http://www.siliconinvestor.com/insight/ifc/
Technology stocks were in a bull market from 1991 to 1996, when lower interest rates and higher cyclical earnings led the Nasdaq Index from a P/E ratio of 20 times to an extremely pricey P/E ratio of 50 times. In 1997, the Federal Reserve kicked its easy credit policies into overdrive and the Nasdaq moved into a mania stage. By the summer of 1998, the P/E ratio zipped up to 100 times, levels that were unheard of in the past.
The mania was interrupted by the near collapse of entire U.S. financial system due to debt exposure to speculative activities. But our hero, the Federal Reserve, rushed in to make certain its friends in the banking and hedge-fund communities suffered no losses. There is obviously nothing wrong with saving the economy from depression, but the perpetrators of the crime should not be rewarded. Indeed, the Fed encouraged them to take even dumber risks in the immediate future. That started the bubble phase of the market. Toward the end of 1999, The Fed, using Y2K as an excuse, increased credit in the economy by nearly 20 percent, taking the Nasdaq market up to a ratio of 200 times, barely growing earnings per share. This means that the bubble morphed into a case of rabies.
Excessive debt creation, like rabies, causes an immediate burst of energy and super strength, but eventually produces painful death. The economy has been growing at a very slow pace if you back out the fantasy "chained dollar" method for counting the contribution of computer sales to GDP growth. Chained dollars is a complicated subject best studied elsewhere. The only example wise investors need to key on is what it means to fake GDP and productivity numbers.
In the first half of this year, computer sales rose less than $8 billion. According to chained dollars, which assigns dollar values to computing speed rather than dollar sales of computers, this rise was recorded as more than $87 billion. That phony number accounted for more than three-fourths of GDP growth. Without it, GDP growth and productivity gains would stink to high heaven. That means our high debt load is accomplishing nothing in real economic terms, just in the speculative markets. When the government brags about the absence of consumer price inflation, it is simply due to an underlying weak economy that their numbers hide.
Of course, the truth about the lousy economy is boring stuff and New Pair of Dimes hucksters can only focus on which stock will next be hyped by the Wall Street shils. After all, there is nothing to worry about. Alan Greenspan sometimes jokes about taking away the punch bowl at the party, while he is busily passing fifths of Jack Daniels under the table.
This market now has rabies and will die a very painful death, which will have far-reaching social consequences. Bond vigilantes and currency traders are pounding U.S debt securities and the dollar as the drunken bash continues, but, so far, equity investors do not care. There is no designated driver in this government and certainly not in the corporate community. Honest managers are being hounded out of corporations as carnival barkers and accounting pencil sharpeners are being brought in to take their place.
So, this Nasdaq/Technology Old Yellar has the disease. However, until he starts to weaken, he is strong and very dangerous. Timing when the Nasdaq will fall 70-90 percent is tough.
-- Enrique Diaz-Alvarez Office # (607) 255 5034 Electrical Engineering Home # (607) 272 4808 112 Phillips Hall Fax # (607) 255 4565 Cornell University mailto:enrique at ee.cornell.edu Ithaca, NY 14853 http://peta.ee.cornell.edu/~enrique