Microsoft Exec’s Speech Knocks Stocks for a Loop


The president of the world’s leading software company on Thursday called U.S. technology stocks absurdly overpriced, sending an already nervous stock market to one of its biggest declines in months.

The remarks by Microsoft Corp. President Steven Ballmer knocked a key remaining prop out from under a market that has been struggling for weeks with fears about interest rates, the weak dollar, a ballooning U.S. trade deficit and the year 2000 computer problem.

In heavy selling late in the day, the technology-dominated Nasdaq composite index plunged 108.33 points, or 3.8%, to 2,749.83, its biggest one-day percentage loss since April 19.


The blue-chip Dow Jones industrial average fared somewhat better but still sank 205.48 points, or 2%, to 10,318.59, its lowest close since April 9.

The Dow now has tumbled 1,007 points, or 8.9%, since reaching a record high of 11,326.04 on Aug. 25. Many major tech stocks, however, have hit new highs in recent weeks, bucking the broader market’s trend.

That gave Ballmer’s comments Thursday to a journalists conference in Seattle all the more weight, on Wall Street and in Silicon Valley.

Ballmer, who was a Harvard crony of Microsoft founder Bill Gates and who now runs the software giant’s day-to-day operations, told the journalists that “there’s such an overvaluation of tech stocks it’s absurd. And I’d put our company’s stock in that category.”

The frothiness is “a bad thing for the long-term health of the economy,” he said, adding, “Anything that’s false is bad.”

The debate over how high stocks should be valued relative to underlying earnings has intensified in recent years as the bull market has roared to unprecedented heights--led by technology stocks.

In one camp on Wall Street are investors who argue that the U.S. economy’s astounding health merits stock prices far above historical norms. And because tech stocks are the leaders of the “new economy,” they merit sky-high prices relative to earnings, this camp contends.

Microsoft shares, for example, are priced at more than 60 times the $1.42 a share the company earned in the fiscal year ended June 30. That so-called price-to-earnings multiple is double what investors were willing to pay for the stock just a few years ago.

In another camp on Wall Street are many other investors who fear that stocks overall, and tech and Internet stocks in particular, are grossly overpriced. Ballmer, 43, has long been in that camp, often warning that Microsoft’s heady growth must slow. But he was perhaps at his most blunt on Thursday.

“Maybe what we heard was the sound of a bubble bursting,” said Arthur Micheletti, chief investment strategist at Bailard Biehl & Kaiser in San Mateo, Calif. “There’s always some watershed event that triggers it.”

“Maybe we’ve found the one honest man,” added Micheletti.

That tech stocks are overpriced is “obvious on its face,” said Michael Murphy, publisher of the California Technology Stock Letter in Half Moon Bay. “But it’s an emperor’s-new-clothes situation: Everybody knows, but nobody’s supposed to say it.”

Murphy recalled that the late Hewlett-Packard Co. founder David Packard helped snuff out a technology rally in the mid-1960s by expressing similar puzzlement at his company’s soaring stock price.

Yet Murphy said that Ballmer’s timing was “bizarre,” coming as it did on the day Microsoft unveiled plans to float new shares in its Expedia Internet site, which lets people make travel reservations online. The apparent goal of the stock offering: to cash in on the resurgent craze for Net stocks.

The markets’ reaction to Ballmer’s words was nearly instantaneous. The Nasdaq index, which had been edging upward after a weak start Thursday, abruptly reversed course. The plunge steepened and spread to the Dow as trading volume surged.

Microsoft’s own shares plunged $4.88 to $91.19. Among other tech giants, Intel slid $5.31 to $77.50 and IBM fell $3.19 to $122.

At midday today in Asia, markets were also down sharply, suggesting Ballmer’s comments echoed worldwide. Japan’s Nikkei-225 stock index fell 2.9% to 16,823. Hong Kong slid 1.9%.

Until Ballmer weighed in, technology shares had been about the only bright spot in a U.S. market that has seen transportation, banking, appliance, chemical and defense stocks--among others--battered in recent weeks.

In fact, more than 70% of the stocks traded on the New York Stock Exchange have lost ground this year. Yet the Nasdaq index, boosted by tech shares, hit a record high of 2,887.06 two weeks ago.

Despite the market’s weakness, some analysts remain bullish.

Thomas M. Galvin, strategist at Donaldson, Lufkin & Jenrette in New York, said the current pessimism is unwarranted. While stocks may move “sideways” for the next few months, he expects a strong rally to kick off the new year.

Many analysts expect companies to report strong earnings this quarter, underpinning stocks.

Still, there have been other signs recently of what some analysts call “market fatigue.” Online brokerage trading volume declined in summer from spring’s pace, suggesting that the novelty of point-and-click investing may have worn off. The amount of cash pouring into stock mutual funds has also declined.

Oddly, Wall Street seems to be getting exactly what it once claimed to want: a global economic recovery. But with the rebound come things that stock and bond investors can’t abide, such as higher interest rates, rising commodity prices and competition for money from foreign markets.

Ballmer’s audience was the Society of American Business Editors and Writers. Not sparing anyone’s feelings, he said the media contribute to stocks’ overvaluation by portraying the technology industry in terms of a “gold rush.”

“The story that gets written is, ‘Isn’t it great to live in California in 1849--I mean 1999?’ ” he said.

For Ballmer, free speech didn’t come cheap. With Microsoft stock’s slide Thursday, his personal stake--240 million shares as of last January--lost $1.17 billion in value.

Asked what Microsoft’s stock price should be, he said, “Less.”


EarthLink and MindSpring plan a merger that could hasten the roll-out of high-speed services. C1



Treasury bond rates dive amid “flight to quality.” C4