Wall Street History
The Bubble, Part III
We now move on to 2000. All of the following is gleaned from
my "Week in Review" pieces. Any quotes are from yours truly,
unless otherwise indicated. The bullet-point format is to give
you a quick sense of the investment scene at the time.
The Dow Jones closed 1999 at 11497. Nasdaq, 4069.
1/8/00 - Nasdaq has risen 187% from the market lows of 10/8/98
through 12/31/99. It closed the first week in 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. [A great opening act for the year, as it turned out.]
Qualcomm (pre-split) went from $800 to $560 in days. Yahoo!
(pre-split) fell from $500 just two days earlier to below $370.
Lucent issued a profits warning and the stock fell $20 ($60
billion in market capitalization).
Consensus economic forecasts have the U.S. economy growing
at 3% in 2000.
Fed Chairman Alan Greenspan was renominated.
Boris Yeltsin stepped down.
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." The core rate of inflation for all of
1999 is at the lowest rate since 1965. But Greenspan added that
the surge in the stock market is pushing the economy beyond its
limits ("wealth effect" playing a major role).
The 30-year Treasury climbed to 6.69%, the highest level in two
and a half years.
Dow closes at 11722. [What would turn out to be our current all-
time high.] Nasdaq, 4065.
I guessed the Fed would raise interest rates 25 basis points in
February as well as another 25 in March.
The Elian Gonzalez case was heating up. A CNN / Time poll
showed that 56% of Americans said he should be shipped back to
his father. 36% said keep him here.
Rudy Giuliani leads Hillary, 49-40 (same as previous September).
Carlton Fisk and Tony Perez get selected to the Baseball Hall of
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 issuing a statement 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."
30-year Treasury hit 6.75% during the week. Bond traders were
spooked by the surge in crude oil as inventories fell rapidly.
Margin debt up 25% in just the past two months.
Median household net worth was $71,600 in 1998 (latest
reporting period) vs. $60,000 in 1995. Median value of stock-
holdings rose to $25,000 in ''98 from $15,400 in ''95.
Apple Computer''s board awarded Chairman Steve Jobs with a
$40 million corporate jet.
1/29/00 - 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
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%.
Me: "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
Fourth quarter ''99 GDP rose 5.8%. Consumer confidence
remains at an all-time high. February will mark the longest
boom in our nation''s history, 107 months of uninterrupted
The yield curve "inverted" (short maturities with higher yields
than longer ones). The 2-year yielded 6.54% while the 30-year
stood at 6.44%.
Qualcomm (split-adjusted) traded at $200 late December. Now
it''s at $110. Yahoo! (pre-split) fell to $313 from $500.
Amazon.com was 50% off its high.
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.
China admitted it was launching a massive corruption
investigation involving a $10 billion smuggling operation.
Al Gore trails George W. Bush by only 47-44, nationwide,
compared to 50-39 in December.
Oil is back down to $27.22
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. Amazon.com was up 30% despite reporting a loss of $323
million in the fourth quarter.
Dow sits at 10963.
The Federal Reserve hiked interest rates 25 basis points on 2/2.
"The risks are weighted mainly toward conditions that may
generate heightened inflation pressures in the foreseeable
Economic #''s: 30-year low in the unemployment rate, increased
construction spending, personal income rising (but personal
spending rising more).
30-year Treasury collapsed from 6.75% to around 6.00%, before
finishing the week at 6.27%. Stupendous volatility.
Treasury Secretary Summers announced a huge buyback of
longer Treasury securities.
GDP rose 36.6% in the 90s vs. 52.8% in the 60s.
John McCain captured the New Hampshire primary, 49-31, over
Bush. Bill Bradley lost to Gore, 53-47.
Gold rallied from $283 to $318 on the announcement that a
major producer was pulling their hedging program.
2/12/00 - Treasury Secretary Summers confused the bond
market when he said that he "expected the Treasury to continue
to use the entirety of the yield curve" in its decisions regarding
the reduction of our federal debt, as well as future debt issuance
and which maturities to bring to market. This was taken to be a
total contradiction of previous pronouncements. The yield curve
was now severely inverted.
2-yr. 6.63% 5-yr. 6.72% 10-yr. 6.62% 30-yr. 6.29%
The Dow Jones fell 538 to 10425 (a "correction" from its high),
while the Nasdaq rose to 4395.
"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
Microsoft fell $6 in one day as one PC expert said users would
have problems with the new Windows 2000 software.
Oil climbed back to $29.35 on reports that inventories were
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."
And. "(The Fed) will stay alert for signs that real interest rates
have not yet risen enough to bring the growth of demand into
line with that of potential supply." In other words, our boy is
trying awful hard to prick the bubble.
The Dow fell to 10219, 13% from its all-time high. Nasdaq sat
Malaysian Prime Minister Mahathir said he was "frightened" by
the growing power of global corporations, some of which "are
more powerful than mid-sized countries."
Rudy / Hillary are even.
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 is 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.
[I elaborated as follows.]
"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?
"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,
".Well, I still say, as for the Nasdaq, CRASH!!"
"And it was an interesting week for Alan Greenspan watchers.
Boy, some big Wall Street names are abandoning him in droves.
4 weeks ago, Greenspan told us the gains in productivity that we
have witnessed were real and a positive; then this week he said
that this productivity was a bad thing, specifically because it
creates a situation where demand outruns supply. But, more
importantly, he continued to make it abundantly clear that the
Federal Reserve would keep on raising interest rates."
Bush won the South Carolina primary, McCain won Michigan
and Arizona. But the next series of primaries didn''t include
A one-bedroom "cottage," listed at $495,000 in Santa Clara, sold
3/4/00 - China issued harsh warnings to Taiwan, "Our way or
"Silly me. I keep forgetting that the Nasdaq has to hit 5000, nay,
10000, before it crashes."
Palm Inc. IPO, priced at $38, trades as high as $165 on first day
of trading, Thursday, and finished the week at $81.
The Dow Jones recovered to 10367. Nasdaq rose another 7% to
"Investors just keep pouring money into technology mutual
funds and the portfolio managers can only go after so many
Auto and retail sales surged, consumer confidence slipped just
The February employment report showed just 43,000 new jobs
Bush wins Virginia and Washington.
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.
Stock in Procter & Gamble fell 39% on dire earnings news. But
P&G had been trading at a p/e of 34 when its shares traded at
$87 on Monday; this for a company that, in a good year, would
grow around 10-12%. Well, now it''s at $53.
I''m conflicted as to the battle between "Old" vs. "New."
"And don''t you forget that what happened to P&G (and before it,
Raytheon, Xerox, and others) can just as easily happen to Cisco
or JDS Uniphase. It''s just a matter of time."
75% of the stocks in the S&P 500 are down 20% from their
The Fed''s "beige book," a survey of economic activity across the
country, showed that there was still little inflation, but wage
pressures were emerging.
Nymex crude oil hit $34 (the 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.
With Nasdaq hitting new highs, Amazon.com is trading at $67
(40% off of its high), while eToys has fallen from $86 to $13.
John McCain announced he was "suspending" his campaign.
Some Republicans feared he was going to launch a third party
bid. Bush had trounced McCain on Super Tuesday. Bill Bradley
was slaugtered by Gore.
Next week, the story of the Great Tech Bubble continues.