Wall Street History

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Wall Street History

07/12/2002

The Bubble, Part I

My “Week in Review” (WIR) columns are perhaps the best
single history of the past few years, to be quite frank about it, and
over 18 months ago in this space, I began a summary of the
Bubble using comments taken directly from WIR archives. It’s
time to play catch-up so I can resume the story where I last left
off in the timeline, June 2000.

But first, over the next two weeks I am consolidating the pieces I
initially wrote late 2000 / early 2001 in order to bring everyone
up to speed.

I selected 6/25/99 as the start date for this history because it was
shortly before the Federal Reserve raised interest rates (6/30) for
the first of what would eventually be 6 increases.

Any quotes are mine, unless otherwise indicated. With one or
two exceptions, the date listed is a Saturday, when I post WIR.

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6/25/99 – Dow Jones (10552), Nasdaq (2550).

“One-quarter point rise in short-term rates won’t slow this
economy down pros are now looking for more of an increase,
probably August 24 so while we all know there isn’t any real
inflation, the Fed sees otherwise.”

Nymex crude oil is $18.39.

7/3/99 – Federal Reserve hikes rates 25 basis points and adopts a
neutral stance on future increases. A survey of economists sees
3-3.5% GDP growth for the third and fourth quarters of the year.
[Instead, we were to see 5.7 and 7.3 percent, respectively.]

Dow Jones rocket’s 586 points, (5.6% to 11139) for its largest
weekly point gain in history. The S&P 500 and Nasdaq are also
at all-time highs.

Maryanne Keller, top auto analyst, leaves Wall Street to become
the head of Priceline.com’s new auto-services unit, continuing
the “brain drain” phenomenon on the Street.

7/10/99 – Report issued on soaring retail sales. Dow closes at
11193. Noted strategist Ralph Acampora raises year-end target
to 12500-13000. S&P price / earnings ratio at 36.56 based on
trailing 12 months earnings.

7/17/99 – Microsoft market value tops $500 billion, the first
company to ever hit this level. This means that MSFT is worth
more than the entire economy of the Netherlands.

Nasdaq is at 2860.

7/24/99 – Nasdaq suffers worst weekly point loss, down 172, or
6%. IBM, Microsoft, Lucent all reported strong earnings yet
declined, primarily due to “the increasing realization that
valuations, by any historical measurement, are stretched to the
max.”

George W. Bush ahead of Al Gore, 55-38.

7/31/99 – Economic statistics show economy roaring ahead.
Internet stocks such as AOL, Amazon, and eBay are in the midst
of a serious plunge over past 3 months. For example, Amazon
goes down from $221 to $98.

I do my own research and find that of 560 possible ratings on the
30 Dow stocks, only 13 had a moderate or strong “sell” label.

Day trader Mark Barton goes berserk in Atlanta.

8/7/99 – Net stocks continue to plummet. Many are off 70%
from their highs. I comment:

“It’s my job these days to look at Net companies and try and
understand their business models and I don’t see a lot of winners
out there. I imagine the true shakeout may be precipitated by the
large overall market decline I see as inevitable. Not simply
because many of the Net stocks’ share prices will be collapsing
further, but some of their backers (will be forced) to pull the
plug.”

8/14/99 – Dow, 10973. Nasdaq, 2637.

Federal Reserve states it prefers 2.5% growth.

Red Hat IPO priced at $14, finishes week at $85.

8/21/99 – Dow, 11100.

Bear Stearns banking analyst Sean Ryan chastised for going
negative on First Union; bad career move.

8/28/99 – “It’s not like stocks are beat up and we’re saying that
the real bad news has been discounted. People are behaving like
they’re totally drunk.” – Money manager William Fleckenstein.

Fed raised rates another 25 basis points and the Dow races to all-
time high (but falls back to close at 11090). Fed says the second
rate increase “should markedly diminish the risk of rising
inflation going forward.” Market participants take that to mean
the Fed is finished for the year.

But later in the week, Greenspan said the Fed needs to monitor
the wealth effect.

Strategist Ralph Acampora calls for 12500-13000 by sometime
in October.

Books are being rushed out with titles like “Dow 36,000” and
“Dow 100,000.” Regarding the latter, the author is calling for
11% a year until 2020 so simply at the historic average return
since 1926. Big deal. I call for book titled “Dow 1 Billion,” but,
being a bear, commence work on “Dow Zero.”

“An Internet company by the name of Bamboo.com went public.
The real estate concern’s share price soared. Obviously,
investors are forgetting that bamboo is the staple of the panda
bear, a species facing extinction.”

9/4/99 – On 9/3, Nasdaq registered its largest point gain ever,
108, on the strength of a tame jobs report. [Nasdaq now at
2840.] Optimism that Fed won’t raise rates the rest of the year.

Nobel Prizewinner Milton Friedman was quoted in a German
newspaper as saying the U.S. economy and stock market were
exhibiting classic signs of a bubble.

Perma-bear Jim Grant (I love this guy), interviews 14 equity
traders on Wall Street. Only one is able to identify where the
P/E is on the Dow. Most of the others said, “Not a clue. Don’t
care.”

9/11/99 – Nasdaq, 2887. Dow, 11025.

Many folks feel corporations will keep spending on technology
beyond Y2K.

Net stocks rallying back, but still 30-45% off of their highs.

Ed Yardeni says Dow should be trading at 8000 as the huge
growth in earnings we have witnessed is a thing of the past.

Oil climbs to $23.55, highest level in 3 years.

9/18/99 – Dow, 10804.

Only 8% of those polled anticipate major Y2K problems. Oil,
$24.73.

9/25/99 – Dow’s worst week in a year, off 4.9%, 10279.

Steve Ballmer, Microsoft president, told a group of business
journalists, “There’s such an overvaluation of technology stocks,
it’s absurd. And I’d put our company’s stock in that category
(there is a) gold rush (mentality).” Ballmer also said that this
bubble in valuations was a “bad thing for the long-term health of
the economy.”

Noted Wall Street author Burton Malkiel reviewed “Dow
36,000” for the Wall Street Journal, calling it a “dangerous book
that may lead some investors who can ill afford the significant
risks of equity investments to throw caution to the wind.”

Commercial time for Super Bowl is already booked at $2 million
for a 30-second spot, thanks to dot-coms.

I happen to walk by Hillary Clinton in New York this week and
she doesn’t even make eye contact.

Some Pokemon cards are selling for $50 or more.

10/2/99 – Dow, 10273. Nasdaq, 2736. It was the Dow’s 6th-
straight weekly decline. The last time this occurred was 7/16/90-
8/24/90.

On Tuesday, the Dow was below 10100 when Ralph Acampora
announced he was bearish, particularly if Dow broke 10000.
Abby Cohen said market was “modestly undervalued” at around
10300. Ed Yardeni sticking to 8000 target.

Gold rallied $28 dollars on Tuesday, biggest one-day rally in
almost 20 years. The European Central Bank announced it was
capping sales from its gold reserves.

China celebrates 50th anniversary of creation of communist state.
The head of Time Warner gave Chinese President Jiang Zemin a
bust of Lincoln. I gag.

Survey says that 90% of Americans consider the entrepreneur a
figure of respect. But in Japan, only 8% respect people like Bill
Gates.

10/8/99 – Oil plummeted as rumors hit that OPEC was going to
soften production cuts. Nymex crude back to $20.90. Dow,
10649. Nasdaq, 2887.

10/16/99 – I made the following comment in discussing the
market environment.

“Just as in 1987, interest rates began to climb while the stock
market rallied It’s not supposed to work that way. The 30-year
Treasury was at 4.75% (one year ago). On Friday morning, it
was at 6.34% The stock market finally had some real
competition (for the investment dollar) this week and investors
didn’t like it.

“The Dow Jones dropped 630 points, 5.9%, to close at 10019. It
was the largest weekly point loss in history. Late Friday, the
average touched 9998, the first time it has been below 10000
since April. The S&P 500 had its worst week, off 6.6%, in 10
years. The Nasdaq lost 5.4% to 2731. Both the Dow and S&P
are off more than 10% from their highs.”

I then added the following as to what the market should be
worried about.

“The stock market falls
leading to a loss in consumer confidence
which would lead to a decrease in consumer spending
meaning corporate earnings would come in lower than
expected.”

So I was a year early!

Nasdaq is about to embark on a stupendous 11-week winning
streak.

10/23/99 – 40% of NYSE issues are off 30% or more from their
highs stealth bear market.

Russell 2000 is still down for the year, while Dow is +14%,
Nasdaq +28.5%.

Nasdaq, 2816. Dow, 10470.

My broker buddies tell me that investors don’t understand how
their own portfolios can be down when the major indexes were at
all-time highs.

3rd quarter earnings up 24.5% for first 60% of S&P 500 to report.

IBM dropped from $112-$90, intra-week, after warning of
slowing sales post-Y2K.

Martha Stewart goes public with her offering priced at $18,
finishing Day One at $35 (after hitting $52).

10/30/99 – GDP for 3rd quarter comes in at 4.8% with zero
inflation.

Microsoft and Intel are added to the Dow along with Home
Depot and Southwestern Bell (SBC). Sears, Chevron, Union
Carbide and Goodyear are thrown out.

Nasdaq up to 2965.

11/6/99 – George W. Bush unable to name specific world leaders
when queried. I blast him but add, “(At least) he would have a
cabinet loaded with experienced, respected hands like Colin
Powell and Dick Cheney.”

Dow closes at 10704. Nasdaq hits 3102, winning streak at 6-
straight sessions.

Market breadth, a concern of many, improves substantially with
7 straight days of more advancers than decliners.

Unemployment rate falls to 4.1% for month of October.

Fed Chairman Greenspan gives a speech wherein he notes that a
boom in home sales has had a bigger impact on the country’s
prosperity than soaring stock prices. “(And) while home prices
do on occasion decline, large declines are rare.”

Judge Jackson ruled that Microsoft was a monopoly.

It was discovered that Al Gore was paying feminist Naomi Wolf
$15,000 a month as a consultant. She was responsible for Gore’s
makeover; employed earth tones.

Doonesbury is running a hilarious spoof on IPO mania.

11/13/99 – Fed President William McDonough says, “One
should not assume that the American economy can’t keep
growing faster without inflation.”

UPS completes the largest IPO in history, $5 billion.

“Pokemon: The First Movie” hits the screens. Parents take their
children out of school to see it.

Dow, 10769. Nasdaq, 3220 (10 records in previous 11 sessions),
and is now up 46.9% for the year.

11/20/99 – U.S. and China sign trade pact. All things China
soar. China Prosperity went from $1 to $80 before finishing the
week at $12.

Federal Reserve raises rates for the 3rd time of the year (others
being 6/30 and 8/24), adopting a “neutral bias” on their future
direction.

SEC beginning to look into methods some Internet companies
employ to mislead investors; for example, booking barter
arrangements as revenue.

Watched animated clip from Pokemon movie; saw better
animation in “Speed Racer.”

ABC raking it in with “Who Wants to be a Millionaire?”

Dow, 11003. Nasdaq, 3368.

Oil hits $26.56.

11/27/99 – Russians blast Grozny to pieces. Putin’s poll #’s
keep rising while Yeltsin is basically incapacitated.

On Tuesday, Ariel Corp. traded at $3. On Wednesday, the stock
hit $10 as the company announced that governments worldwide
were approving the use of its new modem card for Internet
access. By Friday morning (after the Thanksgiving holiday), the
stock hit $56. [As of 1/3/01, Ariel was at $1. I commented on
11/27:]

“So there you have it, the friggin’ feeding frenzy continues. If
you own the stuff, take your spouse or mistress out to the finest
restaurant light a stogie and say, “Thank God I’m in
America.’”

“Y2K the Movie” aired. I was one of five to watch it.

Nasdaq, 3446 up 56% ytd; 16 records in 20 sessions.

12/4/99 – Christmas season looks robust; consumer confidence is
rising again after 4-month slide.

Strategist Ed Yardeni turns less bearish on Y2K. I feel
abandoned. [I had been a big time alarmist on this issue.]

Comedian Chris Rock suggests a new game show for the
children of NBA stars, “Who’s Your Daddy?”

Dow, 11286. Nasdaq, 3518.

12/12/99 – Federal Reserve releases “Beige Book,” a survey of
the current economic environment in the Fed’s 12 districts. The
economy continues to exhibit “moderate to strong growth” rate
of increase in salaries and wages does not appear to be
accelerating.

Example of Nasdaq’s narrow leadership: Through 12/8, 2,158
Nasdaq stocks are up for the year vs. 2,149 that are down.

WTO talks wrap up in Seattle with Clinton officials describing it
as a “circus” and “a fiasco.”

VALinux IPO priced at $30 and hits $320 before closing the first
day at $239, the largest first-day performance in IPO history.
[As of 1/3/01, the company trades at $9.] Freemarkets goes
public; priced at $48, it finishes first day at $280.

Nasdaq ends the week at 3617.

12/18/99 – Nasdaq rises a 9th consecutive week (3752) and is
now up 71% on the year. Dow, 11257.

Abby Cohen issues her 2000 forecast, calling for Dow 12300 by
year-end.

Charles Schulz announces his retirement.

President Clinton has the flu. Jay Leno comments that with
some of the women the President has been associated with, it
must be the “swine flu.”

12/23/99 – Nasdaq winning streak at 10, the longest such run in
10 years, and now stands at 3969. Dow (11405) and S&P 500
also hit records.

Interest rates are climbing, with the 30-year Treasury back to
6.46%, the highest level in 27 months.

Fed keeps “neutral” posture at year-end meeting, but said were it
not for Y2K they would have raised rates.

Economist Henry Kaufman: “Every optimistic forecast about the
economy is based on the premise that stock prices will either go
up or change very little. Not since World War II have we been
so dependent on the market.”

Ralph Acampora calls for another 25% gain in the averages in
2000.

AOL went public on 3/19/92 at a split-adjusted 9 cents a share.
At its current $80 value, it’s up well over 90,000%.

Margin debt is up over 46% from year earlier levels.

As of 12/22, 50% of the issues on the Nasdaq were actually
down for the year.

Jeff Bezos named Time’s “Person of the Year.”

12/30/99 – Nasdaq finishes the year up 85.6%, 4069. Dow
closes at 11497, up 25.2%. Nasdaq’s performance represents the
best ever for a major index.

Oil closes at $25.60. Average price for the year is $18.00

Consumer confidence has rebounded to its highest level since
October 1968. It would appear that retailers had a spectacular
Christmas with sales increases in the neighborhood of 7%.

Markets from London to Frankfurt to Hong Kong all register all-
time highs. “No one can ever recall such synchronized
performances.”

On Wednesday, an analyst at PaineWebber initiates coverage on
Qualcomm and sets a $1,000 price target. The stock had already
risen from $25 in March to $500 when he issued this
pronouncement. Boom! Qualcomm shot up to $659 in one day.
Thursday morning it ran up to $740 before selling off to $660.

“Yes, this one issue epitomizes the whole technology sector’s
stupendous performance this year. Forget traditional valuation
measurements, just think ‘potential.’”

Bart Simpson: “I will not sell my kidney on eBay.”

Time selects Albert Einstein as “Person of the Century.”

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The story continues next week.

Brian Trumbore

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