SAN FRANCISCO (CBS.MW) - What we're learning this month looks like that battery-operated bunny: the bubble keeps bursting and bursting and bursting.
If you thought the second half of 2000 and most of this year were ugly, wait until October's inflated stock prices receive their well deserved pinprick.
Japan's Nikkei 225 Index took 12 years, starting in 1989, to decompress. It reached 39,000 or so and wound up falling below 10,000. In that span, there were plenty of 30 percent and 40 percent and 50 percent rallies. Call them retracements, dead-cat bounces, adjustments, corrections - who cares?
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The Japan and Asia-oriented funds lived off those bounces for more than a decade. Investors made short-term scores, even as the Japanese economy deflated and the Japanese consumer went into hiding. No argument there.
This time around, in the good old USA, the mini-bubble is making an appearance, fed by government stimulus programs, the Federal Reserve's easy-money policies and a Wall Street penchant for hyping the beast. Oh, and deluded individuals who are boarding the October momentum train. Call it a 15 percent retracement in Nasdaq, a dead-cat bounce, a correction. I call it a bear trap, pure and simple.
The air-pocket has names like QLogic (QLGC: news, chart, profile), Applied Micro Circuits (AMCC: news, chart, profile), Surebeam Corp (SURE: news, chart, profile) and Cepheid (CPHD: news, chart, profile). Other names include Krispy Kreme Doughnuts (KKD: news, chart, profile) and P.F. Chang's China Bistro (PFCB: news, chart, profile) - these last two food and restaurant companies that are becoming a favorite of hard-nosed short-sellers who hope to get their just desserts in the coming crash.
The squibs of air being pumped into these securities isn't the fresh mountain air that swept through stock markets in 1998 and 1999. It doesn't have the tingle that comes with fistfuls of corporate profit and a booming economy.
This time around, at their depressed levels, securities of all shades are getting a whiff of the foul air that comes with stale hype and the beating of war drums. Hence the doubling and tripling of shares that once sold for $2 or $4 or $6.
If and when this last-gasp bubble pops, it will be mean and slimy - like an air pocket that belches its way into an oil slick on the Dead Sea. The folks who will hurt the most are the ones already in the stock-market poor house: individuals who don't have access to market-neutral and short-bias hedge funds.
The stock and mutual fund-buying Americans who now suffer 60 percent and greater losses in their self-managed retirement accounts face the greatest risk from the next equity slide. When those Americans get entirely wiped out, many will steer clear of the stock market for the rest of the decade, and some for the rest of their lives.
There are 28 or so reasons why this stock market is an oil slick waiting to happen, as quantitative analyst and fund manager Cliff Asness at $1.3 billion AQR Capital in New York City points out. The price-earnings ratio of the Standard & Poor's 500 Index stands at 28, its richest valuation but for two brief spans of time. "Though of course there are 92 versions of earnings these days," says Asness, a frequent contributor to financial journals and a stock market historian.
One of those expensive-stocks spans was in the November 1999-March 2000 insanity, fed in part by the Federal Reserve's rush of Millennium Bug liquidity. The other came just before the October 1929 crash that marked the start of the Great Depression.
Asness, a fund manager with a sense of humor, is as mystified as anyone why investors are willing to pay such high prices for the stocks of companies that can't possibly recover their pre-2000 growth rates, at least not in the next year.
"I imagine the head of CNBC saying 'You provide the pictures, I'll provide the bull market,' '' he says.
The 72nd anniversary of the '29 crash is Oct. 28-29. That's this Sunday and Monday. Thank goodness for the fact that American markets don't trade on Sundays.
For more on the bear trap, see this from Thom Calandra's StockWatch.
Thom Calandra is Editor-in-Chief of CBS MarketWatch. His StockWatch will be on holiday from Friday Oct. 26 through Friday Nov. 2. |
