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Longboat Global Advisors CrossCurrents 4/7/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 08 April 2004 - 08:49 AM

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Wow, we're impressed. Reuters recently reported that even Bill Gates believes internet stocks are in a mini-bubble. Responding to questions about the prospects for e-commerce companies, Gates said "We are sort of back in a mini-bubble era in terms of people expecting a lot in terms of these valuations, but I don't think we'll see the same exit rate of companies that we saw back in the real bubble. There are some strong companies who are doing things right." Gates went on to glorify the business models of those such as Interactive Corp., Yahoo, Ebay and Amazon, stocks that clearly fit the parameters of a bubble, let alone mini-bubble, and parameters that do not exactly shine with value of any kind that we can comprehend. The average price-to-sales ratio of the four companies cited by Mr. Gates is 11.5, about as bloated as it gets. To be fair, the P/S ratios for Interactive and Amazon are a lot lower at 3.3 and 3.2 respectively, but the numbers at Yahoo and Ebay are 19.3 and 20.2 respectively. We're not exactly sure why Mr. Gates does not rank Microsoft as equally speculative, since his own company sports a P/S ratio of 7.9 and is clearly engaged in e-commerce. Traditionally, when normal markets were the rule and manias were the once-in-a-century exception, P/S ratios were considered fairly rich if they were above 2. And by the way, since the comparison to a mini-bubble was made by Mr. Gates, we at least decided to check out the insider stats for the four companies cited by Mr. Gates. Five buyers bought 52,000 shares and 220 sellers sold 10.72 million, a ratio of 206 shares sold to each one bought. Could have been worse, we suppose, like the zero buyers and 33 sellers of 27.1 million shares at Microsoft itself.

The QQQ Nasdaq Trust represents more than 41% of an entity worth more than $22 billion on its own. To say that the QQQs are popular is like saying Alex Rodriguez makes a decent wage. Approximately 100 million shares are traded every day, which means the entire Trust capitalization turns over about every six sessions. Interestingly, the Nasdaq website STILL touts the QQQs as an “investment,” claiming "The purchase of a single share. That's all it takes to invest in the largest and most actively traded companies on The NASDAQ Stock Market-the companies of the NASDAQ-100 Index." The tout furthermore reveals that, "….because NASDAQ-100 Index Tracking Stock trades like stock, you can buy them on margin, sell short or hold your shares for the long term." Imagine that. The long term? Judging from the activity generated every day, we can’t easily imagine what the short term measures for the Qs. Think of it - the entire capitalization is traded 42 times over the course of a year! Further down the page, it is revealed that, "Long-term performance: If you're investing for the long term, you can hold your NASDAQ-100 Index Tracking Stock throughout the life of the NASDAQ-100 Trust, a unit investment trust which has a 125-year term, subject to certain early termination events." Like an asteroid crashing into the earth, we suppose. Surely, if the Trust is an attractive investment, then the insiders at the top companies must feel the same way, correct? In fact, Insiders are deserting the top ten QQQ companies at a pace we have never witnessed before. At left, only Comcast has escaped the wrath of insiders but also knows no confidants either. Zero activity. Elsewhere, it's as if the anti-matter container of Dan Brown's Angels & Demons was sitting in the corporate headquarters of each and every other constituent of the top ten. A mere 5 buyers competed against a veritable army of 254 sellers, a ratio of 51 to 1. Although we have seen the same ratio before, it is the concentration of activity that really caught our eye this time around. The buyers invested in a grand total of 8000 shares while slicing and dicing through 70.6 million shares on the sell side. In case you haven’t yet noticed, the amount of shares sold is a staggering 8830 times the number purchased and equates to a net of 86,255 shares sold by just these insiders every trading hour of every trading day over the last six months. The prior record from our earlier ramblings was a mere 1857 shares sold for every share purchased back in July 2003. Ironically, we note that earnings have actually improved for the top ten and the average P/E, which has come in consistently higher over the last few years, is now down to "only" 46 (we’re counting Comcast’s loss as a 100 P/E, when it is in reality, infinite). Of course, as we discussed in our last issue, there is essentially zero reason for corporate insiders to reward shareholders with dividends, so they do not, and the average yield for the group is a pathetic and selfish 0.2%. Remember, if dividends are paid out, share price drops and stock options are not as valuable. And of course, this is another reason why every ounce of productivity is relentlessly pursued, why every job that can be outsourced, will be outsourced, and why every accounting gimmickry ever devised and that has yet to be devised, will continue to be devised - to keep the shares as richly priced as possible for insiders to unceremoniously dump the very first opportunity they can.


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