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Tech stocks prove law of gravity
By David Henry
NEW YORK -- If you didn't load up on Nasdaq issues as tech stocks rocketed into the new millennium, you're probably snickering now. It feels great to discover that you weren't nearly so dumb as you looked when everyone else was getting rich because they could accept the obvious benefits of new technology.
But it is best to try to restrain your glee. The market gods will eventually strike you down for your newfound hubris. Besides, it is not polite to laugh when others are hurting.
And, many people are hurting in a big way. The Nasdaq composite index has been knocked to the mat for the second time this year. At Wednesday's 3168.49 close, near its low for the year, it was down 25% since the end of August. It was knocked 37% from its record close of 5048.62 March 10 to 3164.55 in late May.
Sure, there probably weren't that many people who paid top dollar, but millions have been investing monthly through payroll deductions at prices significantly higher than today.
The standard answer for the market's trouble is a list of e-words: earnings, energy, euro, etc. But the longer the Nasdaq gets battered, the more obvious it becomes that the real explanation lies back in 1999 and early 2000. It was an exceptional period in which rare forces coincided to set the Nasdaq precariously high.
The index was up an amazing 86% in 1999 and still climbed an additional 1,000 points, 25%, to its ultimate peak. In retrospect, it is hard to remember that those fast-money gains seemed like real and lasting money at the time. Its climb was so straight up that, even at Wednesday's battered levels, the index is at about the same level as it was Nov. 10. Since the start of 1999, it is still up 44.5% for a compounded annual growth rate of 23%, which is still 5 to 10 percentage points above what many experts would consider normal.
Blame part of the rise to unsustainable heights on the Y2K bug. Few computers crashed at midnight Dec. 31, but the fear that they might prompted the Federal Reserve and other central banks to let the money supply balloon at millennium's end. It was a surge of liquidity that topped off the money the central banks poured out to ease the 1998 crisis in Asia and emerging market debt. It was money that found its way into the greater fool game being played in dot-com stocks. But it was a one-time force that's now been reversed. Whereas the money supply grew faster than the economy in 1999, now it is growing more slowly and weighing on the market.
Jim Paulsen, investment strategist at Wells Capital Management, counts five other Nasdaq drivers from 1999 now in reverse:
* The Asian economy breakdown made prices for computer products fall 40%, compared with their usual 25% decline. The deflating price drove unit sales through the roof and raised expectations too high.
* Corporations bought extra tech products to counter the Y2K bug.
* Spending for fiber optics, routers and other implements of the Internet infrastructure surged. Think Cisco and Nortel. That spending will still be strong, but the growth rate is slowing.
* Internet start-ups spent their IPO money for office space, computer servers and advertising. ''The dot-com phenomenon in 1999 was just like the wildcat driller phenomenon in 1979,'' Paulsen says. ''In the aftermath, it becomes a huge negative, and it is this year.''
* The one-time spending on tech accelerated the economy with higher household incomes and profits.
What happens next? Paulsen says the economy and market will be grappling with a rare slowdown in what suddenly became their leading industry. ''It is probably going to be rough,'' he says.
Prudential Securities strategist Ed Keon told clients this week tech stocks will drop more. Their prices are still high compared with their future growth. Keon conceded that until recently he was recommending stocks of growing techs. ''It may be that the great tech earnings growth of 1998-2000 was driven by Y2K and the rollout of the Internet,'' he said.
Ideally, the market would hold steady for a while as investors wait patiently for earnings to catch up with stock prices. But that would be against the natural tendency of markets to go from one extreme to another, passing out humility along the way.
-- (M@rket.trends), October 13, 2000
Would you like to buy a tulip bulb?
-- (greaterfool@Amster.damn), October 13, 2000.