A Misconception

There is a misconception about the meaning of a stock split.  The result of a stock split is that more individual investors can afford a round lot, or 100 shares, because each share costs less.  Capitalization, accounting relationships, company operations, marketing, etc. are not affected.  Since potentially more people can buy  --  and may hold  --  the stock should trend up in value if all other factors remain unchanged.

This idea that a split affects marketing or other aspects of a company is an example of a misconception that if wide-spread enough, can impact the price of a stock.

Watch what happens when a company announces a stock split and follow it through the split.  You may observe other factors also impacting the price.

Dateline May 5, 2000, CNBC cable TV

Recently CNBC ran a feature story about where to invest in these times of high market volatility.  The CNBC reporter said that some people¹ are recommending holding cash and staying on the sidelines.  The reporter went on to say, "But that can be risky."

UnderstandingMarkets.com visitors realize that cash can earn a reasonable return today via government bonds, municipal bonds, and bank CDs.   Cash is where you put it and can be available for reinvestment on demand if you do simple planning before placement.

The editors of Understanding Markets feel it is wise to put a larger-than-you-might-have percentage of your portfolio in cash during this period of high volatility.  There are many repositories other than the mattress that are reasonably safe and where cash may be retrieved quickly when you see some great investment opportunities.  Even in this boom period  --  which will someday return to something resembling normal  --  it is not rational to expect 20+% annual return and cash is a good hold in this time of low inflation.

1. Editor's note: "People" is CNBC's euphemism for "we sort of think this and want say it, but have no one to quote."

There's Just One Economy

New York, April 11, 2000, Bloomberg News
By David Pauly
David Pauly is a columnist for Bloomberg News.

Despite what you might read and hear from the loose-lipped media multitude, there's only one U.S. economy.

It's the sum of the goods and services Americans produce and buy, whether it's books over the Internet from Amazon.com Inc. or aluminum foil from an Alcoa Inc. factory.

There's no such thing as a "new economy." Or an "old economy." The government doesn't figure a separate inflation rate for the new economy that economists can compare with Brazil's or an unemployment rate for the old economy for comparison with the jobless rate in France.

This new economy nonsense is Wall Street's most-brazen attempt yet to seduce investors.

Whenever stock prices go to unsustainable heights, brokers and analysts go to great lengths to tell customers, "It's different this time." Currently, the pitch is that the Federal Reserve -- with the help of productivity gains generated by computers and the Internet -- has killed inflation. But it's more than just different this time -- it's a whole new economy.

That's why you should believe that Commerce One Inc.'s $33.6 million in annual revenue from setting up industrial trading sites on the Internet actually should command a market value of $9.25 billion.

Billions for Research

And why the shares of Celera Genomics, which seeks to identify every human gene and its function, really are worth $5.62 billion, though last year the company had only $12.5 million in revenue and lost $44.9 million.

It goes without saying that you shouldn't question Krispy Kreme Doughnuts Inc. shares trading at 92 times the doughnut- retailer's earnings.

God forbid securities firms call the market for what it is. A bubble. A craze. A mania. If they did, everybody would sell; new public offerings would disappear. Trading commissions and investment banking fees would dry up.

You know the new economy is a phantom because pundits toss the term around without ever defining it. Ask your broker if drugmaker Merck & Co. is a new-economy stock or an old-economy stock? Watch him scratch his head.

And what about Wall Street's own Merrill Lynch & Co.? It looks old -- stockjobbers have been around for centuries -- but it's now acting new, gearing up to buy and sell securities for customers on the Internet.

Down the Aisle

Home Depot Inc. has to be old economy, doesn't it? Retail stores. Plumbing supplies. Fertilizer. But its stock trades at a new-economy 65 times earnings.

For stockbrokers, the neat thing about this made-up dichotomy is that when the new economy hype gets deflated a bit, as it has on occasion in 2000, they simply adopt a new pitch. They switch the saps from Priceline.com Inc. into Ford Motor Co. Ford, of course, makes more sense than Priceline.com -- it probably will benefit more from the Internet through such things as buying parts than Priceline ever will peddling plane tickets and hotel rooms. But investors get put into the stock for the wrong reason.

The new-old stuff has subdivisions. When America Online Inc., the biggest Internet service provider, decided to buy Time Warner Inc., which sells movies, magazines and cable-TV service, journalists romanced the deal -- though it killed AOL stock -- as a happy marriage of "new media'' and "old media". I wonder, if I start up a newspaper, is it a new newspaper or an old newspaper?

This isn't to deny that the economy is changing. The Internet may bring efficiencies we can't imagine. But the economy always is changing. Think of paper money, electricity, oil, the mass production of cars, ice cream. None heralded a "new economy." It was still produce, sell, buy, consume.

What's really different this time is that the hucksters have taken over. You can be certain that somewhere down the road, there's an "all-new economy."

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