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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Commentary Of The Month
November 12, 2004
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by Christopher Mayer

In 1903, Henry Ford built a racecar. He did this after he left the Detroit Automobile Company, to pursue his idea of going into business himself. He built a racecar because he needed capital and this was the way to raise it - build a racecar, win some races and get some attention.

After he built it, he sought a driver brave enough and strong enough (the car was steered with a tiller, not a wheel) to race it. Ford hired a professional bicycle rider named Barney Oldfield and spent a week teaching him how to drive this new, powerful (but unreliable) racecar.

Before the race, Oldfield uttered what must be one of the most memorable lines in all of racing history. He said, "Well, this chariot may kill me, but they will say afterward that I was going like hell when she took me over the bank."

Fortunately for Oldfield, Ford’s new chariot did not kill him and he went on to win the race. Ford got the attention he needed, raised the capital he required and the rest, as they say, was history.

In my opinion, today’s investors have something in common with Oldfield’s spirit. With some of today’s high-flying stocks, I doubt investors will come out of it as well as old Barney Oldfield did. No, these stocks are going to take investors over that bank.

If you think the tech bubble popped in 2000, I urge you to take another look. America’s love affair with racy concepts, phony values and paper pseudo-wealth continues unabated. The flair for risk-taking is still alive and well. Investors are still smitten with New Economy thinking.

Reading a little of veteran tech watcher Fred Hickey’s analysis a few days before Halloween was like reliving a horror show. I kept thinking, "Not again! Didn’t we just go through this not too long ago? Didn’t pie-in-the-sky tech investing get smacked once already?"

"One would have thought that such a shellacking would have ended the irrational love affair for tech and Internet stocks," Hickey writes. "But here we are, almost four and-a-half years from the bubble’s bursting in March 2000, and we are still waiting for a return to a sane investing environment."

Consider just a couple of these tech marvels...

Hickey comments on Travelzoo. Who knows what Travelzoo is all about, but Hickey notes that at a price of $75, the stock was being valued at $1.2 billion, which was 50 times its sales of $23 million. 50 times sales! That value was so out of whack, that when the company had to raise some money with a secondary offering, private investors paid $40 per share - a 47% discount to what investors in the open market had paid.

Or consider Google, selling for about 186 times earnings, and up about 60% from its IPO. Better yet, just look at the whole NASDAQ itself. Hickey notes that the NASDAQ as a whole is trading for 57 times earnings and nine times sales.

Will Rogers once remarked, "The short memories of the American voter is what keeps our politicians in office." Well, we can say that the short memory of the American investor is what keeps these stock prices where they are.

Have investors forgotten the devastating losses that such craziness can lead to? Have they forgotten about the 95% losses on stocks like CMGI, JDS Uniphase, Sycamore Networks and all the rest of the last batch of stocks to carry these kinds of absurd valuations? Have they forgotten that the NASDAQ lost 2/3 of its value in two and-a-half years after starting with such nosebleed valuations?

"Often I sit in my office and I cannot believe what I’m seeing," writes Hickey with exasperation. "The lunacy does not seem to end."

What we are witnessing may be like some sort of Indian summer, a little warmth in the midst of a bearish winter. It’s like a weigh station to a new, more normal value. What that normal value might be, is anybody’s guess.

Famed contrarian Jeremy Grantham, who’s firm, GMO, manages billions worldwide, puts a more normal value for the S&P 500 about 35% less than what it is today. He writes, "A normal profit margin combined with a normalized or trend line p/e of 16 unfortunately produces for the S&P 500 a fair value of 725, which compares painfully to the S&P’s current price of just over 1100."

Unfortunately (or fortunately, depending on your perspective), the normal market is the one that never happens, as markets tend to overshoot, and a bear market could take us below that reasonable projection.

Having laid out that gloomy scenario, I still think there are opportunities in today’s markets. Believe it or not, bubbles such as these often create opportunities in other neglected areas of the market. It’s like a movie theater where everyone piles in one theater, leaving good seats still available in the other theaters.

These problems are self-correcting. In other words, when one theater gets a bit too crowded, people start looking for someplace else to go.

The excessive valuations in tech-land are also self-correcting as new competitors start to come in looking for a piece of that money. Think of it this way, to borrow from Edward Chancellor, if it costs one dollar to dig a hole that is priced for ten dollars in the market, the temptation to reach for a shovel becomes irresistible.

New issues, new technologies, and new competitors will try to cash in on those stratospheric valuations. They are going to find it progressively more difficult to find buyers. More and more investors are going to start looking for someplace else to go.

During the next leg down, the intangibles of technology - the supposed "story stocks" and their great promise - will be outdone, once again, by solid tangible assets that actually deliver real cash flows. You have to be very selective and do some digging, but these companies do exist.

When the market comes crashing down, the hideaways will be in these kinds of companies, where the stock market price is a convenience, not the sole purpose of a business plan.