Telling Fortunes

A San Francisco firm rolls the dice in the multibillion-dollar game of global finance

"It's important to think of this as a game of musical chairs," explains Keith Benjamin, Internet stock analyst at the investment firm of Robertson Stephens. "You need to do your homework and know which chair you want to be sitting in when the music stops."

For now, the music is playing, and the accompanying dance of millions in some ways resembles Galbraith's pre-crisis euphoria. Like Mexico four years ago and Thailand the year before last, California is now a land of surreal wonders.

Consider companies like Amazon.com, which has never turned a cent of profit, but whose stock nearly tripled in value between November and mid-January. At more than $20 billion, Amazon is now worth about three times the value of the bank J.P. Morgan & Co.

Every Californian with a job and a computer seems to be buying Internet stocks. Technology workers quit their positions to play Frisbee for a month, convinced there will be another, better, job waiting for them when the mood arises. Closet-sized apartments are renting for a couple grand a month.

And the U.S. stock market, which has been a lot of fun for a lot of years now, became truly delightful during the past few months.

"Valuations don't make sense. The only thing I can think of is that people buy on the belief that they won't be the last one in. Yikes -- not exactly an investment strategy. It does however seem to be working for many of my friends ... hmm, maybe I should give it a try!" writes Paul Moody, a member of a tech-stock Internet bulletin board.

Jim McGinn, responding to Moody's bulletin board posting, is more dour: "The meltdown will occur. The gamble is when, and how much can be made in the meantime."

Perhaps. Or perhaps it's best to listen to the true believers. They're most comforting during times like these.

Brian Mutert is the self-assured director of Stratagem, a San Francisco Financial District matchmaker who arranges marriages between small technology start-up companies and bigger ones. After 10 years and 70 such deals, he has a suite of 19th-floor offices on Sansome Street and status as a technology-world sage. Mutert was a player in the very first software IPOs, and he was hip to the Web before it was a blip on the rest of the investment world's computer screens, he says. "We were online before online was cool," he explains over coffee.

Rather than a collapse, Mutert expects to see a shakeout of high-tech firms, with the Yahoo!s, Netscapes, and E-Bays of the world eventually trouncing smaller pretenders. Mutert's in his early 40s, a fact he thinks will come in handy during the coming Internet share-price downdraft.

"I clearly think there's going to be a lot of consolidation," he says. "This means increased opportunity for the young and the nimble. While the going's good, you've got to position yourself in the strongest way possible."

Emerick McDonald, who heads a technology stock fund for Amerindo Investment Advisors Inc., is even more enthusiastic. He worked for years as a computer engineer before getting into the fund managing trade, and he says the Internet is now only barely coming into its own. There is no reason the technology stock boom should abate, given this virtually unlimited potential, he says.

Now, around $100 billion worth of commerce is conducted on the Internet each year. There's little reason to think that shouldn't rise to $1 trillion before long, McDonald explains. If one considers the number of households in the world with enough income to buy a computer, then considers the amount of commerce they might be able to do over those computers, the possibilities boggle the mind. Given this projection, the doubling in value of profitless firms like Amazon.com isn't alarming -- it's tame. After all, wasn't Microsoft overvalued in earnings-multiple terms 10 years ago? And wouldn't a 1989 Microsoft investor have made out all right?

"That investment would have been justified even if the stock was five times as expensive, or even 10 times as expensive," McDonald says. "As soon as I saw what a computer could do, I saw that it could be huge. It's been a long time in coming, but the Internet is finally allowing the computer to live out its potential."

McDonald might be encouraged to know that the seers of the modern age, KMV Corp., agree with his optimistic assessment about the strength of technology stocks.

Like rating agencies such as Standard & Poor's and Moody's -- which have traditionally told financiers how likely companies, countries, and municipalities are to go belly up -- KMV takes a close look at data from the balance sheets before making its ratings.

But according to KMV, its model gets a better sense of a company's future by considering fluctuations in the company's stock price, and using a mathematical formula to predict the vicissitudes of the industry a particular company happens to be in. Car manufacturing, for instance, is more stable than making computers, and that is reflected in KMV's model.

As it watches day-to-day fluctuations in a company's stock price, KMV's computer keeps an eye on whether the business' value dips below its debts. Just like in ordinary households, the greater the cushion between net worth and debt, the less likely a company is to go bankrupt.

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