Investors: Is the Worst Over?
By Pierre Belec
NEW YORK (Reuters) - They're Wall Street's walking wounded, the masses of investors in shock after the stock market went from slow correction to freefall frenzy. Twelve months after 'The Big One' started, people are only now beginning to ask themselves ``What could I have been thinking?''
Many have lost their shirts after throwing money into ``New Economy'' stocks, those technology high-flyers.
A lot of tech stocks have crashed and some have burned. Internet stocks that went through the roof two years ago are now selling for pennies a share after having their 15 minutes of fame.
The optimists say the technology-laced Nasdaq market, which has been the hardest hit, appears to have hit bottom and they think that months from now Wall Streeters will be kicking themselves for not scooping up stocks after the tumble. They say the bullish ingredients are coming together, i.e. the media have discovered that there is a bear market, which is usually a good time to start buying.
But there's the scary realization the market is still overpriced, despite its heart-stopping drop.
The Nasdaq composite index's share-price-to-earnings, or P/E, ratio is still high at 100, even after a plunge to a two-year low. The index itself is down more than 60 percent from its March 10, 2000, high of 5,048 points, making that slump the biggest in Nasdaq's history.
SCARY STUFF
The Standard & Poor's 500 index, which is a more honest reflection of the broad market, would need to shed nearly half of its value to get back to a historical P/E of 14. The P/E hovers at 20.
The Dow Jones industrial average sank briefly into bear territory this week, having collapsed 20 percent from the Jan. 14, 2000, high of 11,722 as the plunge in the Nasdaq bullied the world's most closely watched index of blue-chip stocks.
More than 40 percent of the 4,623 stocks in the Nasdaq index have lost half of their value and some 10 percent of the component stocks are down an incredible 90 percent from their peaks.
The market looks set to hit new milestones, this time on the way down, after more than $4 trillion in stock market wealth has been vaporized.
Die-hard technology-stock cheerleaders still see a light at the end of the tunnel, predicting the sector will climb back by year-end. The trouble, though, is the light at the end of the tunnel may be the headlight of a speeding locomotive.
The reason is that just as the tech frenzy caused the market to overshoot on the upside on overly optimistic earnings expectations, the odds are investors may overshoot on the downside on the negative earnings story.
The earnings of technology companies grew by a puny 3 percent in the fourth quarter of 2000, after soaring 50 percent in the second quarter. And a slew of tech companies have issued cautious comments about future results because of the uncertainty surrounding the global economy. As for 2002 results, there is a big hush.
HOW COULD THIS HAVE HAPPENED?
``This was a stock market mania, the likes of which have not been seen since 1929,'' says Alan Newman, editor of H.D. Brous & Co. Inc.'s CrossCurrents financial letter.
``We can understand the inability of professional observers to admit to a mania but the inability of strategists and advisers to admit the presence of a bear market is truly frightening,'' he says.
There is plenty of blame to go around but a lot of fingers are pointed at the corporate propagandists who spun buzz words about their Internet companies' spectacular future.
``The dot-com fallout really pronounced the buzz word phenomena,'' says Eric Yaverbaum, president of Jericho Communications Inc., the nation's 13th-biggest consumer-oriented public relations firm. ``There was a lot of spin by companies which were not doing well and said just about everything to cover the bad news.''
IF ITS TOO GOOD TO BE TRUE, THEN IT'S TOO GOOD TO BE TRUE
The dot-com spokespeople created speculative hype by painting beautiful pictures of their companies' outlook. It worked for a while as investors became convinced that newly issued stocks trading at $120 a share would still be buys of a lifetime.
What happened is that within a four-year window, Wall Street watched a big chunk of the new dot-com industry go from boom to bust. A lot of the mania was fed by what Yaverbaum says was a serious case of bad public relations.
``The dot-coms' buzz has been amazing to read, with the progression of phrases that they threw around such as 'seeking a new direction,' 'poised for growth,' 'great potential' and 'transition years,''' Yaverbaum says. ``They were all signs that said 'Hey, we're in trouble' because we have not been dealing with real world economics.''
He adds, ``From one month, when they were poised for growth, to the next month, when they were readying for a transition, to the following month, when they laid off two-thirds of their work force, it got worse and worse until they eventually disappeared.''
The higher the dot-com and technology start-ups' stocks reached, the more investors fell in love with the sector and the greater the buying interest, thus creating constantly expanding demand.
But investors had no way of figuring out which companies would be the winners because there were no models or history for New Economy companies.
Some investors played it safe by buying chunks of stocks, gambling that out of a dozen names, at least half would be successful. This indiscriminate type of buying created an even bigger bubble and only delayed the market's blow-up.
It started with a slow leak, then the bubble burst. Third-tier Internet companies, which had no earnings or even any hypothetical profits, went off the cliff and disappeared and the secondary companies, or the niche-oriented ones, are undergoing a painful retrenchment.
ADVICE FOR DOT-COMS LEFT STANDING
``I'm waiting for the dot-coms to come forward and just say 'Here's the truth: We have built a business plan that is based on getting unlimited amounts of revenues and the strategy a year ago was hold that corner for the day when the consumers start to come,''' says Yaverbaum.
``'Well, the reality is that the consumers still have not come to this corner and there is no longer unlimited amounts of money and we need to change our strategy to be a viable business,''' he says.
``That would be a company I would trust,'' Yaverbaum says. ''But the trouble is that not a single dot-com has said that. It would hurt the stocks of these publicly traded companies.''
The upbeat chatter about the dot-coms was kept up even as the earnings of technology companies slumped last year as the global economy slowed.
At the height of the mania, when buying technology stocks was a national preoccupation, people believed that in order for a company to be successful, it had to have ``.com'' in its name. With so many of them in trouble, ``.com'' now implies that a company's days may be numbered.
Part of the problem is that the venture capitalists who financed the New Economy revolution have pulled back and are not bankrolling start-up companies. Also, venture capitalists, or VCs, are no longer letting kids with ponytails run and often ruin the companies.
At the height of the dot-com craze, the VCs would risk billions of dollars to finance business models and then cash in when the company's stock went public at extraordinarily high prices.
VALUE IS BACK IN STYLE
The VCs are now doing more than kicking the tires and looking under the hood before buying into an idea. They're backing companies with experienced, gray-haired CEOs from the Old Economy.
As a result, chief executives in the struggling dot-coms have been the biggest group running for the exits. Challenger, Gray & Christmas Inc., an outplacement firm, says 25 dot-com CEOs hit the road in February out of a total of 119 announced departures.
Challenger says that dot-com companies with younger and less experienced CEOs feel vulnerable as the economy slows and the companies' boards of directors may have raised doubts about their CEOs' ability to ride through rough economic seas.
For the week, the Dow Jones industrial average slumped 318 points to 9,504. The Nasdaq composite index was up 37 at 1,928 and the Standard & Poor's 500 index was off 10 at 1,139.
ca.us.biz.yahoo.com |
