Nasdaq 5000, Part I
Brian Trumbore
President/Editor, StocksandNews.com

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.

Brian Trumbore

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative and/or informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.