Alternative Insight
The U.S. Stock Market
The Skewing of American Life
The new millenium stock market has seen a shift in investment from the XX century economy, presently referred to as the "old economy," to a XXI century "new economy." The new investment direction and terminology indicates more than an economic shift. They are posing a deliberate break with the past, formulating a new social and cultural outlook, and rejecting guidance from previous market experiences. They portend an obscure path into the future. They are skewing American life.Those who labored for decades with their muscle power in the coal mines, steel mills and sullen factories, and built a highly visible infrastructure and country of enormous wealth, have been eclipsed by finger power workers. These workers are using minimal physical energy to build a less visible technological infrastructure for a new economy that creates huge personal wealth for themselves. The earlier workers built an economy that supported a strong stock market base. Their heirs have propelled the economy to great heights and have temporarily benefited from a volatile stock market.
If a cynic is a person who knows the price of everything and the value of nothing, (or is it vice versa?), then cynics must be investing in the present stock market. The evaluations of the infant "new economy" stocks, such as Ariba (~90 million dollars in sales, market worth of ~30 billion dollars) have exceeded those of many of the prominent old-timers, such as Eastman Kodak (~ 13 billion dollars in sales, market worth of only 17 billion dollars). The courtly gentleman at Salomon Smith Barney no longer appears on television to state: "We make money the old fashioned way. We earn it." Instead, the more relevant stock climate is presented by a Morgan Stanley Dean Witter (how the names grow) advertisement in which an investor uses a stock "tip" to invest in a company which he later learns will grow fantastically because "it understands the strict demands of the Martians in the Victor nebula." More than reflecting the state of the economy, the present stock market may reflect the mood of the society.
That mood is euphoria and optimism-- a prosperity that has no limits. Attention by an increasing part of the population to the stock market crowds out their interest in social and international problems. Don't pick up a martini and circulate in a gathering unless you know the price of Cisco Systems and understand the value of Application Specific Circuits. Don't mention Kosovo- no company with that name. Be prepared to answer your child's determined question: "What is a microchip?" Gore and Bush know the definition. They also know that "it is no longer the economy stupid." No, "it's the stock market stupid."
A basic fact is overlooked in the money talk and money gathering. Even if the stock market, performance still reflects the economy and its increasing wealth, the stock market doesn't create wealth by itself. It provides a medium for transferring the wealth from corporations to individuals and from individuals to other individuals. The former transaction occurs from dividends. The latter transaction occurs from the buying and selling of shares-- the buyer transfers funds to the seller who may use the proceeds for other stock purchases or for personal spending. Today's aggressive investment reasons defy the previous timid classical reasons to invest. Investment objectives have become skewed.
Receiving dividends is no longer an objective. It may even be a liability for both the investor and for the corporation. In most cases, today's investors have sufficient income and don't want the tax liability. Corporations know they can't remain stagnant and need the money to continually invest in their own business. Why pay dividends if today's investors don't appreciate receiving them? Now, it's only long term growth-- a piece of the action for the future. However, the abrupt increase in the price of the popular fast flying growth stocks, 1000 to 2000 percent in a few years, and in some cases in only a few months, have brought the future to the present and posed a dilemma-- why hold a stock for a longer term if the stock has already reached its predicted potential? And if Proctor and Gamble, a household name for growth stock investors and supermarket shoppers, can lose 1/2 its stock value in one week, who wants to hold a stock for the long term? With the vast amount of Keogh and 401K plans providing an endless flow of money into growth funds which are obliged to reinvest the money into the same growth stocks, how can the investor be certain that the stocks are not being pulled up by their "bootstraps?" The myriad of on-line investment resources should clarify the worth of any company. Except, the facts are being skewed.
(1) Investors aren't properly informed of value. Since it has become a habit for Initial Public Offerings (IPOs) to multiply in price after the initial offering, why doesn't the company, and its investment banker, promote the offering at the higher price? The answer is obvious-- The stock doesn't merit the high value and informed investors wouldn't purchase the IPO at the higher price. These "initial investors," including the investment bankers, realize they can easily multiply their investment if the issue is offered at the lower price and the value is not known. Issues that ordinarily wouldn't be acceptable for marketing by major investment bankers are now acceptable because the return on their sale is huge and guaranteed.
(2) Investors don't realize that the assets and of some new companies come only from the IPO proceeds and borrowing, and that much of the income is derived from investments of the borrowing and not from company activity. A high flying communications company, whose stock has gyrated from 16 to 4 and back to 16 in one year, has total assets of ~1 billion dollars and, coincidentally, >1 billion dollars in stock sales and borrowings.
(3) Investors don't realize that income in some of the fast flying Internet stocks come from the advertising revenue and purchases made by investors in the company. In 1998, a major Japanese company had a 30 % shareholder in Yahoo and its related companies, and also accounted for more than 8% of Yahoo's revenues. The same company subsidized revenue in many of its holdings.
(4) Investors are not aware that large well known investors, who are promoted to demonstrate they have the utmost faith in the new company, are not actually speculating with their own funds. They may trade a service, such as permitting some free advertising for a percent of a company. A major newspaper traded ad revenue for shares in an on-line investment advisor. The stock escalated from $18/share to $70/share on the first day of trading. The share price now sits at $12. .
(5) Several "hot" companies have negative cash flow that continually bleeds them close to extinction and forces them into continual stock offerings and borrowings in order to rescue themselves from disaster. Despite having its revenues soar from 60 million dollars in 1997 to 190 million dollars in the first nine months of 1999, the previously mentioned communications company has had negative income and cash flow in all those years. Since its operating expenses ($314 million) have greatly exceed its revenues ($190 million) in the last nine months, and since its liabilities now exceed its assets, the company may be again forced to issue more stock in order to stay alive.
(6) Psychological factors impel many momentum investors to follow a stock in its fast moving up trend. Mysteriously, stock prices often display a sharp spike in which a rapid upward movement is followed by a rapid downward movement. Iomega, a previously popular company due to its novel "zip" drive for computers, had its stock surge from $10/share to $70/share and back to $10/share in the space of two months. Its stock price presently hovers around $5. How could the company's prospects change so quickly?
(8) Some "high flying" tech companies have products that have theoretical limitations. They may work in a breadboard system, but cannot be mass produced or mass marketed. Iridium, a worldwide satellite phone and mesage provider, had technical problems, pricing problems, marketing problems and competive problems with cellular that couldn't possibly be overcome. Yet, the company raised hundreds of millions of dollars from investors and went bankrupt before its satellites had many trips around the world.Enthusiasm for using the stock market (rather than the Social Security system) as a long term investment for retirement may conflict and obscure the market workings. Having a stock market that benefits a major portion of the population, and not only a select few, may require the market to function similarly to government social policy. Rapid stock movements and price gyrations prevent retirees from being guaranteed a definite return when it becomes time for them to cash in their portfolios. To ensure dependable income for retirement, the stock market will have to be dependable. This type of market will operate similarly to the "pay-as-you-go" Social Security plan. Youthful stock buyers will support the stock prices that will be sold by retired seniors. As in Social Security, present day earners will support the income of present day retirees. For shorter term investments, in which the stock sale is for personal spending, the stock market behaves as a vast transfer payments system. Those who have surplus money, temporarily replace their cash with a non-guaranteed stock certificate, and transfer the sale proceeds to those who have a spending need. The stock buyers wait until another trader is willing to do the same for them.
The stock market frenzy and eagerness to become rich from it may skew society's and individual's directions. If people pursue stocks that have no calculated worth, will that reflect their outlook on life? If a person's life depends upon economic strength, and that fails, will the person's personal life also fail? Will personal worth become related to portfolio size?
Whatever happened to Bethlehem Steel?
