Wall Street History

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Wall Street History

07/19/2002

The Bubble, Part II

Continuing with our memories of the Bubble, we pick up the
story in January 2000, the Dow Jones having finished 1999 at
11497; Nasdaq, 4069. The following comments are taken
directly from my “Week in Review” columns and all quotes,
unless otherwise noted, are mine. [The date listed is that of the
column.]

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1/8/00 – Nasdaq has risen 187% from the market lows of 10/8/98
through 12/31/99. It closed the first week of January at 3882.
The Dow dropped 500 points the first two trading days of the
year, but recovered to close the week at 11522, a new all-time
high.

Qualcomm (pre-split) went from $800 to $560 in days. Yahoo
(pre-split) fell from $500 to below $370. Lucent issued a profits
warning and fell $20.

The world handled the Y2K issue with few major problems.

1/15/00 – AOL and Time Warner announce their merger.

Alan Greenspan gave a speech: “The American economy has
never exhibited so remarkable a prosperity for at least the
majority of Americans.” He added that the surge in the stock
market is pushing the economy beyond its limits (“wealth effect”
playing a major role).

Dow closes at 11722. [Still its all-time high.] Nasdaq, 4065.

Oil shot up from $24.22 to $28.02 as it looked as though OPEC
would stick to their production cuts.

1/22/00 – The Fed announced they would change the way they
release their reports to make them clearer; issuing new
statements such as, “We think a slowdown in the economy is the
greater risk,” instead of just saying the Fed is calling for a
“tightening” or “neutral” bias. I say the Fed should issue
statements like, “Technology stocks are severely overvalued,
sell.”

The equity markets decouple. Dow finishes down 4.0%, 11251.
Nasdaq gains 4.2%, 4236 (new record).

First Call (keeper of earnings data) estimated profit growth for
the 4th quarter of 1999 at 20%. I add, however, “Profit gains
were often the result of the strong performance in the company’s
own investment portfolio.”

Margin debt up 25% in just the past two months.

Apple Computer’s board awarded Chairman Steve Jobs with a
$40 million corporate jet.

President Clinton gives his “How Great Thou Are” State of the
Union speech.

Owners of theGlobe.com, aged 25 and 26, are forced to step
down. Shares have fallen from $90 to $8 with no apparent
business model.

The Dow fell 513 points to 10738. Nasdaq fell 8.2% to 3886, its
worst week since August ’98.

Sanford C. Bernstein analyst Steve Galbraith found that of the 50
Nasdaq stocks with the highest returns in ’99, only 15 made
money. The average turnover in this group was 600% (bought
and sold 6 times over the course of the year). Turnover on the
whole NYSE was 79%. I add, “So, yes, just more evidence that
much of last year’s Nasdaq action was of a casino nature. And in
a casino, the house always wins.”

Fourth quarter ’99 GDP rose 5.8% (first estimate). February will
mark the longest boom in our nation’s history, 107 months of
uninterrupted growth.

The yield curve “inverted” (short maturities with higher yields
than longer ones). 2-year stands at 6.54%, with the 30-year at
6.44%.

Alan Greenspan, in renomination hearing, said he was very
worried about the level of margin debt.

The euro fell below $1 for the first time since it was launched in
’99 at $1.16.

2/5/00 – The Nasdaq registers its best point gain in history after
dropping 8% the week before, up 9.2% to 4244. The index has
already had two, 10% corrections in 5 weeks and keeps bouncing
back.

Yield on the 30-year Treasury collapsed from 6.75% to around
6.00%, before finishing the week at 6.27%. Stupendous
volatility.

GDP rose 36.6% in the 90s vs. 52.8% in the 60s.

2/12/00 - “We still have a market priced for perfection, with
leading issues like Cisco trading at price / earnings multiples of
140 or higher. When the slowdown finally materializes, earnings
projections will head south.” [Cisco’s market cap hit $450
billion and analysts spoke of it becoming the market’s first $1
trillion corporation.]

2/19/00 – Alan Greenspan’s Humphrey-Hawkins testimony:

There is “little evidence” the economy is slowing and, in spite of
the continued tame inflation numbers, “the profoundly beneficial
forces driving the American economy to competitive excellence
are also engendering a set of imbalances that, unless contained,
threaten our continuing prosperity.”

The Dow fell to 10219, 13% from its all-time high. Nasdaq sat
at 4411.

Malaysian Prime Minister Mahathir said he was “frightened” by
the growing clout of global corporations, some of which “are
more powerful than mid-sized countries.”

In “The Simpsons,” Maude Flanders dies. She was eulogized as
one who “didn’t grab our attention with catch phrases.”

Charles Schulz died.

Linus: After you’ve died, do you get to come back?
Charlie Brown: If they stamp your hand.

2/26/00 – The Dow loses 3.5% and now stands at 9862, off
14.2% for the year, while Nasdaq rose 4.1%, 4590, up 12.8%
year-to-date, a historic disparity.

Since the Fed started raising rates 6/30/99, the Dow Jones is
down 10%. Nasdaq is up 71%. Greenspan has not been
successful in pricking the bubble.

In 1973, the median price / earnings ratio on the Top 20% in the
S&P 500 was 33.9, while the median on the rest of the index was
12.3. Today, the median p/e for the Top 20 is 70.8, with the
other 400 issues at 14.7.

As for Nasdaq, I say “CRASH!!”

A one-bedroom “cottage,” listed at $495,000 in Santa Clara, sold
for $750,000.

3/4/00 - Palm Inc. IPO, priced at $38, trades as high as $165 on
first day of trading and finished week at $81.

Nasdaq rose another 7% to 4914. Oil is at $31.45.

3/11/00 – On Friday, the lead column in the Wall Street Journal
blared, “Conservative Investors Finally Are Saying: Maybe Tech
Isn’t A Fad.” The Nasdaq peaks that same day at 5048. Dow
falls to 9928.

Nymex crude oil hits $34 (highest since 11/90) before finishing
the week at $31.75. Iran and Saudi Arabia, OPEC’s two largest
producers, said they’d raise production quotas.

3/18/00 – Biotech bubble bursts when U.S. and Britain agree to
openly share information on the human genome project. Many
of the issues plunge 50% from highs established just the previous
week. The market is worried that the profit incentive has been
wiped away.

Professor Jeremy Siegel writes an op-ed piece in the Wall Street
Journal proclaiming technology grossly overvalued. [3/14]

Margin debt is exploding, up 87% year-over-year.

An analyst on CNBC’s “Squawk Box” program touts a stock,
Aspeon, which proceeds to go from $22 to $35 that morning,
only to fall back to $21 by the end of the same day.

Markets go in different directions. Dow Jones advances 6.7%.
Nasdaq declines 5%.

3/25/00 – Dow finishes up another 4.9%, making its two-week
gain almost 1200 points to the 11118 level. The Nasdaq closes at
4964.

To give you a sense of the volatility in the biotech sector, 52-
week high / low and the closing price for the week.
Abgenix ($413 - $12 - $150)
Protein Design Labs ($338 - $13 - $72)

On March 22, Cisco had a market cap of $500 billion; Intel, $480
billion. Cisco’s price / earnings multiple is 200. Intel’s 68.

Federal Reserve raises interest rates 25 basis points on 3/21 (the
5th such increase since 6/30/99). Market rallies right in
Greenspan’s face.

2-year Treasury yield: 6.62%. 10-year: 6.19%

Mutual fund flows at record levels.

4/1/00 – OPEC agreed to raise production 1.5 million barrels and
announced a new price band of $22 - $28 as being desirable.

Abby Cohen slightly reduced her exposure to stocks in her model
portfolios, saying we need to consider the “question of
valuation.” [Note 7/19/02: Cohen has taken way too much credit
for this miniscule move, if I recall, from 65% equities to 60%.
This was hardly turning bearish, as she now claims.]

Hedge-fund maven Julian Robertson, in a letter to shareholders
announcing his departure:

“There is no point in subjecting our investors to risk in a market
which I frankly do not understand.”

Nasdaq suffers its worst point loss in history, 390, to close at
4572. The week contained the 4th, 10% decline of the year. Dow
closed at 10922.

4/8/00 – On Monday, 4/3, the Dow finished up 2.8%, while the
Nasdaq declined 7.6%, the largest divergence between the two
since the day after Black Monday in 1987. The next day Nasdaq
hit 3649, off 13.6% for the day at its worst point, or a 20% two-
day decline. Then the Nasdaq reversed course and soared 800
points the rest of the week (22%).

C.R.A.P “Companies without revenues and profits.”

4/15/00 – For the period 3/10-4/14 (since the Nasdaq peaked at
5048), the Dow Jones had gained 4% (now at 10305), while
Nasdaq lost 34% (3320).

Nasdaq lost 25% on the week, the worst performance for any
major index in U.S. financial history. [In the span of two weeks;
down 20%, up 22%, down 25%.]

45 analysts rate Cisco a “Buy,” 1 “Hold,” as stock as fallen from
$82 to $55.

Abby Cohen appeared on Wall Street Week and said, “Nothing
has changed.”

4/22/00 – “The tech wreck will have a much more immediate
impact on consumer spending than the interest rate hike the
Federal Reserve has given us.” -- Economist Ed Yardeni. [Like
Yardeni, I was wrong on this end.]

“The impact on the real economy will be faster than people
expect and concentrated in technology.” – Economist Bob
Barbera.

Author Ron Chernow. “Our most prestigious investment houses
have invented bogus mathematical formulas to justify
stratospheric stock prices feeding the inexhaustible appetite of
small investors.”

Investment legend Leon Cooperman:
--Get off margin.
--Know what you own.
--Cut your expectations for future returns.

4/29/00 – “There is an almost surreal quality to the present
boom. What we get (in the stock market, most prominently) is a
tug of war between wild optimism and instinctive caution.” --
Economist Robert Samuelson

I wondered aloud if we really need to keep upgrading our PCs.
“I have trouble with the feeling that we will always be spending
increasing amounts in every tech product imaginable
(particularly on the corporate level).”

AT&T workers are taking out second mortgages to purchase
shares in AT&T Wireless. [They get crushed.]

5/6/00 – “In the past year, the ability to monetize shareholder
ignorance has never been greater.” – Warren Buffett

“The most notable contribution of computers to the recent
growth in productivity has been in the manufacturing of more
computers.” – Jim Grant

5/13/00 – Dow, 10609. Nasdaq, 3529.

Cisco registered its 12th consecutive quarter of beating analyst
estimates by one penny (but this time Cisco fell, closing the
week at $60).

5/20/00 – The Federal Reserve raised rates 50 basis points on
5/16, releasing this statement:

“Increases in demand have remained in excess of potential
supply, exerting continued pressure on resources The disparity
in the growth of demand and potential supply (may) continue,
which could foster inflationary imbalances.”

“Overconfident individuals, companies and foundations are
heavily invested in this market. Some retirees (who) have sunk
all of their savings into stocks risk losing not only their
investments but their homes.” – “Irrational Exuberance” author
Robert Schiller in an op-ed piece.

Nasdaq rises on day the Fed raises rates, just as it has the
previous 5 times since 6/30/99.

Washington Post editorial: “The uncomfortable truth of Wall
Street is that the information on which it runs is suspect.”

5/27/00 – “This is the kind of party where the guests, if deprived
of the host’s refreshment, whip out their pocket flasks and gather
round the piano to sing another round of, ‘Brother, can you spare
a dime?’ They are rude and undisciplined, and they won’t go
home.” – Thomas Donlan / Barron’s; referring to the last Nasdaq
bulls.

Nasdaq, at 3205, down 21% year-to-date; off 37% from the 3/10
high. Dow is at 10299.

The House voted to permanently normalize trade relations with
China.

Total profit per episode for “Who Wants to be a Millionaire?” is
in excess of $4 million.

6/3/00 – CNBC has baseball’s Jose Canseco on in the morning.
Later in the day, one of the reporters goes, “China.com is up.
You heard Jose Canseco talk about it!” That pretty much sums
up the atmosphere during the great Nasdaq bubble.

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We’ll resume the chronology next week.

Brian Trumbore

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