The world, it seems, is obsessed with the machinations of Federal Reserve Chief Alan Greenspan. And why not? The U.S. economy is on a tear, and credit is no more going to be given to the bad boy in the White House or the bitter boys in Congress than it is to the Beastie Boys.
Greenspan is the man, the paternal personification of our economic boom. And that obsession hits its frenzied peak this week with trot-by-trot coverage of his jog across the street en route to Tuesday's meeting of the
Federal Reserve Open Market Committee
. At issue is the federal funds target rate -- and all of Wall Street will be watching to see if he'll jack rates by another quarter percent.
But why should an Internet investor care? After all, Internet companies aren't out there borrowing money. With the notable exception of an
$1.25 billion convertible bond issue and offerings like
, few Net companies are turning to the bond market to raise funds. Venture capital and stocks are the coin of the Internet realm -- no borrowing there. So why do Net stocks quiver with interest-rate fears?
Most analysts on Wall Street fear that an economic slowdown will put the brakes on the Internet's growth. Indeed, when the Fed raises rates, it does so to curb such growth. But some Wall Street heavies wonder if a rate hike is enough to slacken the pace of Internet stocks, which, despite the summer slump, are up 58% this year, as measured by
TheStreet.com Internet Sector Index
"The changes in interest rates affect the demand for companies' products," says Tom McManus, equity portfolio strategist at
Banc of America Securities
. For example, he says, "a company involved in putting a new wing on the house might see a serious effect when the demand for the product itself is interest-sensitive. But I don't think that Internet companies show much sensitivity here. Their growth should be independent of just about everything." With or without a booming economy, McManus argues, Net usage is growing.
Still, the fluctuations in share price can be dramatic, particularly when the interest-rate picture is unclear. James Crowe, chief executive officer of
Level 3 Communications
, is trying to build a modern telco based on Internet Protocol technology. But interest-rate worries have so battered his stock that he took the unusual step of sending an email to each of the company's 2,184 employees to explain how interest-rate fears affect Level 3 stock.
"Investors look at our stock as an investment in the future," says Crowe, "and they discount that future reward, among other things, to the opportunity in bonds. When the bond market offers a better reward, it's natural that we'll be discounted to a different standard. Every time the Fed raises rates, investors reassess what they think Level 3's future is worth."
In other words, stocks are seen as long-duration assets with a value pinned on a payoff over time -- and discounted to the promised payoff of a bond. But how long term is an asset like Amazon.com, a company not expected to offer any return for years?
"They must be super-long duration assets. Everything is 'on the come'," says McManus. "The return is not yet visible."
Indeed, Net business are just scratching the surface of the marketplaces they hope to serve. Essentially, McManus argues, they are too puny to be affected by overall trends in the economy -- they're still at a stage where their growth (or lack thereof) is dependent on execution of business models. He even goes on to speculate that a long-term economic slowdown could even
some Net companies, because workers with more time on their hands might discover the joys of e-commerce.
"Look at the example of the home improvement stores in the last recession in 1991," says McManus. "Their business picked up as people discovered home improvement when they were out of work. Those stocks proved to be anti-cyclical. I don't expect a meaningful slowdown anytime soon, but an economic slowdown might actually ramp the rate of take-up for e-commerce."
And Greenspan will probably get the credit for that too.