Saturday, March 25, 2000

If You Think Last Week Was Wild

This week’s article caught my eye while browsing the NY Times. Titled “If You Think Last Week Was Wild …” by Gretchen Morgenson, you can find it at www.nytimes.com (though you have to register to view it). Fundamentally, the basic premise put forth was that the supply and demand for Internet stocks is poised to do an about face. While the market has chased a limited number of Internet stock offering shares to ever higher levels of valuation, a building change in supply will dampen this demand enthusiasm substantially. This of course will be much to the dismay of individual technology stockholders as well as raging a potentially negative effect on the NASDAQ overall.

By Morgenson’s accounting, “in the next three months, some 2.4 billion shares of stock in last year’s new issues … will be free to enter the market.” From a supply and demand standpoint, this is more than twice the current number of shares of these stocks available on the market today. As I read the article, I couldn’t help but try and factor some of the week’s readings against the article’s prediction! If Internet stocks were truly a scarce commodity, with the run up in prices indicative of demand, then a major change in supply as outlined in the article would certainly make a very interesting natural “trade theory” case for our consideration.


Impact

After reading the article, I sat down with the text and started re-reading it for points of connection. The first I came upon was the classical economists behavior factors of production. If one thinks about the Internet craze and the early public stock offerings, a common element of many of these firms was their location in the Silicon Valley region. (Land is one of the classical factors of production.) Proof that factors would migrate in response to a location trend is evident in the number firms (and people individually) who migrated to Silicon Valley primarily because that was “the place” to achieve the best “trading” possibility in the Internet environment.

Next, the writings about the “price elasticity of demand” and both the idea of consumer and producer surplus also had to come to mind. As did countless stories of individual wealth, as well as stories of companies formed purely (seemingly so) to take advantage of the market (so to speak). Then, in that same section of course, was the definition for “arbitrage” which simply cuts to the core of the market mania subject itself!

Half way through the week’s readings I then happened upon the headline “What If Trade Doesn’t Balance?” Gee, that seems to be a better headline for the article than what the NY Times chose! On the next page though, I had to consider the notion of “comparative advantage” and how a firm gains on the value of its perceived advantages and then gains again when it acquires those skills lacking in its quiver. The market certainly responded in this fashion time and again for the Web aggregators ala CMGI.

Later, when reading of China and the fact that “fears seem to be greater in the government than in the population at large,” I couldn’t help but think about DoubleClick and the way they’ve been trounced upon by lobbyists and special interest groups everywhere but not necessarily trounced upon by consumers at large. (OK, you might think it a stretch to register this point in this paper but I spent too many hours today on the privacy debate issues!)

Then of course, along came Chapter 4 aptly titled “Who Gains & Who Loses ….” (If I only knew the answer to this one I could act profitably on Morgenson’s siren call.) More seriously though, the discussions on specialized factors and their impact on trade, especially the impact of endowment factors, all seemed to call out to be compared to the Internet stock, supply & demand quandary.

Lastly, I was reminded of the issues and potential for governmental intervention and it’s impact in trade progress. The same thing could relate to the market when these hot stocks have to go through all the necessary due diligence to be offered to the market to begin with. Even after a stock has floated, regulations then kick in restricting the trade if certain parameters fail to continue meeting with regulatory approval. Even on the Net, at least when it comes to stock, regulations prohibit truly free trade!

All of this is relevant to my own job as my small team sought to fund an Internet project within a major corporation. A true Intra-preneurial effort! Our first approach was to do so as a division of one of the marketing companies within Sony. Now we’re gearing up to be an independent subsidiary. All the positioning is in part in order to take advantage of the same market forces of supply and demand to which these very stocks are responding. Before this class is complete, our group’s basic structure should be in place. It will be interesting to see how the market (internal and external) responds to us at that point in time. I only trust (hope) that there is truth in the saying that “trade is a positive-sum activity” and thus we can count on rising with that tide!


Summary

In addition to being a launching pad for thinking about “trade theory” I should also pass along the article’s summation. Morgenson put forth that 75% of all early venture offerings typically fail. Further, since institutional investors typically own only 10% of an offering nine months after the initial float, it will be the individual investors (such as ourselves) who “will be left holding the bag” when the fresh supply shows up to satiate demand. Buckle your seat belts folks … there may be turbulence ahead!



Sources

Pugel, T. A., & Lindert, P. H. (2000). International Economics. New York: Irwin McGraw-Hill.

Morgenson, G. (2000, March 19). If You Think Last Week Was Wild … The New York Times, p. D1.