re: There is something wrong with the system here I think:
No, there isn't. What we're seeing, is the typical pattern, that has happened many, many times. This happens every time a new technology gets mass-adopted, and "changes everything". Look at radio and RCA (the CSCO of its time) in the 1930s. Look at the railroad buildout in the U.S. in the mid-late 1800s (that's an especially close analogy). Look at the frenzy of canal-building in the U.S. in the late 1700s and early 1800s. In the 3d millenium BC, the Assyrians invented fast wheeled chariots, and (briefly) conquered the entire Fertile Crescent (till everyone learned how to make them). I'll bet the stock of chariot-builders went (briefly) to as high a P/S ratio as QCOM in 2000. In every case, you have the same pattern:
1. a new technology is refined enough to be mass-adopted.
2. People get excited. Capital becomes easily (too-easily) available to build-out this technology and make it available to the masses. Large numbers of new companies are formed (all with business plans dependant on easy credit). Often, governments get involved, calling this a "strategic industry", and offering large subsidies.
3. A speculative frenzy develops, asset prices become absurd, speculators and charlatans are attracted to the easy money.
4. Now, we reach the stage where the "monetization of ignorance" happens (I love that phrase, WB says so many wise things). The nimble and cynical, who got in early, get out early. They are the only investors who win. Everyone else loses, and loses badly. Bondholders, stockholders, tax-payers, all are bagholders.
5. It takes a while for them to figure this out. There are years of false hope, Bear Market Rallies (some large and impressive ones, which can last for a year or two), people desperately hanging on, repeatedly seizing on every faint signal that the Good Times are coming back. Governments, companies, and individuals exhaust every stop-gap measure, reassuring (=fooling) themselves, digging themselves into deeper holes, avoiding reality.
6. Eventually, there is the Final Capitulation, a mass Giving Up. The general tone is not fear, but rather exhaustion. Large groups of investors, who said they were "in for the long haul", sell out, at the bottom. Almost by definition, the bottom in asset prices can't happen while any significant fraction of investors have any hope. Assets are ignored rather than hated, by investors. This, and the previous stage, are the time in which the public looks for scapegoats. When people are hurting, then someone must be blamed (other than the person in the mirror). The government, which aided and abetted stage 3, now leads the witch hunt. Lots of conspiracy theories are widely believed. The Law Of Conservation of Sentiment says: every period of euphoria must (without exception) be balanced by an equal and opposite period of despair.
7. A few Survivors consolidate each niche in the not-so-new industry. The Survivors are generally not the Early Adopters, who mostly died in the general slaughter/Darwinian winnowing-out of Stages 5 and 6. Since, after the final bottom, no capital is available, a required characteristic of survivors, is that they generate all necessary capital internally, out of cash flow. A dependance on infusions of new capital, from any source, means a company will not survive to this stage.
IMO, the Telecom/internet is currently in Stage 5. I remain open to the possibility that 10/01 was Stage 6, but I think more likely it was an intermediate bottom that will hold for a year or two, and then the market (or at least the telecom/internet part of the market, including every company whose profits are dependant on that sector) goes on to lower lows. The reasons I am leaning towards 5 rather than 6, are:
1. too much hope, not enough despair, remained in 10/01.
2. fear, not exhaustion/apathy, still dominates on downturns.
3. Although the market peaked almost 2 years ago, it usually takes longer till a Final Bottom. From my reading of History, there is, consistently, a certain inertia, a "stickiness" in mass attitudes, which takes time to change. Caveat: the technology itself may make the pace quicker. Not sure how to untangle that logic loop.
4. capital is still available. Much less, certainly, but not the complete shut-down needed at THE bottom. For instance, Worldcom's recent ability to sell bonds is very worrisome, indicating investors are still willing to pour large amounts of their money into the Black Hole called Telecom Financing. Qualcomm's continuing "Strategic Investments", in spite of a series of spectacular failures (Globalstar was only the biggest, by no means the only one), is another very worrisome sign that, as yet, decision-makers Don'tGetIt. The Fed, IMO, has put off (but only put off) the Day of Reckoning.
Conclusion: more pain is needed, more Ignorance must be Monetized. Signs of The Final Bottom will be: telecom service companies can't sell bonds, telecom equips cease making "strategic investments", and the Fed raises rates every meeting for a year, to stop resurgent inflation.
In the meantime, I will invest only in those companies that look likely to be the Survivors, and I will sell the rallies in increments, in case the future is lower lows.
I'd be interested in other people's Survivor lists (using the criteria above). |
