Q. Mr. Hickey, despite of raising interest rates, global trade tensions and turmoil in the emerging markets the stock market in the United States is chasing one record after record. How long will this go well?
A. Today’s situation reminds me of the fall 2000 which was a very difficult time for me as a contrarian investor. The internet bubble had broken in March when the Nasdaq peaked at 5132 and all those crazy valued dotcom stocks had crashed. In the three weeks after the Nasdaq had peaked it looked like the whole stock market had broken. But it hadn’t because investors rotated into what they perceived to be safer big cap tech names. So, they piled into stocks like Intel, Cisco, Microsoft, Nortel, EMC and Sun Microsystems. And that’s what we’re seeing today in a similar way with stocks like Amazon, Apple and, again, Microsoft.
Q. What happened next?
A. Once we got into September and October, the market started to roll over. Back then, I was short via puts a number of tech stocks. My biggest short position was Intel and the stock first went higher and higher. In August 2000, Intel rose 20% in just one month and pushed into a new high of almost 76 $ a share. For me, these were some of my toughest days trying to fight the mania. The maniacs were piling into the stock and had no clue. They were only chasing momentum – just as they’re doing it today. But as soon as Labor Day rolled around, Intel’s shares started to fall because fundamentally the business was deteriorating. Intel had to lower its outlook and the stock crashed 45% in one month. Think about it: At that time, Intel was the second largest company in the world. It’s the equivalent of Amazon today which means that Amazon’s market cap would go from around $1 trillion to $550 billion in just one month. That’s a shocking thing. But the difference is that Intel’s P/E ratio was 55 back then. Amazon’s is 155 today.
True, the P/E ratios don’t look as high as they were in 2000. But other indicators do. For instance, the median price to sales ratio for the S&P 5000 is two times higher than it was in 2000. What’s more, the median price to book value is just as high as it was back then. This shows that this bubble is much broader than it was in 2000. And think about all the methods that corporations have taken in order to pump up their earnings which includes the record number of corporate buybacks and non-GAAP- earnings numbers.
It seems something happening in the markets now. It's amazing that a whole year of gains can be wiped out in a few days. The old adage that the stock markets climb the stairs but descend the escalator is very true. Maybe as another poster pointed out a similar scenario to 2001 after the dot com crash is playing out and there will be a rotation out of us and high tech stocks into other areas, maybe oil and commodities like in 2001, or emerging markets even the troubled European financial stocks. However I don't think something as severe as 2001 is happening, simply because we havnt had the rip roaring stock market decades like the 1980s and 90s. Lots of people talk about the unbroken us stock bull market, however that came after the most devastating stock market crashes in 2001 and 2008.
It seems something happening in the markets now. It's amazing that a whole year of gains can be wiped out in a few days. The old adage that the stock markets climb the stairs but descend the escalator is very true. Maybe as another poster pointed out a similar scenario to 2001 after the dot com crash is playing out and there will be a rotation out of us and high tech stocks into other areas, maybe oil and commodities like in 2001, or emerging markets even the troubled European financial stocks. However I don't think something as severe as 2001 is happening, simply because we havnt had the rip roaring stock market decades like the 1980s and 90s. Lots of people talk about the unbroken us stock bull market, however that came after the most devastating stock market crashes in 2001 and 2008.
It's only U. S markets which have been doing well, the stoxx 600 financial sector etf in Europe is trading at Post brexit levels and the overall European market has been in a bear market now since before brexit
and even the S & P 500 performance has not been that stellar when you compare it with the 1990s, it increased by 170% between 1990 to
year 2000 (in other words it almost tripled), it actually decreased by 33% between the years 2000 and 2010 , it has increased by 107% from 2010 to now, however only by 40% over the year 2000 level, almost 2 decades later.
Therefore when talking about the unbroken bull market in the US markets it must be emphasised the enormous effect of the 2008 crash which resulted in the us markets dropping 33% between 2000 and 2010, this is the backdrop to this bull market an awful lot of it was recovery from 2008 even in the US.
I dont understand why there is not much focus on these facts. Another much under reported fact is that the percentage of global wealth invested in the stock markets has reduced considerably since the 1990s , most of the money invested is now in the global debt and bond markets, followed by the global property marketsthe spanish and italian stock markets are below where they were in 1998 , the french market around where it was in 2000 and the ftse marginally above 2007 levels , only germany has matched the u.s market this past decade .
I dont understand why there is not much focus on these facts. Another much under reported fact is that the percentage of global wealth invested in the stock markets has reduced considerably since the 1990s , most of the money invested is now in the global debt and bond markets, followed by the global property markets
It looks nothing like 2001 where online businesses valued in the millions (quite quaint when they are now valued in the billions!) were worth nothing more than the url.
"Until recently, two men in a garage with a couple of transistors could call themselves an electronics company and raise millions in public offerings. In the early sixties, any company which used the word "technology" liberally in its prospectus, and the suffix "onics" or "ex" in its name, could command a 100-to-1 price-earnings multiple, even if its earnings were only a trick of accounting." - Douglas Casey, writing in 1980
@cremeeg interesting your observations however it would seem odd that when it is easier than ever to invest in the stock markets much easier than bonds or property and much easier than in the past that it is just going out of fashion.
If it is the case that stock market investing will no longer be done by normal people then what are we returning to eighteenth century oligarchs on the one hand or communists on the other. If people are not investing in the stock markets but in assets like property or bonds that pay no interest now are they not setting themselves up for another big crash like 2008 which was disastrous for the wealth of the normal Irish person, or bonds where the possibility of over indebted governments burning their bond holders.
Also if less money is being invested in the stock markets as a proportion of the total surely that means that stock markets (exception of the US for now) are better and better value. Also if companies are choosing not to go to the stock markets for finance and are buying back their own shares is that not all the better for existing shareholders as their shareholding is being increased without them having to buy more shares
a cursory reading of most of the respected financial analysis would have informed you that the US market was overvalued and that this was predominantly because of the fang tech stocks
well there has been significant sell offs and volatility over the last week, i bet most investors are down substantially as a result. I heard a good interview with peter brown this morning on radio 1 discussing whats happening. He says that both the US stock market, and the US dollar are overvalued. He says he expects both to correct over the next few years which means that european investors in US stocks could be hit on the double. However he reckons that european and emerging markets are now very good value especially for US dollar investors. He says that for US investors the european market is the cheapest its been for 30 years. Just to reinforce the point that it is really only the US that has been in this decade long bull market.
yea but you keep making that point, but its still the case that european markets are better and better value, and emerging markets have done even worse than europe. I think we are entering a period like after 2001 and the dot com crash, although i dont think it will be as extreme as 2001, when the euro was actually worth less than the US dollar. I think Europe, emerging markets and commodities will out perform and the US market takes a back seat like what happened from 2001 to 2008, the canadian economy did much better than the US in that period, maybe also another global property bubble that seems to be well underway already.European markets always follow u.s markets down, European equities have had poor earnings seasons this year where as American companies have beaten expectations, America is just a far better business environment.