Some investors like the new economy types dispute the notion of the $3 trillion bubble!
>Mercury News
Call it the $3 trillion bubble.
That's what last year's historic rise in technology stocks now looks like. Not a bull market. Not the investment opportunity of a lifetime. Only manic excitement at the end of a decade of prosperity.
When stocks trade next Friday, it will be one year since the Nasdaq composite index hit its historic record of 5,048.62. During the last year, Nasdaq investors have lost nearly 60 percent of their paper wealth, a loss valued at $3.1 trillion. That's the equivalent of all the personal savings set aside by everyone in the United States during the entire decade of the 1990s.
Worst of all, it may not be over yet, according to some of the best-informed tech investors in Silicon Valley. ``We're in a full-scale bear market,'' said Ken Fisher, president of Fisher Investments in Woodside, who has tracked Silicon Valley stock performance for more than two decades. ``This is the ugliest time I've seen in 18 years.''
For Silicon Valley's tech economy, built on IPOs and stock options, the damage has rippled outward like a financial earthquake. It wiped out the options that lured employees to work grueling hours at start-ups, scaled back the future for small investors, downsized CEO fortunes and undercut corporate profits.
``Everybody's seen the market skyrocket, and now everyone's in a funk, not sure which way to go,'' says Damon Vanderhorst, a 46-year-old member of a San Jose investment club. He has lost almost half the value of his investment since the peak last year.
Vanderhorst wanted to use the extra money for his children's college tuition. ``Where do we put our hard-earned money now?'' he wonders.
The answer is that it's going to a take a lot more work to find real investments. Stocks overall are sinking. The Dow Jones industrial average is holding up, only off 8 percent from its Sept. 6, 2000, peak. It closed Friday at 10,466.31. However, the Standard & Poor's 500 Index, a much broader gauge of the market, is off 20 percent from its peak March 24, closing at 1,234.18 last Friday.
And the Nasdaq composite index -- the exchange where most Silicon Valley companies are traded -- continued to sink all last week, dropping almost 200 points to close at 2,117.63 on Friday.
``Now we're in the slow motion deflation of that bubble,'' says Tom McManus, equity strategist at Bank of America.
Consider the following:
If you had bought one share of each of the 434 public companies in Silicon Valley tracked by the Mercury News, you would have spent $19,350 last March 10. What would your investment by worth now? $6,188 -- a decline of 68 percent.
More than one in five of those Silicon Valley companies have lost more than 90 percent of their stock value in the past year, according to a Mercury News analysis.
A majority have lost more than half their value. For instance, since the peak, investors in Cisco Systems have lost $295 billion in market value; in Intel, $208.7 billion; in Yahoo, $82.6 billion.
And most distressing of all: the Nasdaq composite index remains unusually high according to one flawed but frequently used measure of value, the price-to-earnings ratio. From 1986 until the bubble started in late 1999, investors paid an average of $41 a share for every $1 a share earned by the Nasdaq companies during the previous 12 months. By March 2000, the peak of the market, they were paying $245.70 a share. Last week, it had declined to $104 a share -- still more than twice its past average. For comparison's sake, the Standard & Poor's 500 Index, a broader gauge of the overall market, is now at around $23.20 a share compared to its long-term average of $17.40.
``The earnings have dropped faster than the stock prices,'' says James Stack, president of InvestTech Research, in Whitefish, Mont., which keeps records on the PE ratio for all 4,800 Nasdaq companies.
Some analysts ignore the P/E ratio because in a recession, it can become deceptively high when earnings are depressed. And they argue that it's an outdated way of measuring fast-growing companies.
Some also dispute the notion of a bubble. Kevin Hassett, an economist and resident scholar at the American Enterprise Institute, argues that prices soared last year because investors were having a difficult time valuing the emerging Internet world. As investors learned what worked and what didn't for Internet companies, stock prices adjusted accordingly.
``When news moves prices, it's not a bubble,'' said Hassett, who argues that stocks are undervalued and has recommended non-tech stocks.
But if you're the worrying sort, there's plenty to worry about right now.
Ben Inker, director of asset allocation at Boston-based Grantham, Mayo, Van Otterloo & Co., believes that both the Nasdaq and Standard & Poor's are overpriced. His computer model, based on the cash flow at individual companies, calculates that the Nasdaq index will decline to about 1,200. By using an entirely different method, Fisher in Woodside hits almost the same estimate for the Nasdaq. And Inker believes the Standard & Poor's is headed toward 700, more than 40 percent below its close last Friday.
``When we examine the numbers, it's hard for us to come to any other conclusion,'' he says. ``And if we're right, the economy could be in serious trouble, the kind we haven't seen in a long time.''
After all, just as investors have historically become too optimistic as stock prices rise, they have also become overly pessimistic when prices are falling too. That could drive the market lower than its basic value.
Plenty of other professional investors come to a more optimistic conclusion, and point to signs of change that can only improve the prospect for stocks: the Federal Reserve Bank is likely to cut rates later this month to stimulate the economy, and the very spread of pessimistic sentiment will lower stock prices to make them better bargains.
``The economy is not looking at a prolonged downturn,'' says Bruce Elwell, senior vice president at the Palo Alto office of U.S. Trust Co., which manages funds for wealthy individuals and families. ``I don't think this bursting of a bubble is going to have a lasting impact. This is not Japan of 10 years ago.''
Evelyn Meyer, a 65-year-old retired parts buyer, hasn't let the Nasdaq slump rattle her. She has invested about $3,500 over the past 10 years through an investment club, an amount still worth $16,000 despite the drop in prices. ``We're still buying stock,'' she says.
Other small investors are also adding to some of the stocks they already own.
``We think the companies we bought into are sound,'' says Vanderhorst. ``All I can do now is wait in anticipation that the market is going to recover. We weren't expecting it to skyrocket, but we were hoping at least to do 15 to 18 percent.''
That attitude worries some professional investors, who say the bubble years changed the public's attitude toward what to expect from the stock market. The historic average return on stocks is only about 7 percent better than inflation.
``The expectations are of 15 to 20 percent returns forever, and it's going to take while to get this out of people's mindset,'' says Inker, whose firm manages 53 funds worth $25 billion.
Lou Nguyen has changed his expectations dramatically. The 37-year-old accountant started with $5,000 ten years ago and parlaying it into a sum ``in the seven figures,'' enough to start working with a venture capital firm and buy his mother a house.
He remembers his moment of wealth fondly. ``You have a different attitude about life,'' Nguyen says. ``You never feel like you're at the mercy of someone for the next paycheck. You feel in control, and it's a nice feeling. Life is good.''
One year later, he's lost most of what he gained, now works at a corporate job, and ignores the stock market.
``Basically, I gave up,'' he says. ``I work for a living and I don't look at the market any more.''
Still, many small investors haven't lost their faith in the market. ``We feel we've purchased stocks with value and good value stocks will rebound,'' says Meyer. ``Careful investment over time reaps profits.'' |
