Beware parabolic price increases
The NASDAQ doubled from March 1999 to March 2000 to over 5000 on flimsy fundamentals, and then had a little problem — it crashed, falling 70% to a low of 1600 or so. It is axiomatic that no one who bought at the high believed they were buying at the high:
Here’s a story from the time from SmartMoney, all full of optimism and certainty that the frenzied bull market in the NASDAQ was going to go on forever:
THE NASDAQ BROKE 5000 today on a broad-based rally sparked by those irrepressible, highflying technology stocks. Who would have thought on Jan. 1 that 69 days into the new year, the market of the 21st Century would be sitting at more than half the level of the Dow Jones Industrial Average?
The Nasdaq Composite surged 149.60 points, or 3.1%, to a record high of 5046.86 its first close above the 5000 level. Today’s was the fourth-largest price gain ever, but not even in the top 10 in terms of percentage. The Russell 2000 Index of small-capitalization stocks also hit a record, climbing 11.37 points to 606.05.
Meanwhile, the Dow, which fell 117 points early in the day, leapt 154.20 points, or 1.6%, by the close to end at 10010.73. The broader S&P 500 index jumped 34.99, or 2.6%, to 1401.69.
The Nasdaq Composite, a weighted index of all the stocks on the Nasdaq Stock Market, has more than doubled since Jan. 1, 1999. It hit the 3000 mark on Nov. 3, 1999, and crossed 4000 for the first time less than three months ago, on Dec. 29, 1999.
“The Nasdaq 5000 is smacking people across the face and saying, ‘I don’t care if the Dow is down. There is money going into stocks and they’re real stocks,”‘ says Ben Marsh, director of equity trading at Adams, Harkness & Hill. “The money will continue to go into these Nasdaq companies. The drop to Dow 10000 will wake up some common person and he’ll say, ‘Berkshire Hathaway isn’t the only way to play. There are other ways to make money right now.”‘
Just like the NASDAQ, in the 12 months from April 2007 to April 2008, the price of oil has doubled, while forecasts of demand have been repeatedly lowered over the period (we note there have been some minor disruptions in Nigeria and that China appears to be building some oil inventories prior to the Olympics). Another element that the dual run-ups may have in common is the monetary easing of 1999 for Y2K and the corresponding easing in 2008 as a result of the subprime mess, both of which would appear to be temporary in nature:
A Wall Street trader’s perspective:
Oil is not going back to $70, where ag plantings might be unclear and nat gas might be just a bit better than oil. It is not going back to $80, where it made good economic sense to get more fertilizer or drill for more natural gas. It may not even go back to $90, where food for oil is outrageously profitable and natural gas is a shoo-in. A retreat to $100 seems hard now. As someone who has been saying that oil is headed to $125 — been my thought now for two years — I have to say that these prices for these ag and nat gas companies are NOT TOO HIGH to pay.
OPEC says that it is spending $160 billion in member countries to increase output by 5MM bpd. Meanwhile, according to an OPEC official quoted by Bloomberg, “Oil consumption in some parts of the world, including the U.S., may be affected by high prices, though Asian demand won’t be.” Such certainty in predicting the future is wrong a pretty high percentage of the time. We’re not saying that prices can’t go higher, but everyone in the world, even the most sophisticated investors, seems to be on the same side of this trade — and that in itself ought to be a red flag.
April 22nd, 2008 at 7:46 pm
This article juxtaposes the NASDAQ and oil.
Notwithstanding its 20% decline in recent months, the NASDAQ is more or less back on its long-term logarithmic trendline. Arguably the upward deviation that climaxed in the 2000 top began around the time Clinton and the Republican Congress agreed on a strong dollar and fiscal restraint. Suppose that The Most Brilliant Man Harriet Miers Ever Met had continued those policies. NASDAQ 5000 was untenable and a bear market was justified, but afterwards would NASDAQ growth have resumed at the 1995-1997 rate?
How should OPEC try to reinflate the oil price after the bubble presumably bursts (cheating notwithstanding, production cutbacks are an obvious option), and how should oil-importing nations counteract such efforts?
(Of course, if war with Iran or the like impairs the Middle East for an extended period, we won’t be talking about an oil bubble; we’ll be saying how prescient the market was.)