Monday, September 03, 2001
ORIGINS OF THE DOT-COM BUBBLE
Having revisited The Producers, a movie by that mad genius Mel Brooks, now a major Broadway musical, I have deciphered the rationale of the dot com period of the recent US and the world’s ecionomic spurt. It was scripted from the aforementioned motion picture.In the movie, producer x and accountant have decided to sell to gullible old ladies fraudulent 50 percent shares in a Broadway show that is bound to fail. Therefore, their fraud will not be detected. Conversely, a success will expose their crime. Of course, "Springtime for Hitler" turns out to be an insane success, and the smart guys are jail-bound.
Relate this to the tech and budding commercial Internet era of the 1997-March 2000 period. Let me step through the process. Based on the success of a few trailbreaker companies, all of a sudden, hundreds of enterpreneurs determine that selling goods and services through Internet, like mail-order, bypasses the conventional costs of of office rent and store rent, and expensive warehouses near the stores, and sales clerks, brokerage clerks and warehouse people in cities earning city salaries. Big warehouses in low-cost labor areas and FedEx is all that’s needed for distribution, a minimal amount. Reducing commissions will attract stock traders, insurance buyers and parts buyers. But how to lure customers away from storesand other existing venues? Easy, offer the clients a share in the savings through humongous discounts, and sell as much as 50 percent below cost to attract initial purchases.
With that kind of prospects the enterpreneurs could sell stock in their non-functioning companies, and the cooperation of the hallowed names in inves tment banking, Morgan, Goldman Sacks, Salomon Brothers, Merrill Lynch and the like. Huge stock issues could be placed, at prices well below projected value (present value of all future earnings) producing rapid stock price increases above opening numbers, and luring millions of profit seekers into the post-IPO market. The IPOs, of course went to favored customers.
So here we had the prospective mass distributors of groceries, toys, cars, furniture and such, forecasting earnings beyond the wildest dreams of avarice. All they need is customers. Enter marketing specialists with a secret, that is called establishing a brand name. Name recognition and a good reputation - obtained by low prices, good fulfillment - are needed, and advertising, advertising, advertising will do the job. Where to advertise? The Superbowl, of course! And in some similar high priced sports events, tennis and the Series.
Does it matter that 40 unknown dot.coms wit stockholders’ money to burn will show their wares on Superbown, diluting the impact? Who can remember the names, no matter how insane or otherwise memorable the splash on the screen? Would any experienced marketing people, ad agencies and TV companies advise the clients of the foolishness of packing so many names in one event? Of course, not! Turn down money? Come on, the thing to do is to encourage them to waste the stockholders’ funds!
As the prospect of a business succeass waned, the chances of making money out of failure and the wanton greed of the ad agencies and media people became apparent to the young promoters, who sold off scads of their shares, soon as the mandatory 6 months hold period passed, meanwhile throwing away the stockholders’ money on more ads, to keep the prices of stocks high during the selloff.. There was no way that Priceline.com and Amazon.com could stay up in stratospheric numbers, and wise market heavies, Ronald Perlman and such, made piles of money short-selling Toys.com and the like.
For those of us who want to place the blame on the burst of the Technology and Internet marketing bubble and the creation of the famed "irrational expectations," the culprits are staring at us. The initiators, young promoters eager to be millionaires, wwho produced business plans that could never be met, with fuzzy math. The lying marketers, who helped them squander stockholder money, collecting 15 percent ad commissions, and the media space sellers.
And us, the greedy get rich soon speculators, Mr. and Mrs. America, who bought the promoters’ spins, looking for an easy retirement. Some of us mortgaged homes to pull out funds for speculation, hoping that the prices would go up, forevet Some of knew it would not last but counted on the "greater fool" effect, hanging in to the end - March 2000 - for the last penny of rising prices.
Another culprit was the steady growth of new money in the stock market, as more people put more of their pension monies into 401k mutual funds. The current decline is also partially due to the monie withdrawn from stock funds. A few trillion of withdrawals from the stock market will do the prices in, no matter how good the earnings.
With all this experience of the past year and a half staring at us, Why spould President Bush maintain that investing a percentage of Social Security funds in the stock market will improve the returns? The answer is twofold - one, stock market investments are historically the best, in the long run (presumably he wants to do a steady dollar-cost averaging program, into index funds,such as the S&P500, so as not to favor specific companies). And two, the unspoken one, that a steady flow of money into stock market will support a long term rise. Sounds good
With this background of experience, we have begun to revert back to the value theory. We are beginning to remember that increases of stock prices are justified by increases in earnings, and real forecasts. With this in mind, and understanding that recessions will occur when consumer confidence fails, when industry overproduces and creates excessive inventories, when capital expenditures NP?
.
Relate this to the tech and budding commercial Internet era of the 1997-March 2000 period. Let me step through the process. Based on the success of a few trailbreaker companies, all of a sudden, hundreds of enterpreneurs determine that selling goods and services through Internet, like mail-order, bypasses the conventional costs of of office rent and store rent, and expensive warehouses near the stores, and sales clerks, brokerage clerks and warehouse people in cities earning city salaries. Big warehouses in low-cost labor areas and FedEx is all that’s needed for distribution, a minimal amount. Reducing commissions will attract stock traders, insurance buyers and parts buyers. But how to lure customers away from storesand other existing venues? Easy, offer the clients a share in the savings through humongous discounts, and sell as much as 50 percent below cost to attract initial purchases.
With that kind of prospects the enterpreneurs could sell stock in their non-functioning companies, and the cooperation of the hallowed names in inves tment banking, Morgan, Goldman Sacks, Salomon Brothers, Merrill Lynch and the like. Huge stock issues could be placed, at prices well below projected value (present value of all future earnings) producing rapid stock price increases above opening numbers, and luring millions of profit seekers into the post-IPO market. The IPOs, of course went to favored customers.
So here we had the prospective mass distributors of groceries, toys, cars, furniture and such, forecasting earnings beyond the wildest dreams of avarice. All they need is customers. Enter marketing specialists with a secret, that is called establishing a brand name. Name recognition and a good reputation - obtained by low prices, good fulfillment - are needed, and advertising, advertising, advertising will do the job. Where to advertise? The Superbowl, of course! And in some similar high priced sports events, tennis and the Series.
Does it matter that 40 unknown dot.coms wit stockholders’ money to burn will show their wares on Superbown, diluting the impact? Who can remember the names, no matter how insane or otherwise memorable the splash on the screen? Would any experienced marketing people, ad agencies and TV companies advise the clients of the foolishness of packing so many names in one event? Of course, not! Turn down money? Come on, the thing to do is to encourage them to waste the stockholders’ funds!
As the prospect of a business succeass waned, the chances of making money out of failure and the wanton greed of the ad agencies and media people became apparent to the young promoters, who sold off scads of their shares, soon as the mandatory 6 months hold period passed, meanwhile throwing away the stockholders’ money on more ads, to keep the prices of stocks high during the selloff.. There was no way that Priceline.com and Amazon.com could stay up in stratospheric numbers, and wise market heavies, Ronald Perlman and such, made piles of money short-selling Toys.com and the like.
For those of us who want to place the blame on the burst of the Technology and Internet marketing bubble and the creation of the famed "irrational expectations," the culprits are staring at us. The initiators, young promoters eager to be millionaires, wwho produced business plans that could never be met, with fuzzy math. The lying marketers, who helped them squander stockholder money, collecting 15 percent ad commissions, and the media space sellers.
And us, the greedy get rich soon speculators, Mr. and Mrs. America, who bought the promoters’ spins, looking for an easy retirement. Some of us mortgaged homes to pull out funds for speculation, hoping that the prices would go up, forevet Some of knew it would not last but counted on the "greater fool" effect, hanging in to the end - March 2000 - for the last penny of rising prices.
Another culprit was the steady growth of new money in the stock market, as more people put more of their pension monies into 401k mutual funds. The current decline is also partially due to the monie withdrawn from stock funds. A few trillion of withdrawals from the stock market will do the prices in, no matter how good the earnings.
With all this experience of the past year and a half staring at us, Why spould President Bush maintain that investing a percentage of Social Security funds in the stock market will improve the returns? The answer is twofold - one, stock market investments are historically the best, in the long run (presumably he wants to do a steady dollar-cost averaging program, into index funds,such as the S&P500, so as not to favor specific companies). And two, the unspoken one, that a steady flow of money into stock market will support a long term rise. Sounds good
With this background of experience, we have begun to revert back to the value theory. We are beginning to remember that increases of stock prices are justified by increases in earnings, and real forecasts. With this in mind, and understanding that recessions will occur when consumer confidence fails, when industry overproduces and creates excessive inventories, when capital expenditures NP?
.
# posted by Wally Dobelis @ 5:17 AM 
