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From: Christopher Scott <>
Date: Tue, 23 Jul 2002 15:06:30 +1200

Firstly a snippet from Allan Greenspan in 1996 when the DOW was under 7000 
- He warned of "irrational exuberance" in the market.

Big question: Is it still there?

My view: Absolutely !!!

My Reasons:

1. If indexes do reflect the "value" of a market (this is open to debate) 
then what's the difference between 1996 and now? Not much I feel except 
perhaps one very, very significant thing - There is serious distrust in all 
things reported. This distrust has now extended itself to the cornerstone 
of the markets - the big Life and Mutual insurers. You know the guys who 
own and manage the majority of stocks in the market and make individual 
claims like "400 billion dollars of assets under management". The question 
comes back to valuation - is this real value/worth or is it just on paper?

2. The multiplier effect. When you deposit $1 in the bank, the bank is then 
able to lend, not just your dollar, but a multiple more based upon the 
"guess/prediction/bet" that you'll probably not need it for a while. The 
same can apply to corporations with over inflated share prices - they use 
the same principle - until the bubble bursts and their share price plummets 
(if they're lucky, if they're unlucky ? Enron, WorldCom, etc). Now what 
happens if large number of people have used their shares as asset backing 
to loans? A serious contraction of the money supply and continuing 
recession? Central bank response: lower interest rates. It was enough after 
9/11 but will it be enough now?

3. Was it real growth between 96-2001? Or another way of looking at it is 
to ask the question: What has really been produced in the Dot Com era that 
was of real value? Billions of web pages built at highly inflated prices 
because of the severe shortage of trained secretaries! (No disrespect to 
secretaries intended it's just that with a couple of days training the vast 
majority of web sites could be developed and managed by secretaries). 
Static web pages are little more than brochures and should not be valued 
much more highly. No - the amount of real value created in the dot com era 
was actually quite small. Truly useful software takes a considerable time 
to develop and I'd argue that the entire process has been interrupted 
(slowed down) by the dot com era. Yea, yea, you can buy internet enabled 
software everywhere - problem is that it's underlying architecture is 
routed 7+ years ago and it (the software) doesn't even understand the 
complex relationships that can be enabled by the internet. In summary the 
question is: How many companies are valuing (or hiding) out-of-date, 
non-productive web investments as assets on their balance sheets?  Too many 
I'd suggest!

4. The NZ Bourse: Is it really as immune as it appears to be? Nope - It's 
coming here too it's just that investors here are fooled by Telecom's 
apparent immunity to the forces that are affecting every other telco but 
Telecom dominates the NZSE40. My view is that Telecom needs to seriously 
write down its assets related to copper under the ground as it is seriously 
under threat from the airwaves. There doesn't appear to be pressure to do 
this. Why not? I'd argue that setting up a competing network based upon 
wireless technologies could be done very quickly and inexpensively 
(relative to "assets" that telecom thinks it has in it's copper network). 
Or phased another way: How much of the $5 billion TNZ reports as assets 
will need to be written off to reflect it's true value? In Summary: If many 
other companies are valuing assets like Telecom does, then their asset 
backing is overstated and they will be forced to right down these assets as 
Telecom will probably be forced to do.

Enough raving . . . Time will tell where the markets will go and whether my 
(partial) analysis is correct.

Anyone else got thoughts on where we'll be in 6 months time?

NZ Bourse -  a correction coming? (Thank God we'll have Helen at the helm 
to deal with it - Bill can believe all he likes but I think he'd probably 
fall apart ;-)

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