Wall Street History

---

Wall Street History

08/02/2002

The Bubble, Part IV

Continuing with our memories of the Bubble, it’s August 2000.
The Nasdaq is close to an important secondary peak, after which
earnings and the economy move to the front of the news on Wall Street.
All comments are taken directly from my “Week in Review” columns
and quotes, unless otherwise noted, are mine. [The date listed is
that of the column.]

---

[The next two weeks were light in market commentary due to my
travel plans.]

8/25/00 – Dow Jones 11192 Nasdaq N/A

Cisco at $67 was still at a 90 P/E based on 2001 earnings
estimates.

Jack Nicklaus on Tiger Woods. “(He) not only has the ability to
be so much better than the other guys, but the other guys are not
sure they can win.”

9/4/00 – Dow Jones 11238 Nasdaq 4234

After the swoon from the all-time highs of January and March,
respectively, the Dow Jones was only off 4% and Nasdaq 16%.
4234 for Nasdaq would prove to be a key peak. Many investors
had hung in there after the spring tech debacle. Alas, their
patience was not rewarded.

23-year-old Mark Jakob issued an authentic looking press release
on drug stock Emulex, wherein profits were to tumble. The wire
services immediately picked up on the story and shares in
Emulex dived 60% in minutes. Jakob was “short” the stock and
picked up a cool $250,000 on the hoax, before he was arrested.

Dick Cheney announced he will forfeit the stock options he
earned as chairman of Halliburton if elected vice president.

“Osama bin Laden was behind a plot to blow up a nuclear reactor
in Sydney during the Olympics.”

9/9/00 – Dow 11221 Nasdaq 3979

Interesting Business Week survey. Attitudes were changing.

--73% of Americans think that business executives get paid too
much.
--74% feel that Big Companies have too much power and
influence.
--Given the statement “In general, what is good for business is
good for most Americans” 47% agree, 49% disagree. By
comparison in 1996, 71% agreed, 28% disagreed.

Oil prices hit 10-year highs, trading over $35.

More talk of slowdown and impact on corporate profits.

“No action is likely to be taken on prescription drugs because
Gore wants this as a campaign issue.”

9/16/00 – Dow 10927 Nasdaq 3835

“The U.S. equity markets have been priced for perfection. It’s
becoming increasingly difficult to attain it.”

Oracle fell $7 when it announced revenue growth may not be as
robust as it had been in the future.

Bloomberg survey: 10 largest brokerage firms published 9,402
ratings on individual issues and only 29 were pure “sells.” I
added, “Of course, the reasons for this dearth of anything
negative have to do with conflicts of interest and investment
banking relationships.”

9/23/00 – Dow 10847 Nasdaq 3803

Intel warned revenues would fall short of expectations in Q3, but
Nasdaq weathered the bombshell. “What the market did on
Friday was slough off Intel’s revenue warning as a one-time
event, limited to Intel and some of its closest brethren, like Dell.
This may prove to be a bit too optimistic.”

The great economist Ed Hyman released a statement proclaiming
that the risks of a global recession had picked up markedly.

Fed Chairman Alan Greenspan, speaking before the American
Bankers Association:

“Today’s products and rapidly changing structures of finance
mean that supervisors are backing off from detail-oriented
supervision, which no longer can be implemented effectively.”

And Greenspan stressed that we need better disclosure of risks in
order to avoid public loss of confidence. [“Moral hazard” issue.
Some institutions too big to fail?]

9/30/00 – Dow 10650 Nasdaq 3672

U.S. Treasury Secretary Lawrence Summers: “Oil prices are the
largest dark cloud in the blue sky of the global economy
History shows that supply shocks often have larger effects than
people expect.” [Oil peaked at $38 during the week, before
closing at $31.]

Nasdaq lost 12% in September. Apple Computer lost 50% in
one day. Commenting on the latter, I wrote:

“I continually use the phrase ‘priced for perfection’ to describe
the current market environment for a reason. There simply is no
room for error in this new era of investing on Wall Street.

“And it’s not like Intel, Kodak and Apple are losing gobs of
money. Rather, Wall Street’s research community has helped to
promulgate this nonsense that valuations don’t matter!”

Foreign money flows:

In 1999 all foreigners bought $332 billion worth of U.S. stocks
and spent $276 billion on direct investment in the U.S. – buying
American companies or building factories, shopping malls or
office complexes.

And here is what foreign investors owned as of March, according
to the International Monetary Fund.

--$1.4 trillion worth of U.S. stocks, or 7% of the total.
--$900 billion of corporate bonds, 20% of the total.
--35% of publicly held federal debt, with a face value of $1.3
trillion.

But what if capital flows reversed? Economist Robert
Samuelson commented:

“The magnitude of capital inflows into the United States ought to
give us pause. They could reflect America’s genuine strengths –
or represent speculative excess. We have ventured into
unexplored territory. Hardly anyone truly understands today’s
rapidly changing world of global finance. Even for the United
States, what goes around could come around.”

From PIMCO’s Bill Gross, who was concerned about the ticking
debt bomb:

“Corporations are assuming more and more debt, as they are
forced to invest and innovate in a furious attempt to keep up with
their Silicon Valley compatriots. Falling behind is akin to falling
off a cliff, so the debt piles up along with the hopes that it can be
serviced and paid off sometime in the not-so-certain future.”

10/7/00 – Dow 10596 Nasdaq 3361

Earnings news increasingly gloomy.

September unemployment rate fell to 3.9%. [The low.]

10/14/00 – Dow 10193 Nasdaq 3316

6-week losing streak for both indexes. Middle East unrest was
growing. Market action extremely volatile.

Apple Computer hit $19, while its high on 3/23/00 was $75.
Intel had fallen from $76 just six weeks earlier (8/28/00) to $35.
Home Depot, Motorola, Lucent and Yahoo among those
warning.

Abby Cohen issued another “stay the course” message.

10/21/00 – Dow 10226 Nasdaq 3483

PIMCO’s Bill Gross sees increasing odds of a “hard landing” in
the U.S. economy.

IBM reported weaker-than-expected revenues for Q3. The next
morning, the Dow opened down 4%, Nasdaq down 5%. Then
investors swooped in, with Nasdaq climbing from Wednesday’s
low of 3026 to 3483.

“What is obviously now clear is that last spring the bubble burst
on those issues without any real business prospects and it has
been a slow death ever since. That game is over, finis. There is
enough material there to occupy market historians for decades.”

10/28/00 – Dow 10590 Nasdaq 3277

Markets diverged. Dow +3.6%, Nasdaq –5.9%.

Q3 GDP comes in at a slower-than-expected 2.7%, but reaction
was positive, except for tech. Commenting on the number, I
wrote the following:

“Of course, just 24 hours before Friday’s release of the GDP,
Wall Street was saying that we needed to see 4% growth to prove
that corporate earnings were not falling off a cliff. Then the
2.7% figure was printed and suddenly that was good news. It’s
all a bunch of bull, but I do my best to sift through it for you. If
you remember to wash your hands afterwards, you can keep from
becoming ill.”

Telecom index fell 9% in one day as Nortel disappointed on the
revenue front, heralding the slowdown in that sector. Nortel lost
close to 25% in one day.

[Sorry to be political, but in light of current events, I have to add
what I noted back in 10/00 concerning New Jersey Senator Jon
Corzine, who at the time was in a heated race.]

The New York Times, in a stunner, endorsed Republican Bob
Franks, and said in part:

“ Mr. Corzine is arguing that a confidentiality agreement with
Goldman Sachs, the investment firm he once headed, prevents
him from telling New Jersey voters the specific sources of the
money for this tidal wave of personal spending. But New
Jersey’s voters did not sign an agreement with Goldman Sachs,
and they have a right to know how a multimillionaire candidate
amassed the wealth that enables him to spend almost $2 million a
week on advertising.”

11/3/00 – Dow 10817 Nasdaq 3451

Economy was slowing. “The earnings outlook for 2001
continues to deteriorate, particularly versus the frothy
expectations established by Wall Street.”

Slide in consumer confidence for the month of October is
largely attributed to problems in the Middle East.

WorldCom saw its shares body-slammed as the company
announced that future prospects would not be as strong as
expected.

And to digress a bit, I noted the following from a former White
House aide, James Pinkerton, concerning space. Pinkerton first
quoted Carl Sagan.

“In the long term, even if we were not the descendants of
professional wanderers, even if we were not inspired by
exploratory passions, some of us would still have to leave the
Earth – simply to ensure the survival of all of us.”

Pinkerton added, “Pioneers are still needed, in other words, and
visionaries must point the way.” So while today’s politicians
straddle the political middle, “content with the shortest possible
time horizon the high court of history, foreseeing potential
annihilation, offers an enormous reward to the leader with the
longest and broadest vision of the future. It’s such a leader who
will save the human race.”

Note 8/2/02: After this week’s GDP revisions for 2001 and the
realization that the first through third quarters of the year were
negative, not just one single negative print, those who were
bearish and calling for a “hard landing” look even more
prescient.

---

Next week we’ll finish up this series by taking the timeline from
the presidential election through the beginning of 2001.

Brian Trumbore

---