When Growth Is the ‘Problem,’ Tech Prices Aren’t

Steven Ballmer, Microsoft Corp.’s 43-year-old president, apparently has his sights fixed on a far higher calling: He wants to be chairman of the Federal Reserve Board.

We can surmise this from Ballmer’s comments last Thursday to a group of journalists meeting in Seattle. On the subject of technology stocks, by far the hottest stock sector of the 1990s, Ballmer insisted that enough really is enough already.

“There’s such an overvaluation of tech stocks it’s absurd,” he said. “And I’d put our company’s stock in that category.”

Remember Fed Chairman Alan Greenspan’s warning in 1996 about the dangers of “irrational exuberance” in financial markets? Neither that comment nor any of Greenspan’s subsequent fretting about a potential U.S. market bubble had such an immediate and severe impact on share prices as Ballmer’s remarks.

He triggered a 3.8% dive in the technology-heavy Nasdaq composite index on Thursday and a 2% slide in the Dow Jones industrials. On Friday, the sellers overall still were in control,

driving most key stock indexes at least marginally lower. The Dow ended at 10,279.33, its lowest level since April.

With that kind of power, and with Ballmer’s motivation clearly being his concern for the greater good of mankind--overpriced stocks are “a bad thing for the long-term health of the economy,” he said Thursday--it should be obvious to President Clinton that Ballmer now is the best choice to succeed Greenspan when his term expires next June.

Just imagine the new candor Ballmer would bring to the Fed. We would trade ever-blurry Greenspan-speak for Ballmer’s declarative sentences.

“I demand that the market fall 20% to correct stock price excesses,” Chairman Ballmer would say. And so it would be done.

*

Well, maybe not. However overpriced tech stocks in general and Microsoft in particular may be according to the No. 2 executive of the world’s leading software company, many investors see things differently.

Indeed, by Friday, Ballmer’s message was generating catcalls in the form of reiterated analyst “buy” recommendations: Two of Wall Street’s biggest brokerages, J.P. Morgan and Salomon Smith Barney, urged clients to jump into Microsoft shares on any continued price weakness.

Although the stock fell as low as $88.88 on Friday, it closed at $90.94 on Nasdaq, off just 25 cents for the day after Thursday’s drop of $4.88. Microsoft share owners, including Ballmer (he has about 240 million shares), are still sitting on a 31% year-to-date gain.

That’s exactly what irked (and frightened) many Wall Street bulls last week: Ballmer was attacking one of the few pillars of strength left in the U.S. stock market.

Major technology stocks such as Intel, Cisco Systems and Apple Computer had been hitting record highs in recent weeks even as the broad market was sinking under the weight of interest rate worries, the slumping dollar and the usual end-of-quarter concerns about corporate earnings.

Microsoft stock could give up one-fifth of its current value and still be up for the year, and the Nasdaq composite index still sports a 25% year-to-date gain. But many other stocks are already in loss territory for 1999.

Measured by Standard & Poor’s stock sector indexes, for example, the average transportation stock is down 11.8% for the year--and down 29% from its record high reached in May.

The average utility stock is off 7.4% year-to-date, and the average financial stock is down 4.9%.

The average small-company stock, as measured by the S&P; small-cap index, now is down 3.4% for the year.

When too many stocks are going down instead of up, Wall Street first labels the situation a “correction.” Take enough out of prices and you’ve got a bear market.

Where are we now? Good question. The Dow industrials have fallen 1,046.71 points, or 9.2%, from their record high of 11,326.04 reached Aug. 25. Crossing the 10% mark would put the Dow in an official correction.

Crossing the 20%-loss mark would mean an official bear market. (“Official” in all references here means nothing more than an entry in some market historian’s scrapbook.)

The last official bear market occurred in 1990. A year ago we almost got there: The Dow fell nearly 20% after Russia’s currency devaluation, but bottomed there and soon resurged.

Yet as the S&P; indexes and other market gauges show, plenty of stocks already are in deep bear markets this year--Maytag, down 55% from its 1999 peak; DaimlerChrysler, down 37%; and Eli Lilly, down 33%, to name a few.

*

Even more troubling, perhaps, is that many commodity-oriented stocks--shares of paper and chemical companies, for example--have crumbled recently even though the prices of their commodities are in uptrends with the recovering Asian economy.

Still, the average general U.S. stock mutual fund was holding on to a 1999 gain of 4.8% as of Thursday, according to Lipper Inc. No doubt some big chunk of that remaining gain is owed to the presence of Microsoft and other tech leaders in many portfolios.

Or perhaps more funds than we suspect own Internet start-up stocks--which, ironically (at least in the context of Ballmer’s remarks) led the market’s attempt at a rebound Friday.

If you believe Ballmer’s assertion that Microsoft is overpriced, you probably wouldn’t turn around and buy most Net stocks. But on Friday, Net directory firm Yahoo leaped $9.56 to $183.31, its highest price since April.

More stunning was the trading debut Friday of networking firm Alteon WebSystems. It rocketed from an initial offering price of $19 to close at $74.94.

Tech stocks are overpriced? Yes, Steve, they are. But investors, for better or worse, can’t get over the idea that technology still is the most promising growth business of the new millennium, and probably the millennium after that as well.

You’ve got to give people a much better reason to sell many tech stocks than simply that Steve Ballmer thinks they’re too expensive.

What might be a better reason to sell? If the economy skids into recession. If tech companies’ earnings collapse. If the Y2K computer bug renders all electronic systems useless. If an extremely large sinkhole swallows Silicon Valley.

Or if the Fed, under Greenspan, raises interest rates again when policymakers meet Oct. 5 and announces that there will be many more increases to come, until the economy finally slows decisively.

But as stocks in general slide further, finally taking tech shares down as well, it’s worth noting that the key “problem” dogging the market this time around is stronger worldwide economic growth and its side effects (in particular, perhaps a little more inflation).

That’s a much better problem to be facing than the threat of global recession or depression. A growth environment is one in which many companies, and stocks, ought to fare quite well.

Maybe Ballmer has rung the closing bell for the great 1990s bull market. But there’s another strong possibility: The Fed on Oct. 5 raises rates, or doesn’t--but either way signals it is moving to the sidelines. In this exceedingly pessimistic market, that could be all it takes to bring buyers back to Wall Street.

*

Tom Petruno can be reached at [email protected].