Wall Street: A Wild Ride
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KWAME HOLMAN: Caution was in order this morning on Wall Street, a day after a record-setting roller coaster ride. All eyes were on the NASDAQ exchange, home to stocks of many high-tech companies that make up the so-called “new economy,” companies like Amazon.com, Dell Computer, and MCI WorldCom.
Earlier this year, NASDAQ moved generally upward, peaking at 5,048 on March 10th. But it’s been volatile and downward since then. Yesterday, it plunged 14% at midday, before rallying to close down 2% for the day. Much of the money flowing out of NASDAQ’s new economy stocks went into so-called “old economy” companies, particularly those represented by the Dow Jones Industrial Average. The Dow, which includes companies like Coca-Cola, Eastman Kodak, and American Express, retreated early in the year, when NASDAQ was moving up. But since, the Dow has moved higher. Yesterday, the Dow followed NASDAQ, moving down, then back up, ending down 0.5%. (Applause)
KWAME HOLMAN: Today, broadening the new economy was the topic at a White House Conference of prominent economists, entrepreneurs, academics, and government leaders.
PRESIDENT CLINTON: How do we keep this expansion going? How do we extend its benefits to those still left behind in its shadows? What could go wrong, and how do we avoid it?
KWAME HOLMAN: Federal Reserve Chairman Alan Greenspan said it is an open question whether high-tech companies will continue to lead the markets, and the economy, upward.
ALAN GREENSPAN: The gap in expected profit growth between technology firms and others has persistently widened. As a result, security analysts’ projected five-year growth of earnings for technology companies now stands nearly double that for the remaining S&P 500 firms. To the extent that there is an element of prescience in these expectations, it would reinforce the notion that technology synergies are still expanding, and that expectations of productivity growth are still rising. There are many who argue, of course, that it is not prescience but wishful thinking. History will judge.
JIM LEHRER: We get some judgments of our own now. Ash Rajan is senior vice president at Prudential Securities; he will join us in a moment. We’re having technical problems from New York. We hope that he will be joining us in a moment. E. David Ellington is here. He is the chairman and CEO of Netnoir, an Internet Web site focusing on black culture. Hugh Johnson is chief investment strategist at First Albany Corporation, a brokerage firm. And Robert Shiller is an economist at Yale University and author of a new book on financial markets, “Irrational Exuberance.” Both he and Mr. Ellington attended today’s White House Economic Conference.
Mr. Johnson, what’s your reading of what’s happening right now on Wall Street?
HUGH JOHNSON, First Albany Corp.: Well, I’d say the simple version, Jim, is that, you know, we had the market go a long way very fast and reach levels that are arguably overvalued. And now it’s sort of coming back down to earth, not the overall market, but primarily these technology stocks and Internet stocks. The more elaborate version is we’ve gone through a period of fairly elaborate speculation, where individuals have been, you know, borrowing lots of money to buy stocks at prices that were arguably overvalued, with the dream or fantasy that they’d become even more overvalued, and financial market history tells us that, when you have a period of speculation, it’s often followed by a period of distress, revulsion, where prices come down and we come back down to earth, so to speak. So it’s really a simple version of what goes up must come down, and we’re seeing that right now played out in front of us with those technology stocks and Internet stocks.
JIM LEHRER: There were a lot of folks who said quite openly yesterday, they were scared, this whole thing was scary. Did they have good reason to be scared?
HUGH JOHNSON: Well, they’ve got… I think they’ve got good reason to be scared because, when you see prices come down that fast, it’s obviously a very scary and an emotional experience. But if they check financial market history out, they’ll see that they shouldn’t be scared, primarily from the point of view that this kind of pattern gets repeated over and over again. It might mean that there’s more ahead of us in the way of sort of an adjustment down in prices. But this is not unusual in terms of what happens in financial market history. Again, what goes up goes up fast, comes down and comes down very hard, and it can be very emotional and very scary.
JIM LEHRER: Ash Rajan has joined us. Mr. Rajan, welcome.
ASH RAJAN, Prudential Securities: Thank you.
JIM LEHRER: Where do you come down on the scare market here? I mean is this something that people should be worried about, or is this just something that’s understandable and should have been expected?
ASH RAJAN: In fact, I think you hit the key word “expected.” We were all anticipating some sort of a pullback and a correction. It happened. But Wall Street is not known to be sober. We tend to overreact both on the positive and in the negative, and we did exactly that yesterday afternoon. I think there was a lot of a very climactic type of selling that’s typical, that the technicians would argue that’s typical of a bottoming of the market.
JIM LEHRER: Well, now, Alan Greenspan said today that, I mean in typical Alan Greenspan fashion, he said, you know, the technology stocks, or the technology companies that are driving the market, they could continue to grow and grow forever, or that could be wishful thinking. Where are you on that?
ASH RAJAN: I’m right in the middle of that sentiment. I certainly believe that technology, telecommunications, e-commerce, are central platforms for growth, not just to this economy in the U.S., but certainly the global economy, Jim, and I’m very, very convinced that the participants of those three sub-sectors of the economy will do very well from an investment point of view.
JIM LEHRER: Mr. Johnson, who’s getting hurt by this volatility?
HUGH JOHNSON: You’ve got — anybody that’s over focused or concentrated on technology stocks. The real lesson of this is you need to diversify your investment portfolio, if you’re overexposed in large-cap, or not even large-cap, but all technology companies, Internet companies.
JIM LEHRER: What’s large cap?
HUGH JOHNSON: Large cap is really larger companies, companies like Oracle, Microsoft, Texas Instruments, Sun Microsystems, some of those. But most importantly are the Internet companies, Internet companies like Priceline.com. You’ve heard names like E-bay, America OnLine, Amazon. Those that owned too big a percentage of their portfolio in just those stocks found out, first of all, the lesson of diversification, but it was a very painful experience for them.
JIM LEHRER: Mr. Ellington, they’re talking about you, you’re in the Internet…
E. DAVID ELLINGTON, CEO, NetNoir Inc.: I know, and I’m, like, a little surprised. Well, I mean clearly there are some serious issues there, and we think that, at least in my space, that there’s still a great deal of opportunity. We are not… I think the lesson to learn is really the whole margin issue. I think that’s really what’s profound.
JIM LEHRER: Explain that.
E. DAVID ELLINGTON: The idea that people borrow money to actually buy equity, to buy stocks. And I think…
JIM LEHRER: And hope it goes up.
E. DAVID ELLINGTON: And pray it goes up because you get that…
JIM LEHRER: They do more than hope, they pray?
E. DAVID ELLINGTON: Yeah, so that ultimately they’ll be able to benefit, and make some money out of it. I think clearly…
JIM LEHRER: Excuse me. Let’s explain why that’s a problem. If you already have money and you put it in the market, you can afford to go up and down and up and down. But if you’re borrowing all the time…
E. DAVID ELLINGTON: In theory, you can’t. You’re only supposed to use money in the markets that you can afford to lose. So that’s in theory, but this has been a frothy market for some time, so a lot of people have been participating in a lot of different ways.
JIM LEHRER: But you’re in the Internet business, and you hear people like Alan Greenspan or anybody say… Well, Mr. Johnson just said, “hey, be careful in the technology area.” And that this may not be the peak. We may have already peaked here. Do you feel that way?
E. DAVID ELLINGTON: Not at all. Coming from the Bay area and I drink the Kool-Aid, as I say, a lot. Bottom line is, we think that there’s still… We’re in transition. We’ve come from the old economy into this transition period into the new economy. I’m not naive. This is clearly, when you have… you know, the metrics here are completely different. We are focusing on price-to-earnings ratios and that kind of stuff, typical companies. But here in the Internet, it’s more based on momentum, size in the market, strategic relationships, growth. You know, Yahoo came out today with some numbers, they beat their numbers. So there are some bellwether stocks out there that are really showing great growth and great growth potential.
JIM LEHRER: And it’s not even close to being over, in your opinion?
E. DAVID ELLINGTON: Oh, no. I mean, again, we’re in transition. This is only… This is year 5.5 of the Internet phenomenon. It started with Netscape’s IPO back in November of ’95.
JIM LEHRER: That’s an initial stock offering, right?
E. DAVID ELLINGTON: Exactly. I’m sorry, their initial private offering… public offering.
JIM LEHRER: Public offering.
E. DAVID ELLINGTON: The bottom line is that this is a great period, there’s growth, there’s going to be a lot of volatility. I don’t… you know, we, none of us deny that. And there’s going to be a lot of washing out. And I think what the market is saying… A lot of people are betting on the future, you know, deciding who’s really going to be the player and that player will seriously dominate. Look at the position of America Online. It was able to buy Time Warner. And hopefully that will be approved, and we all expect it will be. So the bottom line is there’s a real transition, there’s a real new economy out there, and it’s… we’re in a transition period.
JIM LEHRER: And it’s real, and it’s nothing to worry about?
E. DAVID ELLINGTON: It’s real, we all… It’s going to be very volatile, but there’s a lot of opportunities still out there.
JIM LEHRER: Professor Shiller, where do you come down on this?
ROBERT SHILLER, Yale University: Well, the Internet economy is real and is important, but people today are exaggerating the importance, losing sight of the fact that everything has its price, and some things can be overpriced. The Internet is exciting. The whole family loves it, right? They play on it. That excitement conveys an exaggerated sense of value to the market.
JIM LEHRER: In what way? How does it do that?
ROBERT SHILLER: You’ve got to compare the Internet revolution with other technological revolutions that have also a very important impact. I was thinking just the other day, vending machines, candy bars, that’s an important innovation. It’s not exciting, right? We’ve had lots… in history, lots of important innovations that don’t have the excitement of the Internet, and they didn’t have an impact on the market.
JIM LEHRER: Well, now, how does the excitement get translated into a stock price in a way that it shouldn’t be?
ROBERT SHILLER: Well, the thing you’ve got to remember, a stock price is the price at which all of the shares are demanded. So it’s determined by what do people want to pay for it? And so the kind of decision that people are making is very emotional, personal, you know, “do I want this or I don’t?” It’s like walking into a restaurant and deciding what you want on the menu. And a lot of people now want these stocks.
JIM LEHRER: But hasn’t it always been that way, or are you suggesting in the new economy, there’s more emotion, there’s more of that than there has been in the past?
ROBERT SHILLER: We are in a very unusual market situation. The market has never been this overpriced. There have been other periods in history…
JIM LEHRER: Now, I hate to keep interrupting you here, but what does overpriced mean? How do you say that a stock is overpriced or not?
ROBERT SHILLER: See, what people forget, they look at a stock and say, “this is a wonderful company.” But that doesn’t mean it’s a wonderful investment. Everything has its price, and the feeling that I have and that many people express who look at this, that the market… the public has just valued things too highly, and so in the long run… look, we’re forgetting that on this S&P, we’re getting a dividend price ratio of 1.1%.
JIM LEHRER: What does that mean?
ROBERT SHILLER: That means that the only thing that you get from holding the stock from the company is 1.1% a year. That seems low. I mean, why would people want that investment?
JIM LEHRER: So you’re essentially… everybody who’s into these stocks is betting on the stock going up and eventually selling them, and that’s how they’re going to make money? It isn’t holding them for a long haul and clipping coupons they used to say. Forget that idea, right?
ROBERT SHILLER: What people forget is that the reason stocks historically have been great investments is because they pay a lot of dividends. Typically, stocks pay 5% dividends in history. That’s a good return. Now they’re paying 1%. That’s a bad return, but people think it’s going to go up and make up for it.
JIM LEHRER: — Mr. Ellington -
E. DAVID ELLINGTON: I mean the bottom line is in this particular segment of the stock, of the stock market, in the technology sector, specifically in the dot.com sector, the market has decided that this is how this area will be dealt with, the way you make money is to sell and trade your stock. It isn’t necessarily waiting for a dividend. Now, I understand how a lot of economists feel uncomfortable with that. We were just at the conference today and we were joking around that the economists were more pessimistic than some other folks. But the bottom line is, is right now this is the transition. If you believe in the free market, it seems to be speaking loud and clear.
JIM LEHRER: Mr. Rajan, what does that market say to you is going to happen to you from this point on? Take from us say, here to tomorrow and the next day?
ASH RAJAN: I think the market’s already beginning to fall into a sense of compromise between the so- called old economy and the new economy. The market is now demanding that a new economy does not necessarily have to be analogous to companies that don’t make the money. So they would rather invest in those companies or enablers that make the old-economy companies sort of enter the portals of the new economy. And that to me is a terrific investment idea, and a very, very solid economic concept because…
JIM LEHRER: How do they do that? How does that happen? What do you mean?
ASH RAJAN: Well, you invest in companies like the Sun Microsystems, like one of our colleagues alluded to earlier, or Oracle. These are enablers. They actually make it possible for the old-economy companies to enter the so-called new world, but this way they’re still making the profits, they’re still making the revenues, and gives you a perfect investment opportunity that’s a lot more tangible and accountable.
JIM LEHRER: For instance, Mr. Johnson, it was widely said on this program and elsewhere in the world that, when AOL bought Time Warner, that was a classic case of an old economic company being purchased by a new economy company. Do you agree?
HUGH JOHNSON: Yeah, I think that’s a good case. But I think the lines of distinction between old and new should be really blurred. You have companies like General Electric, for example, which are users of the new technology that are being produced by new companies or new-economy companies, but they also are in a sense a new-economy company and one that’s sort of an… they produce the new technology and they also use the new technology. So I don’t know about those distinctions. I don’t know if they’re very useful.
JIM LEHRER: Some people have suggested, Mr. Johnson, that an old company is not going to survive if it doesn’t get into the new economy.
HUGH JOHNSON: Well, I think that’s very clear, and we’ve seen some companies more recently announce that they’re not going to have the kinds of sales, and most importantly, earnings, and the reason they’re not is because they, quite frankly, haven’t been using technology to the extent, and driving their costs and driving their profits by using technology. And those companies, quite frankly, will be left behind in a very competitive economic environment.
JIM LEHRER: Mr. Ellington, how do you see this? Do you see companies like yours eventually becoming part of the old economy, or the old ones coming and joining you?
E. DAVID ELLINGTON: Well, actually, I think in terms of the overall market, I think that’s the trend that’s happening. And that’s what’s going to create the… business webs are going to be really exciting and the whole… I know you have to explain every term– the idea of the old businesses, old-economy businesses transitioning to the new economy and how can you facilitate that and create businesses to help them do that?
JIM LEHRER: But that’s an exciting future to you?
E. DAVID ELLINGTON: Oh, that’s… I can’t imagine anything more exciting. It’s revolutionary, it’s a paradigm shift. It’s becoming more efficient. It’s actually maintaining leadership position for the economy for this country. I think that’s really a great kind of opportunity.
JIM LEHRER: You see this the same way, quickly, Professor Shiller?
ROBERT SHILLER: I think it’s wonderful, I love the Internet, I love these new sites, but I think some people are paying too much for something and they’re going to get hurt.
JIM LEHRER: All right, thank you four very much.