"The Rich Get Even Richer"
Jose G. Perez
jgperez at SPAMfreepcmail.com
Fri Sep 24 18:21:21 MDT 1999
In looking at stock valuations, and individual wealth figures, it is very
important to keep in mind that a lot of this is "a tale told by an idiot,
full of sound and fury, signifying nothing."
The way it works Is like this. You get an Internet business like, say,
sucker.com. You have an IPO of, say 1 million shares. Your top officers,
"angel" and "venture capital" investors own 39 million more and you own 60
million. Now, if the shares of sucker.com go to $100/share, the
capitalization of sucker.com becomes $10 billion and everyone will say your
stake in the company is worth $6 billion.
Yet it is trivial to demonstrate that the $10 billion capitalization is
largely fictitious. If your tried to put even a few million of your own
shares up for sale, the price of the stock would collapse. There simply
isn't that much demand for sucker.com. Very few REALLY think it is worth
$100 million, never mind $10 billion. The people that own your stock at this
level do so because they hope to find some greater fool that will pay even
more than they did. And finding enough fools for a float of one million is
one thing. If you increase the float to ten million, that's something else.
Now you say, how it is I claim the "sucker.com" valuation is fictitious
capital, they've just been acquired by super-sucker.com for 10 billion. Look
at the details of the transaction. It's an all-stock deal. Sure,
super-sucker is happy to buy regular sucker's inflated stock with its own
This explains, for example, why many of the most successful sites on the
web --which belong to established media conglomerates -- do not give
"dot-com" magic to the conglomerate's stock. (Moreover, these sites actually
MAKE MONEY, unlike the start-ups.) But it is very hard to speculate dot-com
style with a stock whose float is in the gizzilions of shares. If the price
of a Disney, Time-Warner or New York Times runs up a few dollars, you'll
have tons of individual and institutional investors more than happy to cash
out and buy something that looks like a little better value for money. That
tide of selling, of course, prevents the runaway share price climbs typical
of dot-com issues.
So the dot--coms are working this way on the stock market, just as
biotechnology firms were the craze of the early 90s, anything that had
"electro" in its name was a hot seller when Jack Kennedy was president. The
archetype of the phenomenon is the Tulip craze in Holland in the -- was
it? -- 1600s? There's often one or another bubble in the stock market and I
think the "dot-com" craze is going to go down in the history books as a
classic of the type.
Does this mean the stock market at as whole is overvalued, that it is a
bubble? This is a different question, and I think one that is devilishly
difficult to answer right now. Based on historical averages current price
levels for broad indexes are out of whack. But interest rates are unusually
low, which justify somewhat higher valuations, and, more importantly, REAL
U.S. interest rates (interest rate minus inflation rate) are very HIGH, so
the smart money is betting that medium term (a year or two), US rates are
going lower still, Greenspan's blustering notwithstanding. It is clear that
some combination of exceptional factors has put the U.S. economy into
overdrive and when those factors exhaust themselves, such very high real
interest rates would strangle economic growth. With long-term rates at
around 5%, 1% lower than now, it would be very hard to argue that the stock
market is overvalued by the most widely accepted --and I believe the
basically correct-- measure, which is the Price/Earnings ratio, i.e., the
Stock's price divided by the profits per share.
And the current pullback in stock prices is perfectly normal given the rise
in interest rates from below 5-1/2% a few months ago to 6% now. It tends to
show, I think, that on average, over time the financial markets are
operating largely as one would expect, rather than in strictly "bubble" mode
or speculative mode.
I should add that all these sorts of discussions about the stock market
being fairly valued and so on should always be read with an implicit
disclaimer of give or take 10%, or even a little more. Markets are way too
sloppy in their movement and operation for anything more.
From: Owen Jones <owen.jones at ultramail.co.uk>
To: marxist-activist at egroups.com <marxist-activist at egroups.com>;
marxism at lists.panix.com <marxism at lists.panix.com>;
marxist-worker at egroups.com <marxist-worker at egroups.com>
Date: Friday, September 24, 1999 6:08 PM
Subject: "The Rich Get Even Richer"
>-- Not wishing to disgust everyone on the list, but their pockets are
>getting bigger. Interesting how many of these horrifically rich people rely
>on the stock market boom for their wealth - at present, though it seems to
>have been strangely overlooked in the bourgeois media, the stock markets on
>both Wall Street and in Europe seem to be heading for a crash. Remember a
>few months ago the bourgeois press were boasting of how the Dow Jones had
>gone over 11,000 points? This week it has crashed down hundreds of points
>not much over 10,000 - in around a week it has gone down by almost 1,000
>points. Anyway, what this article of course misses out is that whilst these
>parasitical fat cats get richer, ordinary people in the West are getting a
>lot, lot poorer, now getting even faster here in Europe with the death of
>Stalinism and Social Democracy. Some very interesting facts and figures in
>this article. --OJ
>The rich get even richer
>Stock boom adds 60 new names to Forbes list of 400 wealthiest
>September 24, 1999: 9:47 a.m. ET
>NEW YORK (AP) - The soaring stock market
>helped land 60 new names on this year's list of
>the richest Americans, turning 35 of them into
>billionaires, according to Forbes magazine's
>latest ranking of the nation's wealthiest people.
>Of the rookies, 19 made fortunes from
>Internet-related businesses, including
>Amazon.com (AMZN) Chairman Jeffrey Bezos,
>ranked 18th with a net worth of $7.8 billion. Jay
>Walker, founder of the online merchant
>Priceline.com (PCLN), was ranked 43rd with
>Bill Gates retained his place as richest of
>them all. The Microsoft Corp. (MSFT) chairman
>saw his net worth grow to $85 billion from $59
>billion a year ago. Gates was twice as wealthy
>as the second richest American, Microsoft
>co-founder Paul Allen, with a net worth of $40
>billion. Warren Buffett, chairman of Berkshire
>Hathaway Inc. (BRK.A), ranked third with $31
>The 400 richest Americans for the first time
>have collectively amassed $1 trillion, a figure
>greater than the gross domestic product of
>China. The total number of billionaires on the
>annual list increased by 79 to 268, making 1999
>the first time billionaires made up more than half
>the list, Forbes said in its issue dated Oct. 11.
>The minimum net worth needed to qualify for
>the Forbes 400 rose to $625 million from $500
>million in 1998.
>Wall Street helped some on the list become
>billionaires almost overnight. No. 68 Gary
>Winnick joined the billionaires club just 18
>months after founding Global Crossing (GBLX),
>which is building a global fiber-optic
>Rounding out the top five, Steve Ballmer,
>Microsoft's president, was No. 4 with $23 billion,
>and Dell Computer (DELL) CEO Michael Dell,
>with $20 billion, was No. 5.
>A college degree wasn't required to make the
>list -- at least 63 members never graduated
>college. Their net worth averaged $4.3 billion.
>Nearly 40 percent of the list, or 149 members,
>got rich the easy way: They inherited some or all
>of their wealth. Their average net worth was
>$2.5 billion. The 251 members who struck it rich
>on their own had an average net worth of $2.7
>billion. The average age of Forbes 400
>members was 60, with financier Max Fisher the
>oldest at 91 and Daniel Ziff, of Ziff Brothers
>Investments, the youngest at 27. And nearly a
>quarter of the 400 live in California. The state's
>98 members on the list include many Silicon
>Valley and other high-tech executives.
>Copyright 1999 The Associated Press. All
>rights reserved. This material may not be
>published, broadcast, rewritten, or
>(Oh well, property is theft and all that).
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