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UK Guardian newspaper, Friday January 7, 2000

SOME PARTY, SOME HANGOVER:

The London trading year is only three days old yet already the stock market has fallen #100bn in value. Some hangover. But then it was some party. In the run-up to the millennium, London and most of the world's leading stock markets had been on a buying binge. The charge had been led by telecommunications companies, at least some of which were household names, and the real rocket stocks - virtually anything with dot.com in its name. By the end of the year market after market was clocking up record highs.

Since the new year it has been a different story. The rally has gone into reverse. The question now facing equity strategists is how 2000 will be remembered.

There are three scenarios. The first is that this week's selling is a short-term correction before the markets head back upwards, as in the past. The second is that the year will see a more deep-rooted curb on investor enthusiasm. The third is market meltdown.

There is no shortage of bears out there. Charles Dumas at Lombard Street Research pointed out this week that the technology rich Nasdaq index started the year on a price earnings ratio of 143 after a 50% gain in the previ ous 2 months. That is almost 10 times the long-term average for the Dow Jones industrial average and double that of the Nikkei 225 index just before the 1989 collapse. The new year market capitalisation of Nasdaq's top 100 companies of $3.35 trillion (#2.03 trillion) was double the GDP of Britain.

All the signs point to a bubble waiting to burst. Just ask Sony president Nobuyuki Idei. At the beginning of the year Sony shares hit a record 32,250 yen (#186) on the back of plans for an internet bank and a stock split. Mr Idei was not impressed.

"When our earnings levels are considered, the appropriate price would be about %20,000. Above that would be a bubble," Mr Idei said. Predictably that sent investors rushing for the exit, though Sony is still trading in what Mr Idei regards as bubble territory.

Paris-based broker BNP Paribas Equities is equally cautious. Its European equities strategist, Florent Brones believes the internet effect has been overdone and markets are overvalued by 15-30%.

"All the conditions are in place, based on our classical models, for something unpleasant to happen," Mr Brones said. "The globalisation of the American dream regarding the new technologies and internet seems too optimistic."

Mr Brones, like many others, is also worried about interest rates. The concern is well-founded. As economies in Europe start to pick up the pace of expansion the European Central Bank is expected to tighten monetary policy. As American growth continues into uncharted territory so is the Federal Reserve. With British house prices soaring and retail spending strong, the Bank of England may well be the first central bank to move when it meets to discuss rates next week.

The fact that there has been no discernible impact from the millennium bug is seen as bad news for share prices, because the threat of a global computer virus was one factor deterring policymakers from increasing borrowing costs.

Where next? The balance of risk must be on the downside. Stock markets are already discounting improving global growth prospects. Investor appetite for internet stocks should reach satiation at some point. It is to be hoped the feeding frenzy does not end in a bilious attack. So a resumption of the fin de sihcle madness looks the least likely of the three scenarios.

Defensive stocks may become the fashion. Markets in Europe may benefit from what is euphemistically called corporate restructuring - takeovers to you and me - as companies try to position themselves to operate increasingly on a cross-border basis. And if investors are already discounting further growth they must have factored in the impact of higher interest rates too.

That is the logical view. But markets are not logical - at least not in the short term. If they were irrational on the way up, may they not be irrational on the way down?

So welcome a sizeable correction and keep your fingers crossed it is no worse.

-- Risteard Mac Thomais (uachtaran@ireland.com), January 07, 2000

Answers

"So welcome a sizeable correction and keep your fingers crossed it is no worse. "

And so, I think, we all will.......

(Have I said YIKES yet?)

Yikes.

-- DavePrime (DavePrime@hotmail.com), January 07, 2000.

A troubling truncation...

-- dinosaur (dinosaur@williams-net.com), January 07, 2000.

Ya gotta love the European talent for understatement:

"All the conditions are in place, based on our classical models, for something unpleasant to happen," Mr Brones said.

Chuck

-- Chuck, a night driver (rienzoo@en.com), January 07, 2000.

Chuck,

Yes, quite.

-- Wilferd (WilferdW@aol.com), January 07, 2000.

Bully!

-- =DSA. (dsangal@attglobal.net), January 07, 2000.

With all due respect, I beg to differ. You guys know I don't post crap here but on this one I think it's misguided. There are a whole host of stocks out there with P/Es at 10 and even 8. There is a bubble in many of the tech stocks no doubt. But I'm telling you I really believe there is a convex and concave bubble. Many many stocks are undervalued due to all of the capital flight into the tech and growth stocks. Just my humble opinion but anyone can go to e- trade or Motley fool and find quite a few real bargains.

-- Hank (reardon@not.now), January 07, 2000.

Hank -

Agreed, but I don't think that will save the overall market from a truly serious correction. The total undervaluations do not seem to balance out the total overvaluations at all, which will leave money looking for safety anywhere it can find it.

This recent and rather modest downdraft was very orderly and had no apparent effect on market psychology as a whole. Very few bulls have become bearish, and lots of folks still see Qualcomm, for example, back at 200 or higher (with a jaw-dropping P/E of 500+). Have yet to read any analyst's comments that really support that target, just stuff that seems to net out as "Spandex jackets for everyone". What sort of earnings will QCOM have to have to support a P/E of even 100? Does anyone really believe that they'll have those earnings in the next year or two, or five? They've sold off the phone-building business and will be making most of their money off royalties and such. CDMA is an important and lucrative technology, but it's still not a global standard and TDMA stills owns much of the European "space". Cisco is a much stronger Internet play and has three times Qualcomm's revenues. How will QCOM make all that money to justify that P/E? I just don't see it. Guess I lack "vision"...

I watched a very experienced market analyst yesterday who was waxing rhapsodic about the Internet and its effect on the economy in the future. This guy must be in his late 50s or even early 60s, and he noted that his grandson was helping him learn to use a computer and such. This is a respected analyst and you could tell that he has almost little or no idea what the technologies are really all about, yet he's making glittering predictions about their impact. People invest based on his statements. *sheesh*

-- DeeEmBee (macbeth1@pacbell.net), January 07, 2000.

Now doubt about Qcom and others as I said being way overvalued. I don't think the phone business they sold to Ericson was even profitable so that will actually impact positively. If you look at the economy from about 1810 to right before the civil war it grew at over 7 fold. We could easily be in a similar pattern. The stability is there VIA 401Ks and payroll deductions. For alot of folks the mutual fund is social security. If you believe in a crash even though there are strong econ. fundamentals what will drive it? If the capital flees where does it go?

-- hank (reardon@not.now), January 07, 2000.

Am certainly not looking for a crash and don't recall calling for one. I do expect a real correction (20% down and holding for 12-24 months) to occur in the very near future.

This stock market is not driven by the economy; it's doing the driving. Saw a chart recently (CNBC?) showing retail sales being pushed by market gains. What happens when that momentum reverses?

Re capital: where does the "money" go when the value of any asset falls? It essentially vanishes into the ether whence it came. A correction will destroy a lot of market cap, but it will leave lots of money looking for safety in any number of vehicles, as it always has. It will also squeeze a lot of the speculation out of this market and unfortunately, many people get hurt financially in this process. Volatile markets help absolutely no one.

-- DeeEmBee (macbeth1@pacbell.net), January 07, 2000.