Originally created 07/06/99

Now, back to the big celebration



NEW YORK -- The Fourth of July fireworks were nice -- entertaining and very pretty -- but of course they lasted only a brief time. Now back to the stock market, where prices explode almost every day, all day long.

From that perspective, the Fourth was just a restful weekend respite from the frantic, yearlong, financial festivities.

Year long? How about decade long? Since 1989, the Dow Jones industrial average has risen five-fold. Impressive, without a doubt, but consider this: Since its August 1982 low, the Dow has risen 14 times!

A celebration of this sort is historic; nothing comparable has ever occurred before, and in spite of an oversupply of free-spending, new-era investors, there's a good chance it won't happen again for a while.

Meanwhile, it has, for the time being, ridiculed as nonsense some of the most fundamental, elementary, time-honored principles of investing, such as the role of profits in setting the price of shares.

For example, Amazon.com rose 900 percent last year while earning nothing at all. It still hasn't, but that's OK under the new rule, which declares that you don't need profits if you gain market share.

If that sounds extreme and exceptional, it nevertheless is symbolic of what is occurring these days. What once were considered healthy price-to-earnings ratios -- that is around 15 -- are now double that and rising.

PE ratios measure confidence; they indicate the number of times annual per-share earnings that investors are willing to pay for a stock. As such, they measure expectations; the higher the PE, the higher the expectations.

Michael Flament, an analyst at Wright Investors' Service, has made detailed studies of how today's prices deviate from long-term norms. An example:

It took Microsoft nearly 10 years from its initial public offering in 1986, during which earnings rose about 50 percent a year, to grow by as much as no-profit Amazon grew in 18 months.

High expectations aren't new, of course, nor were they back in the 1920s. Analyst Charles Allmon recalls a significant passaqe from Benjamin Graham's classic tome, "Security Analysis," that describes the kind of thinking that existed in the 1920s, to wit:

"Making money in the stock market was now the easiest thing in the world. It was only necessary to buy 'good stocks' regardless of price, and then let nature take its course."

Eerie reminders of that sort could put a damper on the current celebration. But maybe not. The current market has defied almost all negative opinions and forecasts, including those of Alan Greenspan.

Greenspan, as newspaper readers have read again and again, is chairman of the Board of Governors of the Federal Reserve, and thus is this country's most powerful and best known monetary figure.

For more than two years he has expressed doubts about the durability of the stock market. He has warned about irrationality and exuberance. And he has now emphasized his concern by raising interest rates.

But nothing has stopped this market for more than a few days at a time. Perhaps, in spite of all, the marketplace has sensed a rosy future not evident from the usual statistical studies. Maybe.

And maybe not. The future does not reveal its plans.