This week is the fifth anniversary of the Nasdaq Composite index's all-time high in March 2000, as months of hysteria about tech stocks in the media and among the public reached a crescendo. The Nasdaq closed above 5,000 for the first time on March 9th, 2000 and hit an all-time closing high of 5,048.62 on Friday March 10th.
|Nasdaq's all-time closing high of 5,048.62 - Friday, March 10th, 2000|
CNNMoney said the following in its markets report that day: The divergence between the blue chips and is symbolic: The Nasdaq finished above the key 5,000 mark, while the Dow ended below 10,000.
Analysts see the trend continuing.
"The Dow would do well to get back to its all-time high while the Nasdaq is in uncharted territory," said Donald Selkin, chief investment strategist at Joseph Gunnar. The Dow "has too many stocks whose time has past."
The Nasdaq Composite Index is now about 60 percent below the all-time high set on March 10th, 2000 and has to rise 140 percent to reach its pre-crash level, compared with 7 percent and 25 percent for the Dow and the S&P 500, respectively.
What a weekend followed Friday March 10th, 2000, for those who believed the hype that the "old economy" and the rules of economics were for people stuck in a Stone Age.
Cisco Systems traded at more than 150 times year 2000 earnings estimates compared with 19 times earnings oday; Oracle traded at 125 times 2000 earnings forecasts compared with a P/E of 21 today while Microsoft had a P/E of more than 60 compared with 20 today.
According to Datastream, the Nasdaq Composite Index was trading on a historic price earnings ratio of 72 in March 2000. It is 15 today - the average valuation is 15 times average annual earnings .
Just a few nuggets from those halcyon days when there were so many who fed on the snake oil peddled by chancers:
On Dec. 16, 1998, CIBC Oppenheimer analyst Henry Blodget predicts that the share price of Amazon.com, then $242.75 despite the company's losses of 90 cents per share in the most recent quarter, would reach $400 within a year. The self-fulfilling prophecy sparks a frenzy in which Amazon jumps $46.25 that day alone and to a split-adjusted price of nearly $600 12 months later.
Blodget writes the following in a column for News.com in January 1999: "Unlike with other famous bubbles ... the Internet bubble is riding on rock-solid fundamentals, perhaps stronger than any the market has seen before. Underlying the crazy price increases are the foundations of what could become the early 21st century's leading growth companies.... Just because the Internet stock phenomenon looks like a bubble, it isn't a given that the bubble will burst."
Alas, Blodget, now with Merrill Lynch, maintains his buy rating on Amazon until July 27, 2000, when the stock's split-adjusted price has dwindled to about $180.
Blodget rates ExciteAtHome "accumulate," but in an e-mail terms it "such a piece of crap."
While Infospace is being touted as a "Top 15" firm by Merrill Lynch with a "buy" rating, Blodget tells his colleagues: "This stock is a powder keg . . . given the 'bad smell' comments that so many institutions are bringing up."
In The Cheating Culture, David Callahan wrote:
What Blodget didn't mention to CNBC junkies or Merrill Lynch's own clients was that his role at Merrill went far beyond analyzing stocks. Like other star analysts of the time, he also became deeply involved in Merrill's investment banking business, helping to bring Internet companies-and fat underwriting fees-to Merrill. One of the companies Merrill's investment banking division represented was Go2Net, a company that InfoSpace was in the process of purchasing in 2000. Merrill had a financial interest in InfoSpace's stock price staying high so that the deal would go through.
Debases Kanjilal held on to his InfoSpace stock even as it declined steadily. Finally he sold at $11 a share and took a staggering loss. At the time Kanjilal sold, Merrill and Blodget were continuing to recommend InfoSpace to investors. Kanjilal's losses were part of an estimated $4 trillion that investors lost when NASDAQ crashed. Big-name analysts hyped many sinking tech stocks with the same enthusiasm they'd shown in pumping them up. For example, as of May 2001, Morgan Stanley's top Internet analyst, Mary Meeker, was still bestowing her once-coveted "outperform" rating on Priceline, then down from $162 to $4, and on Yahoo!, down from $237 to $19.50.
Kanjilal's lawsuit against Merrill Lynch attracted the attention of Eliot Spitzer's office not long after it was filed. Initiating a criminal investigation, Spitzer uncovered a shocking pattern of public deceit and conflict of interest at Merrill Lynch. He found e-mails by Henry Blodget privately ridiculing the same stocks that he and Merrill were publicly pushing. "A piece of junk," Blodget had called InfoSpace, even as he recommended it. He privately called other stocks a "pos," or piece of shit. Spitzer also found a memo in which Blodget detailed the compensation he deserved for bringing in investment banking business-a memo that flatly contradicted Merrill's claims that analysts were not rewarded for playing such a role. As a result of the investigation, Spitzer charged that Merrill Lynch's "supposedly independent and objective investment advice was tainted and biased by the desire to aid Merrill Lynch's investment banking business." In Spitzer's view, the behavior by Merrill and Blodget constituted securities fraud, a serious felony.1
Spitzer's evidence against Merrill Lynch resulted in the company agreeing to pay a $100 million settlement. This case turned out to be just the first step in a larger investigation of other top Wall Street firms that had engaged in a range of abuses by insiders, which culminated in a historic $1.4 billion settlement in 2003.
And what happened to Blodget? Not much. Saying he wanted a "lifestyle change," Blodget had accepted a November 2001 buyout offer from Merrill worth an estimated $5 million. He spent his days working on a book for Random House and meeting regularly with lawyers. In 2003, Blodget settled with Spitzer's office, agreeing to pay a $4 million penalty-yet admitting no wrongdoing. The settlement was easy enough to afford. Blodget had pulled in nearly $20 million during his brief star turn at Merrill.
Just one other example of the hubris of that crazy period:
After raising $10 million in funding in May 1998, James Cramer, co-founder of TheStreet.com, issues a press release in which he exults, "The dead-tree boys must be shaking in their boots. We now have the money we need to complete our vision of crushing the old-line media behemoths."
One year later, we said on Finfacts:
It took Nasdaq stocks almost two years to close at a record 5048.62 on March 10th 2000. While the subsequent decline was not a huge surprise on Wall Street, few expected that a year later the market would look so bleak.
The average decline of 60% has had an impact via the so-called wealth effect in a U.S. economy where some 50% of adults own stocks either directly or indirectly.
Federal Reserve Chairman Alan Greenspan, has said that a glut of high-tech manufacturing and falling prospects for returns in 2000 foretold a slowdown was coming, but not the speed or extent of it.
"The adjustment has occurred much faster than most businesses anticipated, with the process likely intensified by the rise in the cost of energy that has drained business and household purchasing power," Greenspan said.
An Irish Times analysis in March 2001 provided data on the performance of Irish technology companies quoted on Nasdaq.
One of the worst performers Trintech, fell from a high of $75.44 on March 10th, 2000 ($150.875 before the two for one share split) to $2.65 on week commencing March 5th.
Baltimore Technologies fell from $44 to a low of $6.50 and Riverdeep which hit a high of $72.50 on March 9th, 2000, is trading in the $25/$26 range.
Even the biggest tech names have proved to be no refuge for investors since the Nasdaq peaked
* adjusted for splits
**Shares of Yahoo fell 18 percent on Thursday March 8th
Source: CNET Investor