war" campaign, and how this could affect our tenuous relationships with Russia, China and all Muslim countries. Thank you.
Meet the Street: How Sept. 11 Might Change the Movies
You might have asked Terry George about what impact the sex and sexual innuendos that constantly pepper U.S. films and sitcom-type shows have in terms of how foreign folks view the U.S. people. The Arab nationslook at the U.S. as a Christian nation and all they see is the seamy stuffand the violence. That's Christianity to them. Is it any wonder theydon't want anything to do with American culture in their countries? It's allbecome very degrading to us as a nation, and we, if we were truly Christian,would not be watching.
American Air Style
Meet the Street: An Economist Argues Against Federal Bailouts
What David Henderson fails to mention is if an airline goes bankrupt, the assets will be picked up by some other airline, but what about the employees? Thousands of employees would be on the street.
Right now there are very few carriers that have the extra cash to spend onexpansion by buying the assets of a failed airline. Also, if this countryhas only, let's say, three major airlines, there goes the competition; fares go up, service goes down.
Airlines are a very important part of our economy and the people of thiscountry have a short memory. They do not like inconvenience, therefore, theywill not be going to that business meeting or maybe taking their families toDisney world by train or bus. This country is used to the speed of airtravel. We will not go back in time.
As a taxpayer and frequent business traveler, I applaud Congress for acting in behalf of the airlines as quickly as they did. If you were an airline employee or maybe your mother or father worked for the airlines, I wonder ifyour opinion would be the same?
-- Beverly Walker
Disney's Best-Laid Plans Have Gone Awry
Oh come on
, do you really want
to be the psychiatristfor your children? You're down playing a stock because the company isn'ttrying to solve the psychological problems of the nation. Disney isdoing exactly what the president called for -- they are working as theynormally would. Although you say you aren't, you are in fact tellingpeople to sell Disney. You say you aren't telling people to sell, thenyou list a string of "factoids" justifying the sale. If your readersare stupid enough to sell at $17.90, then people like me will just buymore. Disney isn't going away. In fact, they'll benefit by their recentstock buyback. Sure, some Europeans won't fly to Orlando for avacation next summer. Did you ever think that some Americans won't beflying to Europe now? We are now planning to cancel our trip to the U.K.and France. Guess where we're going now -- Disney World!
-- Charles Gillis
Your column on Disney was excellent, although your
face-off opponent alsomade some good points. When considering Disney's future prospects, Ithink you have to add into the equation the fact that they have dissipateda lot of their goodwill among their target market: families with young kids.By extending their franchise into "adult" markets, they have affixed theDisney name to many questionable products. This may have producedshort-term financial benefit, but long term, the bottom line is that many parents no longer trust Disney.
Michael Eisner's gratuitous slap in the face toward Baptists chased away one ofthe core segments of his audience, and one of that's actually having kids. I grew up watching Disney. I resent it when they usethe goodwill built up over all those decades with people like me in orderto promote films like
I took my kids to see the
The Princess Diaries,
and we enjoyed it. However, when I see the Disney name Idouble-check before I take my kids. It's no longer an automatic decision;in fact, I tend to avoid Disney when possible.
When Michael Eisner took over Disney, it was like a gold mine with all the gold -- decades of accumulated goodwill -- still sitting in the ground. Now they've tapped that resource. Going forward, "Disney" won't mean the same thingit did in 1980. Now, it's just a multinational conglomerate trying to sellquestionable products to your kids. As Ben Franklin said, "Reputations arelike china: easily broken and never fully mended."
Disney's been struggling for a while. It looks like they hit their highback in 1998. Their problems are not just related to the terroristattacks, although that's certainly not going to help. In 1998 and thenagain in 1999 and then again in December 2000, Disney found support around 25.Now that they've decisively broken down through that level, they can't rely ontheir faithful customers to pull them back up.
-- John Galvin
Bailing out the Skies
The Daily Interview: Airlines Could Be Headed for a Grounding
Here's an idea. Why not let the governmentbuy round-trip tickets from the airlines and distribute them among thetaxpayers based upon some undetermined method. Rather than just giving themoney to the airlines, this would actually put extra money into the economy.Rooms would need to be booked, meals eaten and
spending increased in thosedestinations. In addition, the airlines would need to maintain a full workforce to handle the passengers. Granted, many of the details of this idea have not beenthought out, however, I thought this was sensible alternative to theproposed bailout.
It's hard to believe that the government will let the airlines go into bankruptcy, but what will happen to the 100,000-plus laid off employees filing for protection in bankruptcy? That surely will be a large impact on the economy. It all is starting to be a domino affect. I am an aircraft machinist/mechanic waiting to get notice in what's up, also waiting two more months until I am able to retire. It looks like it's all on hold. Everyone has a bad taste in our mouths, and we all feel really bad
about what has happened.
Bursting the Buyer Bubble
It's Time to Investigate Those Who Inflated the Bubble
I loved your article. You are right about the empty bag that wassold to the naive and trusting American people. Also, we all know people whobecame either instant millionaires or close to one. But the reality is thatmost people have lost a bundle while the brokers became richer and richer.The SEC should be held accountable because they have to have known thereality of the situation,-- there were no earnings behind these companies.Luckily for my family, we had an advisor who saw and warned us of this. Whata shame that the scam artists were allowed free reign. Thank you.
Dr. James Waite
I read your article, I couldn't agree more. I was saying this to friends and co-workers more than 6 months ago. The implosion of the Net sector signaled a fundamental inadequacy in IPO requirements. Companies like Webvan and TheGlobe.com, among many others, had no business going to the equity markets to raise capital. In terms of their operating histories, they were far too immature to merit anything but venture capital funding.
In my opinion, when an investment house underwrites an IPO it vouches, to some degree at least, for the legitimacy of that business. Of course the prospectus lists all the risks, but when company after company goes under, the legitimacy of the underwriting process has to be called into question.
Congress needs to step in and either force the SEC to establish much tougher underwriting requirements, or write them into law themselves. Also, there should be something akin to lock limits in the initial trading of these stocks. Stocks going off at 4, 5, even 10 times their offering price is ludicrous. It turns the stock market into a casino.
As for the valuation bubble in the tech and telecom sectors, that is much more difficult to address. You will never be able to prevent the occurrence of such bubbles unless you actually tie the value of the stock to a fiscal parameter of the company itself, such as revenues. I don't think that is likely to happen in the forseeable future. Megacap fund managers who never had a problem with the valuations of these stocks simply because they were the leaders in their fields have faded from the headlines. They'll be back when the greed train starts rolling again. People simply have to realize that these guys needed investors to keep buying these stocks to keep their funds growing. These funds were so big that only megacap stocks could impact them. This can certainly happen again. The buyer must always beware.
Cleaning up Biopure
Biopure's Safety Claims Leave Some Doctors in Doubt
You seem bound and determined to trash
product, Hemopure. In doing so, you've made the same mistake.
Biopure CEO Rausch made a statement; it lacks some of the sophistication of a scientist. The statement asserts that some instances of temporary renal failure occurred in patients treated with either Hemopure or blood transfusion; furthermore, the incidence of renal failure was the same in both groups, within the bounds of statistical significance.
If this indeed is accurate, then Hemopure has been proven safe in relation to the current standard of therapy, transfusion.
One of your physician sources states, that transfusion does not cause renal failure. Yet, these instances of renal failure occurred in some patients treated with transfusion. Why? Because medical events will occur in human beings undergoing surgery or other alterations of physiology. Some patients may have been predisposed to renal failure by diabetes, hypertension, medication or other factors; the stresses of surgery, including a drop in blood pressure with surgical blood loss or anesthesia, could then precipitate renal failure. Physicians observe such events commonly.
The incidence of renal failure in both groups may have been higher than that usually observed in surgical patients; many studies have encountered the same type of unexpected phenomenon, a form of sampling error. Yet, the conclusion stands: Hemopure was no more likely to cause renal failure than transfusion. Indeed, Hemopure may not cause renal failure at all.
You also miss the point when you dismiss the determination of "risk" as skirting the issue of actual causation. Causation IS risk. If a large group of smokers had an incidence of lung cancer no greater than a matched group of non-smokers, then no causal relationship could be established between smoking and lung cancer. As a hematologist, I am an expert on the subject of blood transfusion.
David H. Witt MD
Breaking the Tech Addiction: Five Investor Delusions About the Sector
You ask when tech investors will break the addiction, well, here's when:
1. When you at the
The Street. Com
do. When you stop writing about them, and why nobody should ever own them. When
stops featuring them on its home page. When I go to your home page and see nothing about "tech," then I'll know it's time to sell.
2. When today's dogs never become tomorrow's stars. Remember a few years ago when analysts, pundits, writers, etc. were dissing tobacco stocks? How about oil service stocks? REITS? I'll bet the people who bought those "sectors" when everyone was selling are pretty happy now. I've learned never to chase hot sectors and never to dump those which are out of favor for the moment, like tech stocks are now. A few years from now I don't want to be kicking myself for selling my Q's at a loss.
3. When the Dow and S&P 500 stop being dead money. I know the Naz has gone down 60%. But it has the potential to go up 100% in a year, we've seen that. I'll just bet that people who buy the Q's today will be a lot happier a year or two from now than those who buy DIA or SPY. The upside potential seems to be greater with tech (Naz) stocks, and if you're going to take risk, it might as well be risk that your equity investments might outperform the risk-free sectors. I don't see the Dow falling in that category.
4. When it becomes certain that the U.S. equity markets are like Japan's, and indexes will never go back up to their highest point as they have always done in the past. We may be there, but I tend to agree with those who see differences.
5. When Congress changes the rules to allow capital losses to offset ordinary income up to 100%. Last I checked, the limit was still $3000. Oh sure, you can still carry over, but that's too strung out. As it stands now, any investment in the stock market, whether it's NAZ, Dow, or S&P is only good for offsetting other capital gains or ordinary income. If my Q's don't start going up, I plan to sell 100 shares on the first trading day of each year, offsetting $3000 in ordinary income. I dump them all now, I miss out on the chance that they might go up again, and I'll have to remember to carry over the loss for years to come.
As long as
tells us all to sell tech stocks, I'll keep buying.