Interesting ...
(1) go to Market Observations 11/21/00 (titled Where Are All the Bias?)
contraryinvestor.com
The entire article is interesting, and specifically ...
In very coincidental fashion, mutual fund investors in the 1973/74 period did not begin selling their mutual funds until well into/after the market had already completed most of its decline. The 73/74 precedent does speak to the fact that the NASDAQ could easily have another down year next year. Clearly a decline of the current level being followed up by another year of significant decline is not w/o precedent. It's happened before. Then, as now, we strongly believe that the public will be the key to the next leg down in the bear market, if there is to be a next leg down. It's during the second significant downturn in most "classic" bear markets where anxiety and fear take hold and the public reacts out of emotion. As you know, though, in 1974 we were facing significantly higher energy costs, the beginnings of the onset of serious inflation,...hmm, maybe we better just stop right here.
(2) ... also interesting re stock options ... I wonder how SUNW fits in here with Microsoft and Dell?
prudentbear.com
and (3) ... from Fortune ...
fortune.com
Will Tech Boom Again? Have We Hit Bottom? by Bill Savoy
Interviewed by Brent Schlender
Bill Savoy, 36, runs Paul Allen's investment firm, Vulcan Ventures. In the past three years, three specific events occurred that caused the Federal Reserve to inject a significant amount of liquidity into the system: the Asian contagion, the bailout of Long Term Capital, and the Y2K scare. In spite of the rhetoric of the Fed, and in spite of the direction of interest rates that they control, the growth of the monetary base exceeded the organic growth of the economy.
Historically, excess liquidity moves toward where it is treated best. At times that has been commodity markets or real estate or high-yield junk bonds. This time those
dollars moved to technology-centric equities. In the beginning it was large-cap equities--Sun, Cisco, Microsoft, Intel, Oracle--great companies with real growth, real products being sold, and real profits. As the Internet came to early adolescence, those dollars chased Internet equities.
That carried through until the first week of January 2000, at which point it became evident that the Y2K nightmare was not going to materialize. The Fed then pulled back on the growth of the monetary supply. Look at M1 and M2 figures, and it's clear. So now there's no excess liquidity to chase
those equities. Coincidentally, it became clear that the business model of selling a dollar for 95 cents online could not go on forever.
So all of a sudden, Internet companies were running out of money, there was no real business, and there was no continued infusion of liquidity to push the equities. The
natural thing happened: The law of supply and demand kicked in, there were more sellers than buyers, and so the inverse of what had happened the previous three years happened through the rest of this year. And I suspect that this will continue to happen for some time.
Another thing that will affect U.S. technology companies is the strong dollar. For big companies like Sun or Microsoft or Intel, half their revenue comes from overseas. Those sales, when you translate back to dollars, have no margin in them. So now you have this cycle of constantly readjusting what our largest signature companies should be worth. Thus the gap between the inflated technology equities and the old-economy companies becomes even more self-evident. Even though the average Nasdaq equity is down 45% this year, the valuation disparity is still enormous.
That's why I don't see how this downward cycle for the valuations of tech companies can be stopped right now. I do agree that technology is the place to be. It will drive us
forward for a long time. But that doesn't mean you should buy technology at all costs. Sometimes you have to deal with the hard reality that the business cycle is here to stay, and that you will go from extremely overvalued to extremely undervalued before you get back to fair value. I'm still
waiting to get to the extremely undervalued place so that we can again be aggressive investors in technology.
There's another indicator we haven't seen yet. Bubbles always end with debt problems. The real estate bubble ended
with debt problems., the junk-bond bubble did the same, so did the Japanese bubble economy in 1990. The last chapter of this cycle will mean serious debt problems for individuals. I wonder how many people are overleveraged, as they've been afraid to sell their thinly traded securities. When you're worth $5 billion on paper, you can borrow a half a billion and feel pretty good about it, but when all of a sudden you wake up and your net worth is $700 million, you don't feel so rich anymore. Credit card and consumer debt are both at an all-time high. And despite the rhetoric, we don't really
have a surplus at the federal government. So I'm waiting for debt to get the spotlight. But I suspect you'll have to see equities unwind a little more before you get there.
At Vulcan we saw this occurring in the second half of last year and have done everything we can to prepare. I'm probably more concerned about this than most oney managers, and I am definitely more negative than any senior executive I've run into. They all say I'm overly dramatic.
I won't say I'm predicting a "perfect storm," but I am saying the weather outlook isn't too good. So what you ought to do is anchor your vessel in the harbor, get inside under cover, and let the storm blow over, however bad it may be. Why take the risk of being on the water when you absolutely
know that there's a storm coming? |
