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Politics : Formerly About Applied Materials

AMAT 341.36

+1.3%

Jan 29 3:59 PM EST

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To: Katherine Derbyshire who wrote (46120)	5/3/2001 12:53:34 AM
From: brunn	Read Replies (1) of 70976

Right now the Nasdaq is right about where it was in August 1998. To argue that the index is still overvalued at this point is to argue that stocks were sooooo overvalued before the LTCM crisis that 2.5 years of robust economic growth still hasn't been enough for earnings to catch up to valuations. In essence, you are arguing that the economy as a whole is worth less now than it was then. When the Nasdaq was peaking at 2000 in 1998, valuations were probably being stretched imo. The following graph shows how P/E's of the tech leaders broke traditional valuation parametrics by 1997-98: quicken.com In retrospect, of course, these stocks probably deserved a premium at that time because it was looking forward to 2.5 years of unbelievable growth. This looking forward to great growth fed the phenomenon of basing current valuation on growth forecast further and further into the future and created the bubble of 1999-2000. (AMAT fortunately was relatively immune to this practice and is why its price has held up relatively well recently.) This huge runup to Nasdaq of 5000 is why 2200 seems cheap today, but is it? If I were to put "fair" non-bubble valuations of where the NASDAQ should have traded over the last few years: 1997 1200-1500 1998 1500-1800 1999 1800-2000 First Half 2000 2000-2100 2nd Half 2000 2100-1800 First Half 2001 1800-? depending on how tech/telecom industries recover in the 4th quarter. These Nasdaq levels would have supported much more traditional valuations, both on the way up and the way down. It also would have shown the greatest growth early when typically stocks move up the quickest and slowed down as fears of economic overheating/business peaking should have started surfacing. P/E's in a rational market would have been decreasing as we approached the peak rather than reaching for the sky (perhaps the definition of a bubble.) Instead, we saw the bubble with valuations reaching atleast twice what probably was merited. This was probably a result of momentum investing/day trading as well as the difficulty in analyzing so many new companies who were having unprecedented growth rates--partially fed by the greed of those very same day traders. Even with my scenario up above, Nasdaq would have seen approx. 20% annual growth for 3 consecutive years, which still would have represented quite a memorable rally. The market was intelligent in 1998 buying in the face of high valuations because of unprecedented growth in 1999 and early 2000. The market was very stupid in late 1999-early 2000 buying in the face of even higher valuations just as business conditions (and Greenspan's interest rates) were turning. And the reason that a Nasdaq of 2000 may have been justifiable in 1998 may not exist in 2001. (By the way, if I knew I would be writing this today when I was investing a year or two ago, I would be a lot wealthier today.)

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