Easy Come, Easy Go
“Every extraordinary capital market gain,” said Jeremy Grantham, courtesy of Marc Faber, “has retreated 100% – or more.”
Grantham, Mayo, Van Otterloo & Co. have prepared charts that show what happened in various “extraordinary capital markets.”
The gold market was extraordinary, for example, in the 1970s. Reading the small type on the charts, I see that the price of gold was about $40 per ounce in 1970. The line spikes almost straight up to over $1,000 in real terms in the late ’80s. And then it comes right back down in a near-vertical line to about where it started.
The chart for oil prices is very different. Yet, the overall pattern is the same. From about $10 a barrel in 1962, oil rose to almost $70 a barrel (again, real prices)…and then collapsed back to almost $10 again.
Similar charts for other commodities – nickel and cocoa – – show the same pattern.
Today’s Reuter’s wire included the opinions of various analysts and investors. In addition to the bullishness about the future were descriptions of present market sentiment.
“Panic and fear” was how one analyst described the mentality on Wall Street. Many of the major dot.coms and big techs have already taken stunning losses. Amazon, for example, was at about $110 a share when Jeff Bezos’s mug was on the cover of TIME magazine in January.
Since then, his stock has fallen below $30…a loss of more than 70%. The Nasdaq as a whole is down more than 15% for the year. And many of the dot.coms – such as Theglobe, mentioned above, have lost as much as 99% of their value.
And yet, most investors still have faith. If the B2C stocks are out of favor, they switch to B2B. When B2B loses its sensational appeal, they move to the infrastructure plays…and when that romance ends, it’s on to the bio-techs, bandwidth, and so on.
October is the month for surprises in the stock market. Often, there is a surprising explosion of prices to the upside. That is what many investors expect this year too. In their minds, the ‘fear and panic’ has been over- done…stocks are oversold…and the short-sellers had better watch out.
Who knows? Maybe they will be right. But the Big Surprise is more likely to be the scope of the damage that lies ahead. Fear? Panic? You ain’t seen nothin’ yet!
Grantham’s charts of “extraordinary capital markets” show what has happened in the currency markets. A chart of the dollar from 1979 to 1992 shows the greenback almost doubling in value on world markets – peaking in 1985 – and then falling back to where it began. The UK pound and Japanese yen charts show a more modest rise…but similar decline.
In stocks, the S&P 500 soared in the ’20s. The chart looks like the Matterhorn. From the gentle piedmont of the early ’20s, the mountain rises sharply later in the decade. Then, after August of ’29, it falls symmetrically. Ominously, however, the line falls well below the starting point a decade earlier. The ‘extraordinary market’ gave back all of its gains – and then some.
There is another chart of the S&P covering the years ’46 to ’84. This mountain looks more like an Appalachian peak than an Alpine one. Again, what goes up comes down. Easy come, easy go.
Then, there is an interesting chart of the Japanese market relative to the world index, as measured by the EAFE, ’81 to ’99. Here too, the extraordinary gain of the ’80s was erased in the ’90s. But the bear didn’t stop there – he erased much of the gain from previous decades too.
The final chart is of the S&P 500, ’92 to ’99. This mountain is the most unusual of all – it has only one side. You see one side of an Everest-like gain in stock prices. The other side is shrouded by the mist of the future. Will it be a geological anomaly, different from any of the other ‘extraordinary market gains’ examined by Grantham? Will there be an even higher peak than the one registered in March of 2000? Or are we on the down slope already?
We will see, dear reader, we will see.
But if the pattern of past extraordinary gains continues, the valley on the other side will be much lower than most people can now imagine.
“Until 1982,” writes Marc Faber, describing the latest and greatest market sensation, “the Nasdaq, which started trading in 1971 with an index value of 100, never exceeded 200. By 1990, it was still below 500. It touched 1,000 for the first time in 1995 and 2,000 in 1998. From there it soared to over 5,100 in March of this year. Never before in the history of financial markets has there been such a highly priced large market (market cap. of over $6 billion at its March peak) as the Nasdaq. Based on current earnings of approximately $25 billion, my estimate is that the Nasdaq will decline to anywhere between 800 and 1,500.”
“I base this forecast,” he continues, “on Nasdaq earnings either remaining at about the current level (no growth) or rising to around $40 billion before major earnings disappointments kick in and reduce the Nasdaq’s P/E to about 40.”
We will see, dear reader, we will see.
Baltimore, Maryland October 10, 2000
*** The Nasdaq was down 130 points early yesterday, after having lost ground each of the last 5 weeks. Investors are turning away from the Big Techs – just as they’ve already turned away from the dot.coms.
*** Reality is meeting virtual reality. “Does everyone who wants a computer already own one?” asked a headline in the NYTimes. Investors are beginning to realize that even tech companies cannot expand forever. And just because a company has a neat technology does not mean that investors can make any money on the stock.
*** But it is not an over-night process. Steve Sjuggerud explained to me yesterday that big institutional holders need months to unwind their positions. Once the romance is over, in other words, breaking up is hard to do. Prices work their way over several months.
*** Intel fell about a buck, yesterday…Cisco lost $2.50. TheGlobe.com came out at $15 and rose to $90. Now you can buy a share for 70 cents. And Amazon dropped to $28…and then revived enough to close a little above the $30 mark… more about the “River of No Returns,” in just a moment.
*** But while the live-in romance with the big techs seems to be over…and investors pack up their socks and prepare to move out…there’s always a lot of talk about making up and “working things out.”
*** Many investment analysts think the Big Techs are just too good to leave. Reuters quoted one who said, “We really got oversold [last week].” Another thought stocks were “too cheap.”
*** This sentiment seemed to gain momentum about midday on Monday…and Nasdaq came back to close just 5 points down. The Internet index rose 1%…and Yahoo managed an increase of $4.50.
*** But let’s return to Amazon. Once the “must own” stock of the New Era, the big muddy river is becoming a piranha, I mean pariah. Analysts are turning against it. “In July alone,” writes Matt Berger in Upside Today, “eight analysts downgraded Amazon in a storm of negative projections about its cash reservoir. Monday, investment bank Janney Montgomery Scott downgraded Amazon’s stock to “sell” from “hold.”
Berger cites a report from Robertson Stephens:
“As (Amazon) expands well beyond its core products of books, music and video, and into new categories such as electronics, kitchen, lawn and patio, and tools and hardware, we hypothesize that the exhaustive assortment which has heretofore defined the company could actually serve as a structural obstacle to achieving operating efficiency.”
*** A NYTimes report says that Amazon has quietly raised prices – so much so that you can now find some books at lower prices in bookstores.
*** And the current issue of Red Herring includes an interview with the Amazon founder, entitled “The Fantasy World of Jeff Bezos.”
*** “To hear him describe it,” begins the article, “Jeff Bezos lives in a perfect world. A world where bad news does not exist. It’s as if the planet’s greatest optimists have been plucked, packed and shipped to Seattle, then downloaded into one very smart, articulate and charming person. But optimism is often a clever cover for denial.”
*** Time’s Man of the Year just refuses to accept it: it’s over…the romance with investors, that is.
*** Meanwhile, the Dow fell 53 points yesterday. There were 1206 stocks advancing, against 1562 retreating. 23 hit new highs. 87 hit new lows.
*** The weather has turned cold here in Baltimore. The cold snap was blamed for the rising oil price. Oil closed up a buck – to $31.86.
*** William Fleckenstein: “The Strategic Petroleum Reserve release was a political outrage… 30 percent of the oil went to folks who don’t appear to have any real chance of executing the contract as required…when all is said and done, the amount of heating oil that’s going to be released from the SPR will satisfy the Northeast for about 12 hours on a cold day.”
*** “The scariest statistic of them all,” writes Uncle Harry Schultz, “and only reported in one newspaper (The International Herald Tribune)… is that it is not true OPEC raised oil production recently by 800,000 barrels. The truth is oil ‘quotas’ were raised 800,000 bbls but actual production was already 700,000 ahead of the quotas, so the net increase was only 100,000 bbls.”
*** High oil prices have been associated with three past recessions: the oil shocks of 1974, 1979 and 1990. According to Ed Yardeni, by way of Gary North, “Americans are paying $161 billion more for their oil, and the price worldwide is approaching $500 billion.” That does not include the increases we are all feeling in electricity and natural gas. North: “It’s as if someone increased our corporate and personal income taxes by 15-20% almost overnight.”
*** And it’s not just in the United States. Singapore, France, Germany, Italy, Sweden, and the United Kingdom all turned in lower numbers for the Purchasing Managers Index, says North. “Every week I see more numbers indicating the world economy has begun to slow down.” (see: Oil Induced Recession In 2001? )
*** What’s a poofter? A couple of readers have written to ask what the word means. One suggested that I may be in violation of incipient Hate Crimes Act, since “poofter,” he noted, is British pejorative slang for homosexual. Uh, oh.
*** “Poofter,” is indeed slang for homosexual. But it is, at least in my usage, more whimsical than pejorative. I practice what might be called ‘Comic Christian Universalism’ – I make fun of everyone…but I love even the sinners. If that is a crime – well, put the cuffs on me.