-Caveat Lector- from: http://www.aci.net/kalliste/ <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Tiptoeing Through the Tulips The Age of the Day Trader Now don't you worry your little head about those Internet stocks The rise in the value of internet stocks has been variously described as irrational optimism, a mass delusion and a confidence trick. Such words barely capture the sheer exuberance of the internet world. The market capitalisation of Yahoo!, the leading internet company, has appreciated by 3,800 per cent since 1996 and is now worth 480 times expected earnings for 1999. Yahoo is worth more than Texaco or Merrill Lynch. America Online, the largest internet company, has risen by 34,000 per cent since 1992 and is now worth 273 times expected earnings for the year to June. That makes it bigger than Ford or Disney. Both companies would be in the Japanese top 10, and AOL would in Europe's top 10, ahead of Nestle, Shell or UBS. In case you were in any doubt that these valuations are abnormal, a string of very, very important people - Alan Greenspan, the chairman of the Federal Reserve Board, Rupert Murdoch, chairman of News Corporation, and most recently Bill Gates of Microsoft - have all said that, in their opinions, internet stocks are over-priced. Yet despite this, a great many people continue to buy and enthuse about internet investments - from private retail investors to some of the leading analysts on Wall Street. The debate about internet stock valuations has so far focused on the companies: are their products and expected earnings really worth these high stock prices? Which companies will survive? And, more generally, how can you assess the potential of an invention as pervasive and revolutionary as the internet? For all these questions, we will no doubt have to wait and see. But meanwhile, there is a second set of questions which has attracted less attention. Who buys these assets? Are they different from other investors? What do they expect of their investments? These questions are just as important because the internet phenomenon reflects a revolution in the behaviour of US private investors, as well as in technology. US private retail investors have been the most important participants in the market for internet stocks. The astonishing price rises of many internet stocks testify to the strength they wield. Appropriately, the internet itself has made this possible. With the services of online stockbrokers they can actively manage their investments from day to day, hour to hour, or even minute to minute. The Securities and Exchange Commission estimates that one in four of all retail stock trades happen through online brokerages and the number of online trading accounts is expected to exceed 10m before the end of the year. The most extreme manifestation of this new form of investing is the day trader - someone who rapidly buys and sells stocks through an internet broker holding investment for hours or minutes. Day traders take little or no interest in what they are buying and are driven purely by momentum. If a share is going up, they buy and hold on to it while it rises and then sell the moment it appears to be slowing. Debbie McClure is typical. She has been day trading for about a year. She runs the Abilene Book Store in Abilene, West Texas but every morning between 8.30 and 10.30, before she opens the shop, she plays the market. She cheerfully admits she often has no idea what she is investing in. "Most of the time I do not know what I am buying. To me it is just a string of letters," she says, referring to the ticker symbols of the stocks. But her ignorance seems no hindrance to money making, at least at the moment. She says she started with about $15,000 and almost lost it all in the first two months. Since then, she has managed to make $70,000 - more than she has made from the book shop. Day trading is not new. It became common in the mid-1980s in Japan, when the largest Japanese companies traded huge blocks of shares very rapidly and made more money by financial engineering than by the more traditional kind. Given what happened to the Japanese bubble economy, this is not a comforting parallel. In the US, day trading is a retail activity, not a corporate one. Guides to electronic day trading have topped the lists of bestselling business books. Internet chat rooms devoted to the trading abound. iVillage.com, a popular internet site for women, suggests day trading alongside childcare as a way to make money working from home. Most of the large online brokers, such as E*Trade and Charles Schwab, say that day traders make up only a tiny fraction of their business. That is no doubt true, but such traders still represent a trend towards greater activism on the part of all US shareholders. Not since the 1920s has the average US investor been so obsessed with playing the market. Retail investors are becoming increasingly active. In Silicon Valley it is common for employees to have a their favourite stock prices constantly displayed on their screens while at work. People are even giving up their jobs or working fewer hours to more their time to playing the markets. Steve Willens, a doctor in North Carolina, for example, now sees patients only in the early morning and late afternoon. Between 10.00 and 12.00 he is trading in and out of the markets from his computer. The restlessness of retail investors has undoubtedly added a destabilising element to some parts of the market over the past year. The Nasdaq, with its strong technology weighting, has been far more volatile in the past year than either the S&P500 index or the Dow Jones 30-Industrials. Some companies have also blamed retail investors for undermining their share prices, much as governments have blamed hedge funds for undermining their currencies. GIC, an Internet entertainment group, issued a statement to that effect in December. All the same, the money that retail investors have made in the internet boom has sucked big institutional investors into the market, driving prices up further. A turning point for the institutions came last year with the news that America Online would be joining the S&P500 index this year. The holiday shopping season of 1998 confirmed that electronic commerce was not only a business with considerable potential but an opportunity traditional retailers could not ignore. However large institutions find it hard to invest in the sector. Apart from a handful of leaders, Internet companies are mostly small, and owned mostly by venture capitalists and founders. Without the ability to acquire enough shares in the smaller companies to make a difference to their portfolios, many firms have been content to invest in the sector leaders, including Amazon.com, Yahoo!, and AOL. Other growing names such as At Home, the internet cable service provider which recently acquired search engine Excite for $6.7bn in stock, are also said to be attracting more attention from large investors. Greater participation by the institutions may help to steady the market. The real question in the internet market is how long shareholders are willing to hang on to their investments. In the case of day traders, the answer may be only a minute. But holding the shares for long periods may begin to make more sense of the current valuations. As Abhishek Gami of William Blair, a Chicago brokerage puts it: "If it's 12 to 24 months [out], these stocks are overvalued, but if you are buying a stock for five to 10 years of performance, some of these stocks look cheap." Mary Meeker of Morgan Stanley uses Microsoft remind everyone that the astonishing rates of growth that would be needed to justify some internet valuations are not as impossible as they might appear in an industry which has produced some remarkable growth stories in the past. Microsoft produced a compound earnings growth of over 40 per cent a year between 1985 and 1995. During that time its share price rose 3,500 per cent. Admittedly AOL's share price has appreciated far faster than Microsoft's. But then the internet is growing faster than the adoption of the personal computer. Five years of annual earnings growth at 50 per cent would give Yahoo earnings of $5.5 per share in 2004. Another five years, and it would be making $41 per share in 2009. It is an awful lot to discount, but it goes some way to making sense of today's share price of $345. But even if there is a chance that the some internet stocks will prove a good investment over the next five to 10 years that does not preclude some very sharp falls in the mean time. This is what most concerns politicians and regulators. With the US stock market on very high valuations and supported to a large degree by US retail investors, the damage to confidence produced by a crash in the internet stocks could quickly spread. This concern is heightened by the lack of experience of many of the traders in internet stocks. Eddie Kwong has been trading shares for over 15 years and runs Realtraders.com, and internet site for day traders. He says that the traders who are keenest on internet stocks tend to be the newer investors who are "not familiar with the way markets typically behave". He also points out a disturbing tendency among day traders to believe they have an infallible system of investing. That said, internet investors have already had to deal with a fair degree of volatility. Amazon.com, the internet book seller, has seen its shares nearly double and then half again since the start of the year. Whether or not the crash comes, the boom in internet stocks has been a dramatic proof of the power of the internet - a point which is itself used to defend the prices of internet stocks. Whether the increased volatility in stock prices caused by online investors will prove to be a passing phenomenon linked to the birth of the internet, or a permanent change in market behaviour is yet to be seen. In the meantime, the day traders tend to get what they can. As Ms McClure says: "We don't know how long this will last." And she does not intend to allow the likes of Mr Murdoch or Mr Gates spoil the party. The Financial Times, Feb. 9, 1999 Wag the Dog Experts Find No Chemicals at Bombed Sudan Plant by James Risen and David Johnston WASHINGTON -- Chemists who examined soil, sludge and debris samples from a Sudanese pharmaceutical plant destroyed in August by American cruise missiles found no traces of chemical weapon compounds, according to a scientist hired by the owner of the plant. The findings, though prepared privately for lawyers for the owner, who is now seeking redress from the United States, raise new questions about the government's reliance on tests of soil samples from the site obtained clandestinely by the CIA. American officials had said the samples contained traces of Empta, a precursor used in the production of deadly VX nerve gas. The United States attacked the Al Shifa pharmaceutical plant in Khartoum and suspected terrorist training camps near Khost, Afghanistan, on Aug. 20 in an effort to curb the activities of the Saudi exile Osama bin Laden after the bombings of two American embassies in East Africa. American officials have said the bin Laden terrorist network was behind the bombings of the diplomatic missions in Kenya and Tanzania. Bin Laden has denied any role in the bombings. At the heart of the new evidence are 13 carefully cataloged samples taken from the wrecked plant and its grounds late in October. The sampling project was designed and supervised by Thomas Tullius, chairman of the chemistry department at Boston University. "The point of what we did was to carefully and scientifically collect samples from a variety of locations and have them analyzed by one of the top laboratories in the world for this kind of work," Tullius said in an interview. "What they found was that in those samples, to the practical limits of scientific detection, there was no Empta or Empa, its breakdown product." In response to the new findings, Clinton administration officials said they stood by their decision to strike the plant. The officials dismissed the findings of chemists working on behalf of the plant's owner, Salih Idris, noting that their soil samples were taken long after the United States obtained its soil from the site and long after the bombing and rains could have dispersed incriminating evidence. Moreover, while they acknowledged that they did not know that Idris owned the plant at the time of the attack, other American officials say they now have strong evidence linking him to bin Laden. "We stand by our evidence indicating the presence of a chemical weapons precursor at this plant," said P.J. Crowley, a spokesman for the National Security Council at the White House. "We stand by our evidence linking this plant to Osama bin Laden's network. We continue to believe that this was an appropriate action to pre-empt Osama bin Laden from further attacks against the United States." Several ground locations at the plant were surveyed, along with interior sites in the plant that were covered by debris and partly protected from rain. One location, a septic tank, was found intact and provided what Tullius said was a historical record of the chemicals flushed through the plant drains. The lab analysis found that none of the samples contained detectable levels of Empta, nor did they find Empa, the subsidiary compound into which Empta rapidly breaks down. Empta, Tullius said, breaks down within days, but Empa remains in the soil, and even in small quantities would be detectable for weeks or months after contact with the ground. In addition to the evaluation of the new soil samples, an international security company, Kroll Associates, was hired by Idris' lawyers to conduct a detailed review of the Shifa controversy. In their report, made available to The New York Times, Kroll Associates found no evidence of a direct link between Idris and bin Laden. The scientists and investigators were hired by the law firm of Akin, Gump, Strauss, Hauer & Feld, which represents Idris, a Sudanese-born Saudi businessman. The law firm has a long-held reputation of influence in Democratic circles with partners like Robert Strauss, the former Democratic Party chairman, and Vernon Jordan, a close friend of President Clinton. But its credentials have not benefited Idris. The firm's lawyers have been flatly rebuffed in their efforts to present their findings to the White House, National Security Council or the Justice, Treasury and Defense Departments. "We've been confronted with the problem of proving a series of negatives that there was no Empta at the plant and that Idris was not a terrorist," said Mark MacDougall, a partner at the law firm. "We think we've done that with evidence that can be admitted in court. But to date responsible officials, including at the White House, have flatly refused to look at the facts. We're sorry about that." The lawyers have not yet decided whether they will sue the government, in what would probably be complex litigation with an uncertain outcome. Nevertheless, MacDougall said Idris wanted to clear his name and unfreeze millions of dollars in bank accounts at the Bank of America that the Treasury Department's office of foreign-assets control blocked after the Shifa attack. In addition, Idris is seeking millions of dollars to replace the plant. In interviews with Western consultants to the factory, employees and others, the Kroll investigators said they had found no evidence that the plant had been heavily guarded or that there had been secret areas in the factory off-limits to outsiders, where chemical weapons might have been produced or stored. The report concluded that the plant produced only veterinary medicines and pharmaceuticals for human consumption. While Al Shifa did export to Iraq, Kroll found no evidence of a chemical weapons link to Baghdad. But the Kroll investigation did provide new details about Idris and confirmed his commercial links to Sudan's Military Industrial Corp., the government entity that produces weapons for the Sudanese army. The United States charged that the industrial corporation was also responsible for chemical weapons production in the country, and that bin Laden had provided financing for the agency. The Kroll report determined that Idris had links to the military corporation through his other business interests in Sudan, but not through Al Shifa. Kroll investigators said the industrial corporation was a powerful military-based organization that reaches into many parts of the Sudanese economy, including Idris' business empire. The New York Times, Feb. 9, 1999 Japanese Financial Markets Japanese Government Bond Market to Surpass the U.S.'s an orgy of government IOU's The Japanese government bond market is set to overtake the US Treasury market to become the largest in the world as a result of its planned borrowing spree this year. Japan will account for more than 90 per cent of net government bond issuance (new debt minus redemption of maturing bonds) among the leading 18 developed economies in 1999, according to J.P. Morgan, the investment bank. The effects are likely to trigger a further sell-off in the Japanese bond market this year and a fall in western government bond yields, which are already hovering around historic lows. "Japan is going in the opposite direction to the rest of the developed world," said Matt King, a fixed income economist at J.P. Morgan. "This could have a far-reaching impact on bond prices around the leading markets." Japanese government borrowing is a desperate bid to ward off depression after a succession of smaller fiscal stimulus packages have failed to revive the economy. Japan plans to issue the equivalent of $517bn in yen in 1999 - a net increase (minus redemptions of maturing bonds) of $352bn in the Japanese government's debt. This contrasts starkly with the US government, which will reduce the outstanding value of Treasury bonds by $112bn in 1999 because of its second consecutive annual budget surplus. [Ha. Don't count on it. The US Treasury issued $110 billion in new bonds last fiscal year, and another $85 billion so far this fiscal year. The probability of the debt actually going down is zero, because there is no budget surplus.--Orlin] At current exchange rates, the value of Japan's outstanding government bonds is expected to rise to almost $2,500bn this year while the value of US Treasury bonds would fall to below $2,200bn. The yield on the 10-year Japanese government bond, which has risen from an historic low of 0.7 per cent last year to almost 2.5 per cent in recent weeks, could therefore have much further to rise. The crucial difference this year is that the Japanese government is unlikely to buy large amounts of its own debt. This is because Japan's Trust Fund bureau is likely to sell a large proportion of its existing holdings over the next two years to meet an unusually high level of redemptions of its retail deposit accounts. The Financial Times, Feb. 9, 1999 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, Omnia Bona Bonis, All My Relations. Adieu, Adios, Aloha. Amen. Roads End Kris DECLARATION & DISCLAIMER ========== CTRL is a discussion and informational exchange list. Proselyzting propagandic screeds are not allowed. Substance—not soapboxing! These are sordid matters and 'conspiracy theory', with its many half-truths, misdirections and outright frauds is used politically by different groups with major and minor effects spread throughout the spectrum of time and thought. That being said, CTRL gives no endorsement to the validity of posts, and always suggests to readers; be wary of what you read. CTRL gives no credeence to Holocaust denial and nazi's need not apply. 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