Wall Street History

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Wall Street History

02/25/2005

Nasdaq 5000, Part I

Five weeks ago I took a look back at the 5-year anniversary of
the U.S. equity markets’ all-time highs for the Dow Jones, S&P
500 and Nasdaq, utilizing my “Week in Review” archives from
that period. The Dow hit its record mark of 11722 on 1/14/00,
the Nasdaq, 5048 on 3/10/00, and the S&P 500 not until 3/24/00,
1527.

But I want to focus in on Nasdaq; first utilizing my WIR
columns of 2/26/00 and 3/4/00 to see what both myself and the
markets were looking at then. Some of us certainly saw the crash
coming and while the following may appear more than a bit self-
serving, heck, I was right.

Also, there are some good market nuggets that may come in
handy in trying to break down today’s environment as well.
And, it’s important to remember that many bellwether
technology issues did not hit their own highs until five to six
months later; for example, EMC, Intel and Sun Microsystems.

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2/26/2000

I was focusing extensively on the war in Chechnya.
Interestingly, in light of U.S.-Russian relations five years later,
I noted the following.

“Last week on ‘Meet the Press,’ (Sen. John) McCain labeled the
whole situation in Russia as being ‘very dangerous.’ But when
Western leaders like our president fail to speak up or fail to
grasp the situation, then we are giving Russia a license to move
from Chechnya on to other lands.”

McCain, for one, hasn’t changed his stance in the intervening
years.

But on the issue of the U.S. stock market, this is what I was
writing five years ago.

“Let’s start out by updating some numbers. The Federal Reserve
began its policy of raising interest rates last June 30 (1999). The
Dow Jones closed that day at 10970, the Nasdaq, 2680. With the
Dow finishing this week at 9862 (the lowest close since last
April) and the Nasdaq at 4590, that means since the Fed
commenced its attempt to try and prick the bubble, the Dow is
down 10% while Nasdaq is up 71%! ‘Old’ vs. ‘New.’

“And the divergence between the two since the start of the year
is just as telling. Dow off 14%, Nasdaq up 13%. Folks,
disparities like this haven’t existed, ever.

“But wait, there’s more. Let’s broaden the parameters a bit and
go back to 10/8/98, the last major bottom for all of the broad
indexes. Since then

“Dow Jones +28%, S&P 500 +39%, Russell 2000 +80%, Nasdaq
+223%!!! 223%!!! Geezuz.

“The Wall Street Journal had an excellent piece on Thursday
concerning stock market valuations and a comparison between
the levels right before the wicked 1973-4 bear market and the
valuations of today.

“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 as
12.3. Today, the median p/e for the Top 20% is 70.8, with the
other 400 issues at 14.7.

“Now since the historical average p/e is 14, that means that the
bulk of stocks are not necessarily grossly overvalued (nor can
you yet say they are significantly undervalued). But the
leadership is in the stratosphere and I keep remarking to my
market buddies, when the hell is this going to crack? [HK in
Toronto remarked that at his financial services firm, an analyst
came in calling a particular stock with a p/e in excess of 200,
cheap. HK, a veteran in the business, said he’s now seen it all.]

“As many analysts have pointed out, the link between the old and
new economies could be as follows: If the economy ever slows
(and Friday’s revised, emerging market-like 4th quarter GDP of
6.9% certainly isn’t pointing to an imminent slowdown) then
capital spending amongst the old economy issues will slow and,
eventually, that impacts the new economy earnings, i.e., how
then would you justify a p/e of 70 with declining, not rising,
earnings?

“Of course right about now in this discourse I can just hear some
of my technology advocates saying, actually, the old economy
has no choice. They have to keep spending, regardless of a
slowdown, just to keep up with change or they’ll die. And a
clear example of this would be Friday’s blockbuster deal
between the Big 3 automakers; Ford, GM and Daimler-Chrysler.
The 3 created a new Internet alliance whereby they will do all of
their purchasing of auto parts online through one coordinated site
(run by Commerce One and Oracle). The savings could be in the
$billions as the Big 3 buys about $250 billion in parts each year.

“Well, having given you both sides I still say, as for the Nasdaq,
CRASH!! And after all, give me a little credit now for my
consistent bearishness (except for 7 correctly bullish weeks last
fall). You see where the Dow has gone since June 30, or last
April for that matter. Nowhere fast. But I, like every single
other analyst, failed to see the extent of the explosive rally in
Nasdaq. Where’s my Lawrence Welk bubble machine anyway?”

And I have to add this random musing from five years ago.

“I admitted last week that the disparity between rich and poor in
this country is a bit troubling. A New York Times piece detailed
a plight that only those living in Silicon Valley can truly
appreciate. 34% of the estimated 20,000 homeless in Santa Clara
county have full-time jobs. Teachers, policemen and firemen are
seeking homeless shelters because they are ‘scraping by’ on
$53,000 salaries. The reason is real estate. For many of the
working poor, 80% of their income goes to housing. Recently, a
one-bedroom ‘cottage’ listed at $495,000 and sold for $750,000!
Folks, if that’s not a sign of a bubble I don’t know what is.”

As it turned out, for this area it was a bubble, but today the prices
are right back to the same insane levels.

Gold was at $293
Oil, $30.35

Year-to-date returns, 1/1/00-2/26/00

Dow Jones -14.2%
S&P 500 -9.3%
Nasdaq +12.8%

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3/4/2000

I began this week discussing China and Russia. Then I had the
following Wall Street comments.

“Silly me. I keep forgetting that Nasdaq has to hit 5000, nay,
10000, before it crashes. You gotta love it when a little handheld
device called a Palm Pilot, which basically keeps addresses,
phone #s and your schedule while selling for hundreds of dollars,
becomes the source of an IPO, Palm Inc., whose new market
value exceeds that of McDonald’s, General Motors and Texaco.
Oh, and did I tell you that the Palm Pilot recognizes your
handwriting? So I’m looking at my $2 address book and $3
daily planner and I’m thinking huh? Now granted, I have
trouble reading my own handwriting from time to time so maybe
a computer can help me out. Otherwise, call me old-fashioned.

“Of course I do recognize that the coming universe of wireless,
palm-held devices is perfect for web sites like this one so I’ll be
careful whose hand I bite, but for the record Palm Inc (a spin-off
of 3Com) was priced at $38 a share, traded as high as $165 on its
first day of trading, Thursday, and finished Friday at $81. Yes, a
ton of folks between $165 and $81 have sizable losses.

“But those sorry saps are about the only losers on the week.
After the first winning Friday in six weeks, the Dow stood at
10367, a pickup of 505 points or 5%. The Nasdaq is now within
a morning rally of 5000 (4914) after its 7% rise. Nasdaq is also
now up over 20% on the year, this in spite of two, 10%
corrections, another phenomenal show.

“Investors just keep pouring money into technology mutual
funds (at the expense of value funds for the most part) and the
portfolio managers can only go after so many issues. But heck,
these funds are up a grillion percent over the last five years. Let
the good times roll, baby! .

“The big catalyst for Friday’s stock surge was a tame
employment report for the month of February. When the figures
showed that only 43,000 new jobs were created (compared to
384,000 in January), traders started foaming at the mouth. As if
a trend was really in place. Doubtful. The economy is still
cooking.

“While the Federal Reserve engineered rise in interest rates has
begun to impact the housing market every other indicator still
points to solid growth. The Fed will obviously have to keep
raising rates.”

Back then the 10-year Treasury was at 6.38%, with the one-year
at 6.15% (the latter key for those with adjustable rate mortgages).

Year-to-date returns, 1/1/00-3/3/00

Dow Jones -9.8%
S&P 500 -4.1%
Nasdaq +20.8%

The next Friday, 3/10/00, Nasdaq hit its all-time high of 5048.

Next week, a look at some share prices from five years ago.
Hopefully, you won’t find this too painful.

Wall Street History returns March 4.

Brian Trumbore

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