Monday, Nov. 8, 1999 | 10:48 a.m.
Is the bubble ready to burst?
Financial prognosticators have been predicting a big correction in the stock market -- particularly among Internet stocks -- for years. On Sunday afternoon in Las Vegas, two big names in the investment community predicted again that the correction is on the way.
"The bubble stands a chance of throwing a monkey wrench into the equation," said William Gross, managing director of Pacific Investment Management Co., a $29.8 billion bond fund based in Newport Beach, Calif. "We're in fine shape, absent that bubble. It's the only thing that can turn off the prosperity going forward."
But technology investment specialists said that prediction might be a bit dire. Michael Murphy, founder of the California Technology Stock Letter, expects a correction sometime over the next two years, "but I don't think it'll have all that much effect on the rest of the market."
"(The Internet sector) really doesn't slop over into other sectors of the economy or into other groups," Murphy said.
The men spoke at the Personal Finance Conference of the Society of American Business Editors and Writers, which opened in Las Vegas this weekend.
Gross pointed to the strange market that's been created in Internet stocks. The 240 largest Internet stocks, he said, have accumulated a market value of $549 billion -- a huge number considering their sales of just $24 billion and combined losses of $7 billion.
"This has been the basis of the market," Gross said. "The question is, can this continue?
"This is really a critical question for me. It's becoming a dominant factor. (Federal Reserve Chairman) Alan Greenspan refers to it almost obsessively these days."
Gross predicted that would lead Greenspan to raise interest rates by mid-November, should the current market rally continue.
A big correction in the equity markets would assist bonds, but Gross said the benchmark 30-year interest rate probably wouldn't dip below 5 percent. "It's not reasonable to expect more than that, absent a catastrophe," he said.
But Paul Cook, senior portfolio manager of the $3.8 billion Internet-oriented Munder NetNet Fund, dismissed talk of a massive correction in the market.
"Many thought we saw the bubble burst this summer," Cook said. "But the market is willing to pay for growth, particularly top-line (revenue) growth. Just because these companies don't have earnings doesn't mean they don't have value.
"I don't think you'll see a bubble burst. You'll see it settle into different sectors, and the different sectors will react differently to trends in the market."
The Internet's influence in business is so pervasive, Cook argued, that virtually every company carries some Internet risk. Even those companies not involved in the Internet carry risk -- the risk that a new company could come along and steal market share by using the Internet to transform an industry.
"If you hold Sears Roebuck, you have some Internet risk," Cook said.
Murphy said the big test for the sector will come this Christmas. Internet companies are starting to pour cash into holiday marketing campaigns -- and for many, it's a now-or-never chance to prove their business models, Murphy said.
"The gross profit margin on the Internet is thin enough that many companies will never be profitable," he said. "Some companies will double and triple sales this Christmas, but triple and quadruple their losses. Obviously, some business models are not working out."
But all agreed on one thing -- a long-term approach will produce success in investing, regardless of any pending correction in the market. Cook, who noted that his fund has held onto Amazon.com since its 1996 initial public offering, referred to the wild swings in Internet stocks as "white noise."
"If your outlook isn't 10 to 15 years from now, this probably isn't the fund for you," Cook said.
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