James, as always ... you are a lot more optimistic than me - GG. I was stunned by the upside valuations of tech ... and lots of them still look very expensive to me. I have no idea how this will resolve itself ... and will just trade when I can and keep cash otherwise. Still .. articles like the following may help the retail investor decide to sell at what could be a climactic bottom
msnbc.com
SINCE NOV. 7, more than $1.62 trillion of national treasure has vanished from the economy, more than doubling — to $3.96 trillion — the losses sustained by investors since the three indexes all peaked earlier this year. And those losses, in turn, are undoubtedly a big reason why everyone seems suddenly so worried about what the future holds. A lot now hinges on the willingness of investors to buy stocks that more and more people now doubt have much value — at least at current prices.
Eleven months into the new millennium, investors have sustained stock market losses equal to roughly 40 percent of America’s total economic output in the accounting year that ended Sept. 30. These are losses of unprecedented severity in post-war economic history, dwarfing the impact of the 1987 stock market crash, when the Nasdaq Composite — then less than a tenth its present size — lost barely a third of its value, and the combined losses of the Dow, the Nasdaq, and the S&P totaled less than 25 percent of the country’s 1987 gross economic output.
This time around, most of the selling has been in Nasdaq stocks. Much has been said and written about the so-called tech sector investment bubble that popped last spring, but not enough attention has been paid to just how big the bubble had gotten by the time it popped, and for how long it had been swelling up.
Since March, when the tech-dominated Nasdaq topped out at an intraday high of 5,132, the index has lost close to 44 percent of its value, the steepest slide the Nasdaq has ever endured.
Yet that slide is merely the mirror image reversal of an explosive runup that caused the Nasdaq to soar by almost exactly the same amount, in almost exactly the same amount of time, beginning in October of last year. The index nearly doubled on the way up, during the six months between October 1999 and March 2000, and the popping of the bubble has so far wiped out exactly the same amount of gains, causing the index to fall by nearly 50 percent in value.
But the bubble itself began to swell far earlier than October 1999. From the late 1980s through the start of 1995, the 100 largest companies in the Nasdaq Composite — virtually the only companies on Nasdaq that had any actual earnings or operating cash flow — barely doubled, a growth rate that roughly paralleled the rise in the Dow industrials.
At the beginning of 1995, both these indexes were trading at roughly comparable price/earnings valuations: a p/e multiple of 18.31 for the Dow versus 22.75 for the Nasdaq 100. But in the 36 months that followed, the Dow industrials barely doubled while the Nasdaq nearly tripled, to a late 1997 high of 1,154.
The best evidence that this represented the start of the Nasdaq bubble is to be found in the exploding p/e multiple for the index. By the start of 1998, the p/e multiple for the Dow industrials had barely expanded at all, to 20.83, meaning that, collectively, the 30 stocks in the Dow had doubled in price because the companies themselves had nearly doubled their per-share earnings.
But during the same period, the price-earnings multiple of the Nasdaq 100 soared from 22.75 to 50.63, meaning that even though the companies themselves had tripled in value, per-share earnings for the sector had, relatively speaking, fallen by more than half.
Noting that it took three years — from 1995 to 1998 — for the Nasdaq to triple to 1,154, it took less than two years, to November of 1999, to triple yet again, a period during which the index’s p/e multiple expanded from 50 to 136.
When the Nasdaq finally peaked on March 24, 2000, the p/e/ multiple of the stocks within it stood at 165 — a more than 600-percent increase in the multiple in barely half a decade. As for the Dow industrials, its p/e multiple peaked at 27.3 on Jan. 14, 2000, an expansion of less than 50 percent in the multiple during the same time period.
With Wall Street now once again focusing on investment fundamentals, the fact that the Dow industrials have so far fallen only 5 percent since the start of the year while the Nasdaq 100 has slumped by 42 percent simply reflects the huge amounts of p/e hot air pumped into the Nasdaq while the speculative bubble in tech stocks swelled.
STORM CLOUDS GATHERING
But this is where the future starts to get worrisome. That is because, at the Dow’s current price of roughly 10,500, the average is once again trading at its price level of more than 18 months ago, in the spring of 1999. And not surprisingly, its current p/e multiple of rough 25 almost exactly matches its multiple of 18 months ago.
By contrast, Nasdaq’s current price level of around 2,900 for the Nasdaq 100 Index, while representing a retrenchment back to the level that prevailed as recently as last November, reflects a current p/e of 124, though its p/e multiple hovered last November in the 80s.
In other words, on a p/e basis — which is how the Nasdaq 100 Index traded up until mid-decade — the index has further to fall before it offsets even the latest, most excessive blowout phase of the tech sector bubble that began last autumn. And that doesn’t even begin to account for the excesses that began working their way into Nasdaq prices from mid-decade onward. To return even to the multiple that prevailed three years ago would imply another 1,600-point slide in the index, to somewhere in the low 1,200s, to say nothing of the more than 2,000-point drop that would have to occur to get the index back to the valuation level that prevailed at mid-decade.
Impossible? Don’t bet on it. At the start of 1995, Microsoft Corp. sold for 29 times earnings. Today it sells for close to 39 times earnings though the company is much larger now and its growth rate is slowing. From a fundamental investor’s perspective, the question is thus a simple one: Why is $1 of Microsoft earnings worth $39 today when it was worth only $29 five years ago when the company’s growth potential was greater? By that reasoning, Microsoft in November of 2000 isn’t worth $68-plus per share, it is worth more like $52. (MSNBC is a Microsoft - NBC joint venture.)
ECONOMIC IMPACT
It is the relentless selling in Nasdaq stocks — and the convincing case that can be made of more selling to come — that now calls into question the outlook for the economy. At its peak last March, the 4,322 stocks of the Nasdaq Composite Index represented nearly $6.6 trillion of capital value on the balance sheet of America.
This was the money that created the late 1990s phenomenon known as the dot-com millionaire … that financed the boom in $2-million-plus Manhattan coops … that triggered the building boom in three-garage homes in the suburbs (with $40,000 SUVs in each of them). This was the money that financed the private school education for the kids, the yachts, the vacations and on and on and on.
This was where the good life of the 1990s really came from — not from the increasing productivity of the workforce but from the stock market.
Between 1995 and now, the wage level of the American workforce grew by less than 22 percent, but personal consumption spending grew at close to twice that rate. Meanwhile, the nation’s personal savings rate fell from 6.5 percent of disposable income at the start of 1995 to nothing at all now and in July actually dipped into the red.
But people spent anyway, and common sense is all anyone needs in order to understand why: Folks simply felt richer. Home prices were rising, the job market was tight, and the stock market was rising — not just modestly but in great vaulting leaps, month after month and year after year, in seeming defiance of all previous human experience. And it was Nasdaq stocks — a part of Wall Street that as recently as the 1970s was disdained as the “over the counter” market — that registered far and away the greatest gains.
Now we are beginning to see the movie run in reverse — and the chilling fact for everyone is, no one knows how long it will continue, or whether the slide will spread beyond the stock market and precipitate a downturn in the economy as a whole.
Plenty of other factors add to the worry. There’s the global spectacle of America being unable to choose its 43rd president. There’s the rising price of oil, rising interest rates and slowing corporate earnings growth.
Mr. Barton Biggs of Morgan, Stanley Dean Witter had already dubbed this confluence of events the economic equivalent of the perfect storm, in deference to the 1998 nautical bestseller of the same name by author Sebastian Junger. Now we will see whether all this adds up to a recession or not — and we probably won’t have all that much longer to wait to find out.
Best Regards
Stephen |
