Newton's In Search Of The Perfect Investment. Technology Investor.
is the five-year anniversary of the Nasdaq 2000 high: Here's what's
happened since. The chart is from The Wall Street Journal.
8:30 AM Thursday, March 10, 2005: The
key to "getting it right" in the search for the "perfect investment"
is to wait and wait and then pick carefully -- very carefully. On the early
morning of Thursday March 3, I wrote that oil was going to $62. It had closed
the previous night at just under $52. Last night it closed at $54.75 and it's
going higher. I hope some of you hold oil futures.
Nasdaq has recovered a little from its lows. Today you'll see a zillion articles
talking about the anniversary and where Nasdaq is going -- the consensus being
No Big New Boom, yet. I agree with that conclusion. There is nothing
on the horizon like there was with the Internet to produce another mad spike.
However, individual stocks and individual sectors will explode. There's
simply too much hot money still around. Apple (AAPL), Google
(GOOG) and even Taser (TASR) have been two mini-booms. There will
be others. It's important for our sanity, pocketbooks (and amusement) to find
them. Meantime, here are excerpts from today's USA Today piece. See if
you you agree with it. Don't listen to Landis. He's the world's worst tech stockpicker.
10 reasons why Nasdaq won't recover soon
NEW YORK Tales of quick riches, supersized gains and waves
of "buy!" orders for tech stocks have been replaced by a new kind
of speculation on Wall Street: bets on when, if ever, the once-mighty Nasdaq
will ascend to a new peak.
It's been five
years since the Nasdaq composite notched its record close of 5048.62 on March
10, 2000. While most milestones and anniversaries are cause for celebration,
the memory of the hissing sound of the deflating stock bubble, rather than the
signature pop, pop, pop percussion of exploding champagne corks, is the sound
more likely to greet investors.
There are legitimate
reasons for investors to embrace a more sober view of the Nasdaq. The most obvious
negative is the fact the technology-packed index remains 59% below its high,
despite standing at 85% above its bear-market low. In contrast, the blue
chip-dominated Dow Jones industrial average is flirting with 11,000 and is just
8% off its peak.
waves a big caution flag. The aftermath of past speculative bubbles has been
painful for investors. Of the giant boom/busts of the 20th century the
1929 stock market crash, the gold rush in 1980 and the super spike of Japan's
Nikkei stock index in 1989 only the Dow, which plunged 89% from its 1929
peak, has eclipsed its post-crash high. But it wasn't easy: It took more than
25 years for the Dow to accomplish that Herculean feat, according to Ned Davis
Research. The Nikkei is still 69% off its high, and gold is 48% below
important to remember that bubbles once popped do not easily reinflate,"
says James Stack, president of InvesTech Research.
There's a wide
range of predictions and theories on when the Nasdaq will post fresh highs,
and what it would take. Forecasts range from a super-aggressive four years,
to a decade, to a generation, to a lifetime. The consensus is that it will occur
later rather than sooner. Here are 10 reasons why stock market experts do not
expect a speedy recovery for the Nasdaq:
to go-go '60s? Working off excesses takes time. There's a strong
chance the Nasdaq will go sideways and "remain flattish" for a very
long time, just as the Dow did after a big rally pushed the blue-chip gauge
above 1000 for the first time in 1966, says Carl Haacke, author of Frenzy: Bubbles,
Busts, and How to Come Out Ahead, and economic policy adviser to President Clinton.
Driven by investors'
fascination with the so-called Nifty Fifty stocks, such as Kodak and Xerox,
the stock market racked up big gains until being stopped in its tracks by the
1973-74 bear market. In a market punctuated by periods of mini-bull markets
and mini-bear markets, it took the Dow 16 years to hurdle 1000 for good. This
period feels similar, Haacke says.
"perfect bubble" is unlikely to be repeated soon. Investors'
fascination with tech stocks in the late 1990s was fueled by a powerful one-two
punch, notes Jeremy Siegel, finance professor at The Wharton School. The key
drivers: the emergence of the Internet and Y2K fears, which sparked a blitz
of buying of tech gear in an attempt to avert computer meltdowns when the calendar
turned from 1999 to 2000.
the culmination of these very important factors that generated huge amounts
of attention," Siegel says. "But both turned out to be one-time events
that resulted in the 'perfect bubble.' "
have memories. The wildly inflated valuations of tech stocks were
never justified, adds Siegel, whose latest book about stocks, 'The Future for
Investors: Why the Tried and True Triumph Over the Bold and the New', was published
this week. The book advises investors to avoid chasing hot stocks and to buy
stocks that pay dividends instead.
learn. People have memories," Siegel says. "When they look back, they
say, 'That was crazy,' and conclude that maybe the Nasdaq shouldn't reinflate."
is not in the Nasdaq. With growth in China white-hot, big energy
companies and Old Economy products such as earth-moving equipment and truck
engines made by big industrial companies such as Caterpillar are hotter commodities
than computer chips, says Stephen Coleman, chief investment officer at Daedalus
Dub it the
"Caterpillar" rally. The big stock market gains these days, and since
the bubble burst, are coming from Old Economy stocks, not tech stocks. Since
the Nasdaq peaked, Caterpillar is up more than 170%, and Microsoft
is down around 50%.
why the Nasdaq is faring worse than the Dow this year, Coleman responded: "Because
Caterpillar isn't in the Nasdaq, and neither is Exxon." These non-tech
names, Coleman adds, are also where the earnings growth is. Analysts expect
Caterpillar earnings to grow 29% in 2005. Exxon posted 55% growth in 2004 thanks
to high oil prices, a trend that shows little sign of abating.
growth for tech giants has slowed. The mega-cap tech stocks, such
as Microsoft and Cisco Systems, that powered the Nasdaq during
the late 1990s, have experienced a sharp slowdown in profit growth. In 1999,
Microsoft was the biggest stock on the planet; its earnings grew 40%; Cisco
earnings jumped 32%.
But those days
are over. Analysts expect Microsoft's earnings to grow just 4% in calendar 2005,
and see Cisco's growth rate at 14%, Thomson First Call says.
rates at the big tech firms have slowed to a crawl," says Gary Kaltbaum,
president of money management firm Kaltbaum & Associates. "Companies
like Microsoft and Cisco are never going to be what they used to be."
big-cap techs will make it more difficult for the Nasdaq to blast higher, Kaltbaum
adds. The index is weighted by the market value of its components, which means
the biggest companies have the greatest impact on its returns. Even if smaller
tech firms innovate and are rewarded with higher stock prices, it will be tougher
for tiny companies to drive the index dramatically higher.
"hot money" has moved on. The so-called smart money, such
as hedge funds, tends to flock to areas of the market that are enjoying the
biggest price appreciation. That's another negative for the Nasdaq, which has
lagged the overall stock market, oil and real estate this year.
money wants to get into what is working," Kaltbaum says. "More and
more, the hot money sees the Nasdaq is not working, so they are going into other
leaders tend not to lead new bull markets. The big winners of one
era are rarely the big winners in the next boom, says Marc Klee, manager of
John Hancock Technology fund. He notes that energy, the big winner in the '70s,
didn't regain its leadership position until last year. Similarly, growth stocks,
or companies with accelerating earnings, dominated the 1990s, but value stocks,
undervalued names with solid balance sheets, have led since the market topped
in March 2000.
tough to hold the leadership mantle on a sustained basis," Klee says. "For
tech to become a megamover again, we'll probably have to wait a few market cycles."
a 100% gain isn't enough. Another psychological downer is the fact
that even if the Nasdaq doubles in value from current levels, it would still
fall 18% short of its March 2000 peak. "There's a lot of headroom to get
back there," Klee says.
stocks are still not cheap. As the Nasdaq neared its top in February
2000, the index was trading at 246 times earnings, InvesTech Research
says. While tech stocks are not selling anywhere near those rich prices today,
they still remain overvalued, InvesTech's Stack says.
The PE ratio
of the Nasdaq 100 is currently 30, which, prior to 1996, was considered
a "peak" level, Stack says. In October 1990, at the start of the great
bull market of the 1990s, the Nasdaq 100 PE was closer to 15. "Bottom
line, one could hardly call the majority of Nasdaq stocks bargains at today's
levels," Stack says.
says more pain is to come. In the grand scheme of bubble aftermaths
comes a decidedly pessimistic observation from Pete Kendall, co-editor of Elliott
Wave Financial Forecast. "The historic pattern is for manias to retrace
the entirety of their advance," he says. In other words, before this is
all over, Kendall says the Nasdaq will plunge back into the "triple digits,"
the level it was at in the early and mid-1990s. Says Kendall: "The Nasdaq
still has a ways to go" down.
But just because
something goes up a lot, then goes down a lot, doesn't mean it can't go up a
lot again, other experts say. Just as there are good reasons why the Nasdaq
will stay down for the count, there are reasons why the Nasdaq might surprise
people and levitate more quickly than some pundits think.
If tech has
one thing going for it, it is its ability to come up with the next big thing,
says Kevin Landis, chief investment officer of Firsthand funds. "I'm looking
out my window in Silicon Valley, and it looks as dynamic as ever," Landis
says. "There will be another generation of companies and another wave of
He points out
that new technologies and new markets are built on the success of past successes.
The PC, he says, paved the way for the Internet, and the Internet paved the
way for networking companies. Today, there's whiz-bang TV technology, cell phones
that take pictures and satellites that beam radio into cars. Tomorrow will bring
fresh innovation. "It's time to question the fear-driven markets and look
for opportunities," Landis says.
The next big
bull in the Nasdaq will come "when there is such disinterest, and they
get so underowned that is when the big move can be made," Kaltbaum
out the chance of another bubble. "Bubbles will increase in frequency,"
Haacke says. "There is huge incentive for the world stock of capital to
chase the next bubble. So whatever looks like the next hot thing in the global
economy, tremendous amounts of money will move there very quickly."
Why not tech?
time to short Hewlett Packard (HPQ)? Now comes word that HP's
printer business is doing badly. Today's Wall Street Journal has a piece
headed" "H-P's Printer Business Takes a Hit As Rivals Muscle In"
the challenges facing Hewlett-Packard Co.'s cash-cow printer business, consider
the deal that rival Seiko Epson Corp. put together late last year.
Trying to stoke
sales of its $199 PictureMate photo printer, Epson launched a promotion featuring
a $50 rebate off the product. It teamed with camera maker Nikon Corp. to offer
an additional $100 off if a consumer bought a Nikon digital camera at the same
time. And it joined with electronics retailer CompUSA Inc. to give another $40
rebate off the printer for CompUSA customers. After all the discounts for this
limited offer, the Epson PictureMate's total price came to just $9.
the PictureMate printer sold out last December, Epson says. "Epson was
by far the most aggressive" printer maker, agrees Gary Bale, CompUSA's
vice president of merchandising.
H-P says it
kept prices of its comparable photo printers at $149 and above in the same period,
though it offered some $50 rebates. Many of these photo printers had double-digit
is just one of a new array of challenges facing H-P's $24 billion printer business.
While the Palo Alto, Calif., computer and printer maker has dominated the printing
industry, rivals such as Epson, Canon Inc. and Lexmark International Inc. have
recently rejuvenated their product lines, teamed up with more partners and are
aggressively ramping up their sales tactics. Dell Inc. is specifically targeting
H-P by undercutting H-P on printer prices. And as H-P diversifies into other
printing-related products such as copiers, it faces new battles with established
players in those fields such as Xerox Corp. and Ricoh Corp.
All of this
is taking a toll on H-P. In its last fiscal quarter, H-P disclosed that its
core consumer-inkjet-printer sales fell 13% from the year-earlier period.
While the overall printing unit usually posts 7% to 10% revenue growth, it eked
out a mere 3% increase.
market share also has taken a hit. Its U.S. inkjet printer market share fell
to 48.1% at the end of 2004 from 57.4% a year ago, and its U.S.
laser printer market share declined to 38.9% from 45.7% in the
same period, according to research firm IDC. H-P doesn't dispute the figures.
shares don't usually shift that much in a mature market like printers,"
says Jennifer Thorwart, an IDC analyst. "This isn't a pretty picture. H-P's
competitors are salivating."
The trend lines
are worrisome because H-P's printing business is the crown jewel of the giant
technology company, supplying roughly a third of total revenue and three-quarters
of its overall profit. H-P earns huge amounts of money from printing because
it has perfected a business model whereby those who buy its printers have to
come back time and again to purchase new ink cartridges or laser toner for the
machines. Profit margins on H-P's ink and toner remain some of the most envied
in the technology industry, at more than 50% for toner and more than
60% for ink cartridges, analysts say...
printing business wasn't something people worried about before, but now there's
a chink in the armor," says Rob Cihra, an analyst at Fulcrum Global Partners.
"If printing's profits deteriorate, that could knock the legs out from
Arthur and the Witch
King Arthur was ambushed and imprisoned by the monarch of a Neighboring kingdom.
The monarch could have killed him but was Moved by Arthur's youth and ideals.
So, the monarch offered him his freedom, as long as he could answer a very difficult
question. Arthur would have a year to figure out the answer and, if after a
year, he still had no answer, he would be put to death.
do women really want? Such a question would perplex even the most knowledgeable
man, and to young Arthur, it seemed an impossible query. But, since it was better
than death, he accepted the monarch's proposition to have an answer by year's
end. He returned to his kingdom and began to poll everyone: the princess, the
priests, the wise men and even the court jester. He spoke with everyone, but
no one could give him a satisfactory answer.
Many people advised
him to consult the old witch, for only she would have the answer.
But the price
would be high; as the witch was famous throughout the kingdom for the exorbitant
prices she charged. The last day of the year arrived and Arthur had no choice
but to talk to the witch. She agreed to answer the question, but he would have
to agree to her price first.
The old witch
wanted to marry Sir Lancelot, the most noble of the Knights of the Round Table
and Arthur's closest friend! Young Arthur was horrified. She was hunchbacked
and hideous, had only one tooth, smelled like sewage, made obscene noises, etc.
He had never encountered such a repugnant creature in all his life. He refused
to force his friend to marry her and endure such a terrible burden, but Lancelot,
learning of the proposal, spoke with Arthur. He said nothing was too big of
a sacrifice compared to Arthur's life and the preservation of the Round Table.
Hence, a wedding was proclaimed and the witch answered Arthur's question thus:
What a woman really wants, she answered....is to be in charge of her own life.
Everyone in the kingdom instantly knew that the witch had uttered a great truth
and that Arthur's life would be spared. And so it was, the neighboring monarch
granted Arthur his freedom and Lancelot and the witch had a wonderful wedding.
The honeymoon hour approached and Lancelot, steeling himself for a horrific
experience, entered the bedroom But, what a sight awaited him. The most beautiful
woman he had ever seen, lay before him on the bed. The astounded Lancelot asked
what had happened The beauty replied that since he had been so kind to her when
she appeared as a witch, she would henceforth, be her horrible deformed self
only half the time and the beautiful maiden the other half. Which would he prefer?
Beautiful during the day....or night? Lancelot pondered the predicament. During
the day, a beautiful woman to show off to his friends, but at night, in the
privacy of his castle, an old witch? Or, would he prefer having a hideous witch
during the day, but by night, a beautiful woman for him to enjoy wondrous, intimate
moments? What would YOU do? What Lancelot chose is below. BUT....make YOUR choice
before you scroll down below.
OKAY? Noble Lancelot,
knowing the answer the witch gave Arthur to his question, said that he would
allow HER to make the choice herself.
Upon hearing this,
she announced that she would be beautiful all the time because he had respected
her enough to let her be in charge of her own life.
the moral of this overly long story?
If you don't let
a woman have her own way.... Things are going to get ugly
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
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