JIM LEHRER: More on all of this now from Jonathan Weber, editor in chief of the "Industry Standard," a magazine covering the Internet economy, and Lynn Stout, professor of securities regulation at Georgetown University Law School. Professor Stout, first just on today's news and based on what we just saw in Paul Solman's report, is there a simple reason for what happened to NASDAQ? Does that relate back to what Paul said? Has he got it right, in other words?
LYNN STOUT: I think he probably does. This was about as classic an example of a speculative bubble as you could cite. A lot of people who got involved in the market quite recently don't have institutional memories that go back any further than 1987, maybe not even that far. And if you look at history, in almost all markets not just stock markets but tulip bulbs, Florida land, you will see periods of time when prices will behave just like this. They will head for the sky for no apparent reason or maybe there's a reason there but it doesn't seem enough to drive their price increases you see. And then just as suddenly they'll come back down to earth.
JIM LEHRER: And is earth where they should be? In other words, are they where they should have been all along?
LYNN STOUT: Well, I personally think so. I could never understand, and many other professionals in the market also couldn't understand why investors were willing to pay P/E ratios.
JIM LEHRER: P/E; what's that?
LYNN STOUT: Price/Earnings ratio. It's comparing the price you pay for the stock with the company's earnings. A P/E ratio of 50 means you're paying 50 times the company's annual earnings to get the stock. There's very little justification for paying that high a price unless you expect the earnings to suddenly turn around and become much larger.
JIM LEHRER: And those rules kind of went out the window during this upsurge in dot-coms and tech overall, right?
LYNN STOUT: A lot of individual investors in particular convinced themselves that these companies were going to be making fortunes in the very near future. And that led them to pay prices that by any historical standard, seemed outrageously high.
JIM LEHRER: Jonathan Web, what's your analysis of what happened?
JONATHAN WEBER: Yeah, I would agree that the dot-com thing was certainly a classic bubble phenomenon. It's important, I think, when looking at the NASDAQ to separate the dot-com bubble, which was a very specific thing, with two other things that are happening now at the same time. One is that in the telecom sector, which is related to but not certainly not the same as dot-com, you have a huge over capacity issue, which has been building for a few years; and that has very recently hit the telecom equipment and service companies very seriously. The other thing that's gone on is that as the economy more broadly is slowing down, there's been a big pull back in capital equipment spending by large companies of all kinds and that's hit the computer makers so you kind of have a triple whammy going on, which is really accelerating the downward slide.
JIM LEHRER: Well your publication covered the, I should say the rise in all of this particularly on the Internet end of this. Did your... did you and your folks see something that this wasn't going to last -- or did you think it was, that these were smart moves that these people were making in investing their money, both the big shots as well as the ordinary investor?
JONATHAN WEBER: Well, I think it was pretty clear all the way along that a lot of the extremes of the dot-com economy were not sustainable at all. The valuations were not sustainable. You know, I'd like to think that as a publication I think we did a fairly good job of expressing a lot of measured skepticism all the way along. It got to such a kind of extreme height that the return to earth has been much more dramatic and much more brutal I think than most people had anticipated.
JIM LEHRER: Well, Professor Stout, for instance, the figure that is being thrown around now is that the amount of money on paper at least that has been lost on the NASDAQ market this last year, from the drop, is $3 trillion. Now what kind of money is that?
LYNN STOUT: If it were really $3 trillion, it would be a lot of money. But, as your question points out, this wealth was always paper wealth. People who looked at their stock statements and said, oh, my goodness, my amazon.com has gone up 1,000%, were looking at just a figure on a piece of paper. If everyone who owned amazon.com stock had turned around and tried to sell the company on that day, they would have find that in reality it was worth a lot less than the marginal prices reported in the Wall Street Journal suggested.
JIM LEHRER: So the woman, the young woman that Paul Solman interviewed who said she had $215,000, now she had $90, she never really had $215,000 unless she had gone out that particular day and gotten lucky and was able to sell it all, right?
LYNN STOUT: Only if she had had the prescience to sell when she was rich, or when she thought she was rich.
JIM LEHRER: What do you think about the $3 million figure, Mr. Weber, does that mean anything, and what does it mean, if it does?
JONATHAN WEBER: Yeah. I would agree that the number really doesn't mean a whole lot. It was paper money and the fact that as you pointed out if somebody has $100,000, it goes to 230 and comes back to 90, you know, have they lost 10 or 140? I think realistically they've really lost 10. I think that points out something else which is very important to keep in mind in all this, which is the issue of perspective because you can kind of compare things to the peak of the bubble and things look really horrible but if you compare it to what was any kind of reasonable framework for looking at the things to begin with, it looks very different. I would cite Yahoo which was in the news last week as one example of that.
JIM LEHRER: What happened with Yahoo? Yahoo, of course is a server. You use it to get on the Internet. What went wrong for them?
JONATHAN WEBER: Well, Yahoo is the most... One of the most popular sites on the net. They rely on advertising for their revenue. And they were a poster child for the dot-com boom. They rode the bubble all the way up to the top. I think their stock was trading at $230 at one point. They had a total market capitalization in $130-$140 billion range. And they took the big hit when the bubble burst and at the same time they had been hit very hard by the downturn in advertising that has affected all advertising-related businesses. So now Yahoo is only worth around $10 billion, which compared to $140 or whatever it was is not much. But compared to a company that had 0 revenue and no market capitalization only five years ago, that's really not too bad a performance to build a $10 billion company in five years.
JIM LEHRER: Professor Stout, he makes a good point, does he not, that perspective is important here, that if you look only at the very top then these things look a little grimmer than they might otherwise?
LYNN STOUT: That's probably about right. What we lose sight of is that the tremendous losses-- and I'll put loss in quotation marks-- that we've seen in the past two years really bring us back to where we were two or three years ago.
JIM LEHRER: So what happens now? Is this the end? Do you think reality... I don't mean... I'm not going to ask you to predict what's going to happen on the stock market. But are we at reality?
LYNN STOUT: Well, of course, my prediction is worth exactly what you're paying for it, right?
JIM LEHRER: Absolutely, right.
LYNN STOUT: If I really could predict the stock market, I'd probably be sipping Pena coladas on my private island but I'll take a stab at it. I see that we're getting down to something much more closer to reality, where you see Intel trading at a 20 to 1 PE ratio. Some of the larger Internet companies are now down to 41, 51. There's still a lot of froth there but less than there was last year. I think there's room for some downward movement, sad to say. But with a little bit of luck, it's not going to be too bad.
JIM LEHRER: What do you think, Mr. Weber?
JONATHAN WEBER: Yeah, I would agree that we're probably fairly close to the bottom although I do stay away from market predictions. I think there is some additional fallout to come. Some of the broader macro economic consequences of the fall-off both in dot-coms and tech in general I think still has to ripple through the economy so I think there's going to be quite a bit of fallout certainly through the rest of the year.
JIM LEHRER: Like, for instance, tech ripple effect like what's happened to Cisco Systems which makes the hardware that these Internet companies use, they're laying off 17,000 people. That just happened last week too. That's part of what you're talking about, right?
JONATHAN WEBER: Yeah, that is certainly part of the ripple effect from the slowdown of the growth in the Internet overall. And then in turn the impact of the ripple effect from Cisco's lay-offs will be felt in the local area around San Jose where they're located and other places.
JIM LEHRER: Is it correct, Professor Stout, to see this tech dot-com market problem in its own context, unrelated, say, to what the Federal Reserve is doing and what the blue chips are doing on the Dow Jones, et cetera?
LYNN STOUT: If we are lucky, it will be. There is some chance of some nasty spillover effects. In the past five years we've had more people, particularly more individual investors, go into the market than we've had in some time. Stock holdings have become a larger part of the average person's portfolio. As a result, people feel that the stock market is much more important to their wealth. When the market's up, they feel wealthy; they spend money. When the market's down, it may work in reverse. And so one thing we need to look out for for the future is, if this makes the average investor, the average consumer more nervous and they cut back on consumption, that could have a spillover effect that is not pretty.
JIM LEHRER: But do you see these two separate markets, the blue chips, the Dow Jones and then NASDAQ, the tech companies always have been... they've never been completely together on any given day. Bad news for NASDAQ is not always bad news for the Dow Jones and the other way around. Is that going to continue -- the separation?
LYNN STOUT: Between the two? One can only hope so. Again there are always... there always are some spillover effects, a little bit of herd behavior on the part of investors. The fundamentals may not support it but I wouldn't be surprised if we see some of the blue chips and the solid firms suffering a little bit.
JIM LEHRER: Do you agree with that, Mr. Weber, that the spillover effect just cannot be avoided now?
JONATHAN WEBER: Yeah, I think that's right. I mean one of the consequences of the long term growth in technology and growing importance of technology to the economy and society as a whole is that there are a lot of blue chips that are now tech companies. So certainly there's going to be a lot of linkage there, but by the same token, the linkage applies on the flip side too which is that a lot of the underlying forces in terms of the growth of technology, new technologies that enable new kinds of things and new ways of businesses operating, all of those things are very, very long-term phenomena and those are going to continue to drive the economy for many decades.
JIM LEHRER: In a positive way you mean?
JONATHAN WEBER: In a positive way, absolutely.
JIM LEHRER: Thank you both very much.
JONATHAN WEBER: Thank you, Jim.