March 5, 1997

President Bill Clinton
The White House
Washington DC 20500

Dear Mr. President:

Why does the financial news media claim that Mr. Greenspan is nothing less than a genius? Last week Greenspan said, in so many words, that the stock market was overvalued. Today he says that the market is not overvalued as long as earnings come in on target. First of all the market is not overvalued. Yes, certain stocks and indexes may be overvalued (nifty fifty), but there are lots of stocks that are undervalued especially in the small and mid cap sectors. Second of all, almost anyone who watches individual stocks and the stock market knows that if a stock does not meet expectations when it comes to earnings the stock will fall and if a lot of stocks report less than expected earnings then the overall market will fall. It's funny when he made his statements last week and today how Wall Street reacted on issues that any second grader should have known. I guess that shows that much of the financial markets are controlled by sheep.

Another issue that Greenspan talked about was his opinion on why the market had gone up so much in the last two years. He said it was most likely the "equity premium" and not the money that was coming in from mutual funds. Why does he and the financial media seem like they all want to find just one reason for the market's run up? The market is a very complex entity and its run up is most likely caused by several factors.

1. Earnings, if a company earns more money the company is worth more and investors will pay more for the company's stock.

2. Capital, if more capital is coming into the stock market through mutual funds or foreign investments the stock market will go up.

3. Competition for the capital, if interest rates are low making bonds less attractive then there will be more capital coming into the stock market and the stock market will go up.

Greenspan also talked about inflation and interest rate increases. He said that the upside risk was greater than the downside risk. No kidding? Remember anytime you here about interest rates they are most likely talking about the long bond (30 years). Almost every other interest rate that exists has a maturity less than 30 years, that is, its yield will be less than a 30 year bond. It will keep going down until you get to the yield banks pay on savings deposits which is currently 1-2%. There is not much more the 30 year bond can fall since it's already floating at just 6%. However, the upside could be 8-10%, or 12-14%, or God forbid, 16-18% like in the Seventies. You don't need to be a math genius to know that the upside risk is much higher than the downside risk.

As far as inflation goes there are many reason why the inflation rate is low.

1. 40% of the GDP is in technology. Remember in the Sixties when a good TV cost you $500. Well, you can still get a good TV for $500. Remember in the Seventies when a calculator cost you over $100, now you can get a better calculator for less than $20. How about in the Eighties when a good computer would cost you $5,000, a VCR would cost you $1,000 and a telephone answering machine would cost you $400. Now you can get a better computer for $1,500, a VCR for $200 and a telephone answering machine for $50. Even if labor costs go up, the cost to build is still going down when it comes to technology.

2. Foreign competition. Don't you think that GM and Ford know that if they increase prices they will lose market share to Japan and Germany. Already GM and Ford are feeling the pain of the higher value of the dollar, that is, they are losing market share because of it. Don't you know that many products and parts are being made overseas at rock bottom labor costs?

3. The real estate market. Here in California housing prices are just now starting to edge up after declining consistently since the Eighties. Remember, if your electric bill goes up by 10% that only costs a household about $10, but if your real estate bill goes up by 10% that costs a household $150. What I'm saying is that if the real estate market is steady or declining that takes a heavy inflation cost off consumers. But, like I said about interest rates, inflation can't get any lower. Prices are not going to do down and inflation is not going to get any better than it is now. The upside potential is much greater than the downside.

   By the way, one thing that is not affecting inflation is Greenspan. He has nothing to do with inflation. Inflation is under control for all the reasons above, not because of anything that Greenspan isn't or is doing. Inflation would be under control, the economy would be doing fine and the stock market would roll along if I was the Fed Chairman.

What Greenspan talked about was either irrational, for example, stating that the market was overvalued when clearly some stocks are overvalued and some are not, or basic, for example, if earnings expectations are met than stocks are fairly valued. What Greenspan should have talked about were the facts that are obvious, but are not being talked about by Wall Street or the financial news media.

For example:

1. Some stocks are overvalued and they are overvalued because the institutions are buying them. Most individual stock selection is made by a small number of people. Look at almost any stock and you will find that the top fifty investors are institutions. Look at almost any run up in a stock and you will see institutional buying supporting it, not individuals. If you want to talk about overvaluation look at individual stocks and the institutions buying them. Don't blame the overvaluation of these stocks on the "investor" or the "small investor."

2. Talk more about overvaluation. Just a few weeks ago Microsoft was up 5 points on about 6 million shares. Even if I assumed that all 6 million shares were bought the cost would only be $600 million. But, the market cap of Microsoft went up by $6 billion. For every dollar investors put in Microsoft that day, $10 was added to the market cap. With market makers raising prices like that it is no wonder some stocks are overpriced. What do you and Greenspan think is going to happen when the institutions (via investors) want their money back? Microsoft will fall like a rock. Some of the overvaluation of the stock market can be attributed to the specialists and the market makers (about 1,000 people at most) raising prices on small volumes. I don't think the investors in Microsoft even realize that for Microsoft to double just one more time (remember Microsoft has doubled hundreds of times in the past decade) it needs to add $120 billion to its market cap and if it does double its market cap will be 1/4 of a trillion dollars or about 1/4 of what the federal government takes in, in taxes from all sources in a whole year.

3. He should tell everyone there are obviously a lot of nuts out there on Wall Street. Many of them are still recommending gold as an inflation hedge. Remember last week when Greenspan warned about inflation. Gold and gold stocks took off. Well I got news for them. In the mid eighties gold was $500 an ounce, now it is less that $400. A 20% loss in 10 years doesn't look like an inflation hedge to me (I'm not even using the extreme high for gold which was $800).

Someone in the government has got to take the responsibility in telling the public the facts about the financial markets. The control of the markets is left in a hands of a few people. The brokerage houses, investment banks, mutual funds, institutions, specialists, market makers, NYSE, AMEX, NASDAQ, and the NASD. And to make things more risky, the people who are watching these people, the financial news media, have a vested interest in keeping them all happy, they pay their salaries (I won't even get into the SEC, they are about as useless as they can be, for example, when you write the SEC, do you know who answers you back?, a Consumer Affairs Specialist, does that sound like someone who knows about the stock market, most of the people I talked to at the SEC don't know a stock from a bond.).

If you don't start doing something about it now when the baby boomers start asking for their savings back when they retire, starting in about 10 years, there is going to be a meltdown like you won't believe. If, to be politically correct, you care about the future of our children you will do something about this problem now (Kind of off the subject, to me everyone is important, old and young. I can't imagine how it must feel to be 70 years old with all the politicians talking about the children and the future of the children. Isn't everyone important and can't the old be just as dependent as the young).

Sincerely,