End Game as Nasdaq Tide Goes Out
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Sun Jun 30, 8:17 PM ET
By Pierre Belec
NEW YORK (Reuters) - Wall Street rules for survival: Don't try to catch a falling knife, and never try to hold on to a falling safe.
Investors are discovering when it comes to Wall Street, excesses in one direction will eventually lead to excesses in the other direction, which is the story that's unfolding on the technology-heavy Nasdaq stock market.
The Nasdaq composite index, turf of speculative stocks of the 1990s, has crashed more than 70 percent from its March 2000 high of 5,048 to close around 1,465 on Friday.
Few experts are willing to predict when the bloodletting will end. But news of WorldCom Inc.'s massive accounting scandal, potentially the biggest corporate fraud in U.S. corporate history, may be the thing that pushes the market into a death spiral, an ugly protracted post-asset-bubble shakeout.
What's in store?
The Nasdaq has a 50 percent chance of plunging to 1,000, says Kent Engelke, capital markets strategist for Anderson & Strudwick Inc.
Don't rule out such a scenario because the Nasdaq is still ridiculously overvalued. What's more, the economy and corporate earnings are not playing out the way investors had expected.
The last time the Nasdaq hung at 1,000 was in September 1995. For those with short memories, those were the days before stock investing became a national pastime and the market turned into the main topic of conversations at cocktail parties.
Worth remembering is that the Nasdaq was the pump that inflated the speculative bubble during the go-go years and its moon-shot ascent proves it.
Consider its trajectory. Nasdaq soared 40 percent in 1995, rocketed another 23 percent in 1996, then climbed 22 percent in 1997 and jumped 40 percent in 1998. Just before the crash in the spring of 2000, Nasdaq went up by an eye-popping 86 percent in 1999, making that gain the biggest in the history of American indexes.
"The simple fact of the matter is the Nasdaq is only some 400 points away from hitting 1,000," Engelke said, when the Nasdaq was around 1,400. "The Nasdaq has already dropped by 3,700 points, so in a relative view, what is another 400 points?" DISGUSTED INVESTORS
"Complete disenchantment is required to declare a market bottom," says Engelke. "Although there are still some long-standing pockets of optimism remaining, many investors are disgusted by the huge sum of money that has been lost on the Nasdaq."
By one estimate, the Nasdaq is currently worth $2.4 trillion after being valued at $6.25 trillion at its peak in the spring of 2000.
For the numbers freaks, a drop in the index to 1,000 would represent a whopping 80 percent pullback from its high. This would make the slump the second worst ever for any U.S. indexes after the 1929-32 crash of 90 percent by the Dow Jones industrial average.
The market's pounding has taken place amid overwhelmingly negative fundamentals about everything tech.
Fair to say that a lot of investors are just itching to throw in the towel after this week's disclosure by WorldCom, the nation's second largest long-distance carrier, that it overstated its cash flow by $3.85 billion and may have to restate results for the last five quarters.
The enormous accounting scandal by the telecom giant, whose stock has dropped more than 90 percent so far this year, follows the story line of Global Crossing Ltd., Adelphia Communications Corp. and Enron Corp. Their stocks have all been crushed by accounting controversies.
The market psychology is also unraveling because investors can't make rational decisions based on companies' forecasts. This week, France's Alcatel, a big telecom equipment maker, made a U-turn, saying it will lose money this year. Two months ago, the company was predicting a profit.
With one corporate land mine after another rocking Wall Street, it's not surprising that investors are looking over their shoulders for the next ambush. So don't rule out a drawn-out fundamental downtrend as the Street drowns in a sea of controversies.
One of the lessons to be learned is that stocks can rally by infinite amounts but can only drop by 100 percent, says Engelke. Just in the last six months, Nasdaq has plummeted more than 26 percent to a low for the year.
The telecom mania of the 1990s created a monster that has been running loose for the past two years. Telecom stock indexes, which were the most outlandishly valued just two years ago, have imploded by 95 percent.
"What could potentially cause the Nasdaq to fall to the 1,000 level are massive corporate earnings blowups and terrorist events," Engelke says.
Three years ago, the big tech companies were cranking out huge revenue gains of 40 percent a year that were not sustainable. Now, most of the companies can't post any growth and many have burned through their cash reserves and are begging the banks to lend them more money. FAMILY SECRETS OUT IN THE OPEN
The tech companies are hanging out their dirty linen. The family secrets are out in the open about their excesses.
WorldCom was the symbol of the craziness during the telecom boom. Founder Bernie Ebbers, who was ousted as chief executive in April, became the most feared deal maker in the global telecom world, snatching up valuable assets and piling on debt.
The company's capitalization has tumbled from a high of $180 billion to less than $2.5 billion. WorldCom's stock has not opened for trading since Tuesday's disclosure of the nearly $4 billion in accounting fraud. It was last traded at 83 cents before the halt on the Nasdaq, having collapsed from a high of $64 in the summer of 1999.
The fallen stock star reported a profit of $1.4 billion for 2001 and earnings of $130 million for the first quarter of 2002. But WorldCom said the truth is that it should have reported a loss for 2001 and the first three months of 2002.
Treasury Secretary Paul O'Neill, the former CEO of Alcoa Inc., the aluminum giant, weighed, calling the WorldCom scandal mind-boggling. He urged that any corporate executives caught cheating should trade their pin-stripped suits for jail-stripped threads.
The cheerleaders on Wall Street are finally realizing they've flown their clients into the eye of a huge storm.
The telecommunications industry is being downgraded almost daily by Wall Street houses.
Some of the biggest executives in telecom predict that a slew of shotgun weddings for the troubled industry after an 18-month downturn.
Ericsson ( news - web sites), the world's largest mobile phone equipment maker, recently warned that its business will not improve next year. Analysts predict it could take another two years for the telecom excesses to shrink enough to allow normal growth to return to the industry.
By some estimates, the amount of cash lent during the telecom revolution in the late 1990s exceeded the total national debt accumulated by Britain over two centuries.
Fair to ask is whether the 1990s may turn out to have been the most incredible period of wealth destruction in history.
(Questions or comments can be addressed to Pierre.Belec(at) Reuters.com) |
