A Question of When

Five years ago today, the Nasdaq kissed an all-time high of
5,048.62.

The optimistic buyers of that era would certainly never
have imagined that they were “top-ticking” one of the most
magnificent financial bubbles of all time.

Five years hence, today’s optimistic stock buyers cannot
seem to imagine that the Nasdaq’s bear market might not yet
have run its course…

Sometimes, it’s worth thinking about the unthinkable.

The buyers of Intel Corp and Cisco Systems on March 10,
2000 certainly never would have imagined that their beloved
Nasdaq Composite was less than 24-hours away from the start
of an epic bust.

And these investors certainly would never have imagined –
even if they had given the matter any thought – that the
U.S. economy of 2005 would be straining against the
considerable adverse forces of soaring fiscal imbalances
and runaway energy prices, while also waging an
economically and politically expensive war in Iraq.

But it’s a “funny old world,” as Bill Bonner and Addison
Wiggin noted in their engaging bestseller, “Financial
Reckoning Day.” (For several weeks, the pair have been
“holed up” in the Paris office, pounding out the eagerly
awaited sequel).

“What makes the world funny,” Bonner and Wiggin relate, “is
that it refuses to cooperate; it seldom does what people
want or expect it to do. In fact, it often does the exact
opposite.”

And so it has come to pass…

The almost unthinkable has occurred and continues to occur.
The Nasdaq skidded 78 percent before bottoming at 1,114 on
Oct. 9, 2002. Cisco, likewise, lost more than three
quarters of its market value. The computer-networking giant
– and former tech-stock icon – once boasted the world’s
biggest market capitalization. Today its $120 billion
market cap trails well behind the new number one:
ExxonMobil’s $400 billion market cap.

In 2003, the Nasdaq rebounded 50 percent, while adding
another 8 percent last year. But that does not mean that
the worst is over. Despite mustering impressive periodic
rallies, the Nasdaq continues to stair-step its way lower
into a protracted bear market. We have seen this picture
before.

The Nasdaq is tracing out an ominous price trajectory that
closely resembles that of Japan’s Nikkei Index. The nearby
chart compares the price histories of the Nikkei from 1979
to present and the Nasdaq from 1989 to present. The
similarity is hard to miss. If this similarity persists,
the Nasdaq will continue foundering in a kind of bear
market purgatory for another 10 years…at least.

“It had all seemed so logical, obvious, and agreeable back
in the last five years of the 20th century,” Bonner and
Wiggin observed. “Stocks went up every year. The Cold War
had been won. There was a new ‘Information Age’ making
everything and everybody so much smarter – and richer, too.

The world was a happy place and Americans were its happiest
people. American consumer capitalism was the envy of all
mankind. The United States guaranteed the peace and freedom
of the entire species, if not with goodness, intelligence,
and foresight – at least with its military arsenal, which
could blow any adversary to kingdom come…It scarcely
seemed possible that there could be any improvement.”

But just then, at the moment of peak optimism, disaster
struck. Over the ensuing two and a half years, the Nasdaq
led the U.S. stock market in to a tailspin that erased more
than $7 trillion from the brokerage statements of the
nation’s investors.

The Nasdaq’s slide not only mirrors the Nikkei’s
ignominious bust, but also resembles the epic bear-market
patterns traced out by U.S. stocks from 1929 to 1954 and
gold from 1980 to present. If past is anything like
prologue, the Nasdaq faces a long and uncomfortable road
ahead.

25 years after hitting its peak on December 29, 1989, the
Nikkei remains 69% below its all-time high. The 1929-
vintage Dow fared slightly better than the 1989 Nikkei. 25
years after the crash of 1929, the venerable Dow had
managed to claw its way back to a new record high. Gold,
for its part, remains 50% below its record high, 25 years
after the fact. Gold reached a high of $873 an ounce in
January 1980, but hasn’t risen above $510.10 since then.

In short, post-bubble financial markets do not always
recover briskly, although they may sometimes appear fit and
sprightly. Even after climbing 85 percent since October
2002, for example, the Nasdaq would need to more than
double to surpass its prior record high.

But a perusal of today’s financial headlines provides
little reason to expect a robust stock market…

“U.S. Stock Prices Fall, as Bond Yields Rise, Crude Oil
Prices Climb,” reads a Bloomberg News headline on a certain
financial Web site. Scrolling down through the other
headlines on the same Web page, one finds the following
series of news stories:

“Gold Near 10-Week high,” “Dollar Hits a Two-month Low
Against Euro,” “Treasuries Hit, Yields hit 7-Month High,”
“Mortgage Applications Dip,” and “Oil Prices Top $55 a
Barrel.”

Nevertheless, James Oelschlager, president of Oak
Associates in Akron, Ohio, exudes optimism. “Everybody is
too negative,” the upbeat fund manager complains to
Bloomberg News. The Nasdaq will eventually reach a new
high, he predicts, “It’s just a question of when.”

True enough, but for most of us, “when” is the only
question of significance.

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Did You Notice…?
By Eric J. Fry

“Although Pinot Noir sales have been experiencing a slow
rise over the past few years,” observes Bryan Spillane, an
analyst with Bank of America Securities, “the October 2004
release of the movie ‘Sideways’ has seemingly catapulted
the label to newfound popularity.”

“Sideways” is, of course, the delightful film featuring the
conversations and escapades of two men on a road trip
through the Santa Barbara wine country. “Vintners and wine
store owners across the country,” Spillane continues, “are
reporting increased consumer interest spurred by the movie,
and expect it to increase going forward as ‘Sideways’ was
nominated for 5 Academy Awards.”

Unfortunately, Rude Awakening readers will find it much
easier to join the Pinot craze than to capitalize on it.
The shares of Beringer and Robert Mondavi – two purveyors
of California wine (including Pinot Noir) – used to trade
on Nasdaq. But both wine-makers were gulped down by larger
wine and spirits companies. Constellation Brands NYSE: STZ)
acquired Mondavi, while Australia’s Foster’s Group (Sydney:
FGL AU) purchased Beringer.

But even though we investors do not have access to a “pure
play” on Pinot, we do have access to pure Pinot. Your
editor recommends the “Mondavi Private Selection” Pinot
Noir.

Of course, those with a more accommodating Pinot Noir
budget should continuing pouring themselves Gevrey-
Chambertins.

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And the Markets…