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Hyped tech stock tremors are not the end of the world

By Peter V O'Brien

Thursday 20th April 2000

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The short-lived boom in technology, e-commerce and internet-related stocks provided a favourable background to the recent worldwide shakeout in the sector.

That point was unlikely to have investors dancing outside the world's stock exchanges but it meant the damage done to all equities should be contained, unlike the situation after October 1987.

The shakeout was not confined to the US, although movements in the Nasdaq and Dow Jones indices dominated the news.

It was intriguing to listen to and watch normally sane people associated with investment saying the indices had their biggest one-day falls in history.

The comment was made in relation to the number of points taken off the indices and it was only the "small print" that gave the percentage movements.

Even the august BBC television world news in the early hours of April 16 (New Zealand time) emphasised the one-day record drop theme.

That approach was a nonsensical media beat-up but gained authority through quotes from investment experts who should have known better.

The Dow Jones average index of 30 industrial stocks, for example, lost a "record" 616.78 point last Friday and closed at 10,306, compared with 10,923 the day before.

Big deal. The Dow-Jones dropped 22.6% on Monday October 19, 1997.

A 22.6% cut in the index last Friday would have left it at 8455 and really raised the old question of whether people wanted hotel rooms for sleeping or for jumping.

The shakeout had to come, a point made in January 28's The National Business Review (when discussing New Zealand's technology-linked stocks) and again on March 31 (the idea of a generational cyclical factor in sharemarket booms and slumps).

A table accompanying the January 28 article gave the New Zealand stocks' share prices at January 21 at the end of 1998, the highs and lows for 1999/2000 and the percentage change from December 31, 1998, to January 21 this year.

The updated table lists prices at the end of last week, and as at January 21, highs and lows this year and the change from the 2000 highs to last week.

It shows some sanity could have been restored in spite of the price dives.

Sanity was seen in the relatively small declines in the price of Sky TV and Telecom, companies that were hardly in the wing-and-a-prayer category of corporate profitability.

Beauty Direct was included because it is technology-linked through its internet operation, although being, strictly-speaking, an e-commerce company dealing in cosmetics.

An important point made in the January 28 article was relevant to the latest situation: "It is worth noting that, in common with many companies overseas, share prices in some New Zealand technology-based companies rose massively before the groups have earned anything; a variation on the mining sector maxim that you never ruin a good mine by putting a hole in the ground."

The article also said something eventually gave when industries went from growth to being fads and people showing some of the (then) massive investment gains would be wise to realise at least some of them.

There would be few, if any, occasions when a group of New Zealand stocks lost the percentages shown in the table in the space of a few weeks.

The nature of most of these companies should not be overlooked when people make investment decisions.

They are mainly investment holding groups with four exceptions and adopt the role of buying other companies, wholly or in part, and/or making capital injections.

There is an obvious danger in that philosophy, which is about the only common element in the current slump with that of 1987.

It can be difficult to control what happens in a company when the investor is only indirectly involved in hands-on management.

There can also be a potential problem when an investment holding company has several investments, none of which gives even effective control of the operating unit.

That happened in the 1980s when the then flood of investment companies would buy, say, 20-25% of others and rely on rising asset values, some of which were artificial, for their own growth.

We have already seen some of the technology-based stocks in New Zealand opt for a string of minority investments. There is nothing intrinsically wrong with that, provided the investment group has a medium- to long-term consolidation policy.

The current tremors hitting the sector were foreseeable but should not be considered the end of the world.

Technology, the internet and its accompanying e-commerce businesses are here to stay as the often-described new economy.

In the short-term, there was an ominous sign: The front page of the Dominion on Monday had the headline "Don't panic - PM."

That was what the politicians said in 1987 from then US president Ronald Reagan downward, or upward, if you prefer.

There is no need to panic but not because politicians say so.

It is because realism and common sense came to the sector at the early stage of the cycle.

Technology/internet stocks

CompanyPrice 14.4.00Price 21.1.00Price 31.12.992000 high2000 low% change to 14.4.00 from 2000 high
Beauty Direct15--3215-53.1
IT Capital40777510540-61.9
Sky TV465329315520290-10.6
NZSE40 capital index2070.962092.252206.692173.761956.46-6.1

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