If you want to understand where the stock market is today,
you might do well to ignore the endless stream of speculation pouring from the
financial-news channels and look at something very basic, but thus far
unremarked upon. The answer may be partly
traced to the rising status in the public’s mind of the Nasdaq as a
benchmark on an equal footing with the Dow Jones and the Standard & Poor’s
indices. Ten years ago, the Nasdaq was barely mentioned and had virtually no
standing in the capital markets. But now, because of a public-relations blitz
and the media frenzy with tech stocks, the ups and downs of the Nasdaq are
assigned great significance, more so even than those of the Dow. The result:
Investors in this country and around the world are viewing the market through a
distorted lens. The fundamentals of the market-the Dow and the S.&P.-are
almost lost in the shuffle. And, like Alice walking through the looking glass,
all logic goes to the wind.
After a hard look at the Nasdaq, it would be difficult to
consider it as an important financial barometer. True, the market value of the
Nasdaq is in the trillions. But if one asks how much of the Gross Domestic
Product is accounted for by Nasdaq companies,
the answer is: not very much, about 2.5 percent according to Wall Street
analysts. And Nasdaq companies certainly employ a trivial number of workers. And what about the companies traded on the
Nasdaq? While the S.&P. is trading at 25 times earnings-high already
in a declining economy-the Nasdaq, which hit 5,000 about a year ago, was
selling then at 400 times earnings. And
even today, with that market down 60 percent, it is still trading at
over 150 times earnings. So what we have is a market which the public thinks is
down 60 percent-but which is still overpriced many times over. Should a
tech/growth company sell at 220 times earnings? Even if one accepts the fact
that there should be a premium over what we call the “old economy,” that
premium certainly isn’t 600 or 700 percent.
“In times past,” notes Grant’s
Interest Rate Observer, these multiples of 25 times earnings on the
S.&P., and more than six times that (150 times earnings) on the Nasdaq, would be “valuations of euphoria, not
disillusionment.” And yet investors now believe the market has already had a
significant correction. Feeding this misperception is the saturation
coverage of the financial markets by the networks, their cable channels and the
Internet. A decade ago, the news of the day was that the Dow was up or the Dow
was down, reported by just three TV networks.
Simply put, many of the Nasdaq stocks are where money is
made and lost for speculators and ill-informed investors. The only way a
serious decline in the Nasdaq will directly affect the economy is when the
people who have lost a lot of money spend less on real estate, automobiles, art
and other collectibles. There is scant evidence that there is any impact on
what really matters-the work force and capital expenditures. But there still
could be a long way to go on the downside for those companies with little or no
earnings, or with an economic model that may never earn them a dime.
They Did the Right
Thanks to a thoughtful Republican from Staten Island, the
New York City Council will not be making a spectacle of itself this spring. Not
When the Council’s Governmental Operations Committee
gathered on March 15, the credibility of the city’s legislature was at stake.
The committee was prepared to vote on a bill to overturn term limits for
Council members, even though term limits were approved twice by city voters.
With the legislation about to take effect, turning two thirds of the Council’s
51 members into lame ducks, a half-dozen lawmakers tried to foil the voters’
wishes by pushing term-limit repeal. They hoped the committee would approve the
measure and pass it along to the full Council.
It came down to Council member Stephen J. Fiala, a 33-year-old freshman
legislator from the city’s most suburban borough. With the vote tied at 4-4,
Mr. Fiala demonstrated that integrity and scholarship are not complete
strangers to the Council chambers. He quoted John Quincy Adams, Thomas Paine
and Ralph Waldo Emerson. He said that while he opposed term limits, he
understood that the people had spoken.
“Twice the voters cast their vote …. And in America, votes are sacred,”
he said. He cast the deciding vote against repeal.
New York voters owe a debt of gratitude to Mr. Fiala and to
Council Speaker Peter Vallone, who also
opposed the repeal bill. The vote reminded us that sometimes politicians
do the right thing and for the right reason.
Isn’t It Rich?
So you’ve just tallied
up your assets and found that you’re worth about $1 million, and you’re
feeling pretty comfortable? Not so fast-according to most Americans, you’re not
rich. The Wall Street Journal commissioned
a survey to find out what people consider to be rich these days-how much one
needs to earn, and what sort of luxury
items one needs to own, to be deemed wealthy in 2001. Most Americans now
believe you must earn at least $1 million a year to legitimately call yourself
a member of the leisure class. Respondents in the New York area sniffed at that
number and added $400,000, for a yearly floor of $1.4 million. They also said
that a net worth of $3.4 million was the prerequisite for being considered
truly affluent. Money alone was not enough. Thirty-five percent believed that
to be rich, one must own a car costing more than $75,000. Thirty-one percent
said that a private plane was a must-have, while 19 percent listed an in-home
movie theater. Asked about the benefits of being rich, “more free time” topped
the list; only 5 percent chose an ability to “give money to causes.”
The irony, of course, is that just 1 percent of U.S.
households make $1 million per year. And the average income of survey
respondents living in the New York area was
$53,100. Apparently one thing the rich do not do is waste time answering