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FINANCIAL POST
MARKET EYE March 10, 2001
William Hanley
whanley@nationalpost.com
Biblical Proportions:
After
human folly writ large -- hope.
Techs
still risky, but Street likes cyclicals' chances.
In
commemoration of the first anniversary of the Nasdaq composite index
peaking at 5132 intraday last March 10, we here at Market Eye will be
laying a wreath at the tomb of the unknown technology investor this
morning and observing a minute's silence to remember those who have since
laid down their portfolios in the subsequent 60% drop.
The
great tech/dot.com mania, which took several years to unfold and quite
ironically ended just as the new millennium began with talk of the
Internet revolution creating a paradigm shift that would change everything
forever, was, in retrospect, nothing less than human folly writ huge:
trillions of dollars of wealth "created" in a few short years;
trillions "lost" in a year as the air escaped from the bubble
faster than it was pumped in.
That
those trillions existed mostly in cyberspace as a notional value in a
belief system that chose to flout fundamental equities valuation is easy
for all to see in hindsight and was apparent all along to those students
of market history who knew about manias and the madness of crowds. And
those speculators who played the greater fool theory endgame at the market
top 252 trading days ago will no doubt believe they actually took leave of
their senses as greed completely overtook fear as the dominant emotion
running the tech stock market.
To
conclude that a lot of people learned a lesson that will stand them in
good stead is not particularly useful if you have seen your savings
evaporate. It is difficult to wax philosophical when you are hit with the
reality you are probably destined to sign on for the Freedom 95 plan. And
it is no use telling yourself regret is the dumbest of emotions.
But
while many people will have to somehow pull themselves out of the tech
wreckage and survive, there is hope out there the broader stock market
represented by the Dow Jones industrial average, the Standard & Poor's
500-stock index, and, to an extent, the Toronto Stock Exchange 300
composite index can get through this difficult period and provide gains by
year-end.
(Before
we enlarge on this hopeful theme, we should note that most of the market
watchers who forecast the Nasdaq bubble would burst are still pessimistic
about tech stocks in particular, stocks in general and the U.S. economy,
which they believe is vulnerable because of dangerously high debt levels. Bob
Hoye
of Vancouver's Institutional Advisors says: "The speculation in
the bubble was certainly of biblical proportions, so the collapse
should be of biblical proportions, too. Unfortunately, we are just
getting through the First Testament. We haven't got to the part where the
money changers were thrown out of the temple."
But
in a similar biblical vein, one senior institutional trader perhaps echoed
sentiment on Wall and Bay streets yesterday when he said: "We've come
through the valley of the shadow of death."
If
we can get through the next few months without some financial calamity
sideswiping the markets, there is every chance stocks -- and especially
the cyclicals such as the metals and the forest products - can produce
some decent gains this year. But the techs are still probably overvalued
and, because people are deeply suspicious of them, the Nasdaq might trade
in a fairly narrow range for the next couple of years as traders sell into
every rally.
The
pattern of much of the past year, in which investors rotate money out of
techs and into the so-called value stocks is likely to continue, though
many people who have become acutely risk-averse are content for now to
park their money in GICs and T-bills. The theory and hope on the Street is
that money piling up on the sidelines will be deployed in the market when
investors believe the worst is over.
The
question for some investors still desperate to make back some of their
tech losses: Is the worst just about over? Besides the dubious tactic of
trying to get even in the treacherous tech stocks, the valuations are
still high if you consider this high growth phase in information
technology is over.
Meantime,
while the Nasdaq crash has shaken the confidence of millions of investors
and the foundations of the equity culture, there is every reason to
believe stocks will remain the preferred asset for savers.
"Equities
are still the repository of the value that's created in the economy,"
a senior brokerage executive says. "It's just that we're getting back
to the rules that were ignored for a long time."
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