what goes up must come downgreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
The following is a members-only alert from Y2KNEWSWIRE ____________________________________________________________
The numbers are in: the Fed has raised rates a quarter-point (25 basis points). This marks the fourth consecutive rate raise in just eight months, charting a sharp trend in rate raises that, frankly, has no end in sight.
As we predicted, the Fed did not go with a half-point raise. This, we think, would have been seen as "too radical" and might have held the risk of causing serious, immediate downward disturbances (i.e. crash) in the market. Because the Fed does not want to be blamed for causing a market crash / correction, expect it to proceed slowly and diligently in the months ahead.
The Fed, however, seems determined to keep cranking up the pressure until investors respond, so expect further rate raises until this market returns to Earth.
As a result of the quarter-point raise, don't expect the bubble to pop just yet. This may take quite a bit more time: months or even years, in fact. The top of this market is only limited by the gullibility of the investing public -- not economics -- and as far as we can tell, the level of gullibility of today's investors has yet to reach any kind of threshold. As long as investors don't know how much they don't know, so to speak, they'll won't come to their senses and sell.
Interestingly, the BOTTOM of the market is, in fact, defined by economics. When stocks crash to the point that they're undervalued, you'll see a new wave of "value investors" stepping in to pick up the pieces. By definition, that forms the bottom "valley" of the market. Following this, expect investor behavior to change dramatically. Our guess is that the ten years following this market crash will see renewed interest in low-risk, value-based investing that attempts to purchase under-valued companies rather than over-valued ones with the hope that they will simply become even more over-valued.
Make no mistake: today's investment strategies are based primarily on that: people buy extremely-overvalued stocks in the hopes that some other sucker will buy them at an even more exaggerated overvaluation somewhere down the line. And so far, they've all been right. There has always been "the next sucker." But the queue of suckers eventually dwindles down, and then the race becomes getting OUT of the market before the next sucker. Whoever sells last loses.
These are the dynamics of any market crash. Greenspan, for his part, seems to be doing his best to attempt a soft landing here. His repeated, quarter-point rate hike strategy is well-suited for shifting blame right where it belongs: with the stock-hype industry and the sucker investors who really should know better. Lessons about greed are always learned the hard way, it seems.
There is a slight possibility of a market crash in the next two weeks, although we put this as very low (less than 5%). Why? The quarter-point raise seems to have actually boosted investor confidence -- they were thrilled to have escaped the possibility of a half-point raise. As long as investor confidence remains high, there is no reason for them to sell. A massive sell-off will clearly only take place after some fundamental shift in the belief systems of investors (or the running out of new investor money, via the "Ponzi Scheme" math).
Make no mistake: this is unexplored territory. Never before in the history of any stock market has the public ignored fundamental economics for so long. Nobody really knows how long this can go on. All we know for sure is that the situation is not sustainable.
WHY THE CRASH IS INEVITABLE Here's a handy technical overview that mathematically demonstrates why this stock market crash is inevitable. For this demonstration, let's look at YAHOO, which recently traded at over 600-to-1 (P/E ratio).
When you have stocks that are overvalued 600-to-1, this means the price of the stock is 600 times the annual dividend earnings. In other words, if that particular YAHOO stocks pays out $1 / year in dividends, it would be priced at $600 per share.
Here's the important part: that means given today's YAHOO profits, an investor would have to wait SIX HUNDRED YEARS to get back the money they invested. That's more than 25 generations. "Here, grandson, hold on to this for a while... it will pay off!"
Of course, companies can also increase their earnings, resulting in a rise in dividends. If YAHOO doubled its income next year, paying a $2 dividend, that would mean investors would only have to wait THREE HUNDRED YEARS to get their money back. A little better, but still nowhere near fiscal sanity.
To really make economic sense, a stock has to give investors around a 5% annual return on their investment. That means a company should essentially "pay back" the investor in 20 years. To do that, YAHOO would have to grow its business by THREE THOUSAND PERCENT.
The key question: can YAHOO expand its business by three thousand percent? The answer, of course, is no. YAHOO is already the top search engine in the market. That means it has little room to grow by market share alone. It CAN, however, expand as the base of Internet users grow.
If today, fifty million people in the United States (the primary users of YAHOO) are on-line, you would need to get one hundred million people on-line just to grow YAHOO by 100%. That's sure possible, don't you think? So let's give YAHOO the benefit of the doubt. Let's say they can DOUBLE their profits in the next five years by benefiting from a larger Internet user base.
But at what point do you run out of new people? In the United States, we have fewer than 300 million people total. Only about half of those are even interested in the Internet (the elderly and infants, for example, won't use it), meaning we have about 150 million potential Internet users in this country. That's approximately triple the current number of users, meaning that YAHOO can conceivably triple its audience base (and, simultaneously, its profits) by getting every potential Internet user in the USA on-line.
This best-case scenario gives YAHOO a 300% growth, which means instead of taking six hundred years to get your money back, it will only take two hundred years.
Are you starting to see why this market must crash? There is no possible way YAHOO can justify a 600-to-1 P/E ratio unless we discover A NEW PLANET full of people ready to join the Internet. Given the potential for 300% growth in the next decade, YAHOO might be justified at a 60-to-1 P/E ratio, but even that's risky business. Still, armchair investors pump money into the stock at TEN TIMES that inflated ratio.
This is just one example. The NASDAQ is full of them. Today, investors are simply pumping money into a system in the hopes that some other sucker will pay an even higher price for the stock. But when reality hits the fan -- and investors start crunching the economic reality here -- somebody is going to lose. YAHOO should be somewhere between 20-to-1 and 60-to-1. That means it must crash NINETY PERCENT. Somebody is going to lose ninety cents of every dollar they're putting in YAHOO right now. Don't let that person be you.
ONE MORE REASON: There is yet another reason why this stock market must return to rational levels: rising rates of return in low-risk vehicles. As the Fed continues to increase interest rates, the low-risk (or even no-risk) vehicles start to look better and better. When a person can make 7.5% in a government-guaranteed municipal bond or T-bill, that's already a 50% increase over traditional (5%) returns. It's a very, very good deal for investors who want security, not risk. So they're increasingly selling stocks and jumping over to low-risk vehicles like bonds.
The Fed is likely to continue raising rates for the foreseeable future. We may, in fact, see rates tickling NINE PERCENT by the end of this year. When low-risk markets promise a nine percent return, the smart investors clear out of most stocks. They'll take low-risk nine percent over high-risk forty percent any day. A guaranteed nine percent, in fact, represents a remarkable combination of risk management and portfolio growth.
At some magic point, of course, the return in low-risk investments simply outweighs the high-risk return in sky-high dot-com stocks. When that happens, investors stampede out of the stock market. And the minute the stampede begins, it doesn't stop until the market reaches economic equilibrium (somewhere around ten cents on the dollar). Does that mean we could see the NASDAQ drop by 90%? Yes. That's exactly what it means. The S&P would even take a heavy hit (although not likely as heavy as the NASDAQ).
EVERYBODY KNOWS WHAT'S UP Let's face it: everybody knows this market is grossly overvalued. Even the bull-market cheerleaders readily admit it. Nobody is arguing against the mathematically-provable fact that this market is way out of whack. What they're saying is that it won't end YET. They're saying it's going to keep going up, up, up for as far as the eye can see. That's like telling a bank robber to keep on robbing banks because he hasn't been caught yet.
But there's a big difference between being wise and not-yet-being-caught. The people playing the stock market WILL get caught. Why? Because they don't have the wisdom to get out now. And if they don't get out now, why would they ever get out? Their unwise behavior has actually REWARDED them, not punished them. So they'll keep going back to the market for more free money just like a crack cocaine junky who needs the next "reward."
By the time they figure it's time to get out, it's already too late. By definition -- by the very structure of the buy / sell trading floor -- the act of just 10% of stockholders getting out crashes the price for everyone else.
In other words:
* 100% of the investors THINK they can get out at the top. * But only 10% (or fewer) actually can.
That means 90% (or more) of today's investors have a hard lesson coming their way soon. They're going to lose money in a big way, and most of them probably won't break even in their lifetime. It takes a long, long time to recover from a 90% loss.
FACT: The market has to rise 1000% to break even after a 90% drop.
FACT: After the 1929 crash, the market didn't recover pre-1929 levels until the mid 1950's!
For all those folks holding on "for the long run," we wish them luck. It's going to be a long, long, long run when this one finally breaks. Our advice? Put your money in the low-risk vehicles that are now, thanks to the Fed, paying out handsome financial returns. When other investors are leaping from buildings after this one pops, you'll be sitting tight on risk-free assets.
-- watch watchadoin (email@example.com), February 04, 2000
Watch...that is the most concise explanation of the market that I have ever read. Thank you. I have printed it for about a half dozen friends. I got out of the market in July 98. I had been getting about 23% on my investments and had built that up to $337K. I am still sitting on it in a cash basis. I kept my portfolio going on AOL just so I could go in and weep about all the money I was losing. Wrong!! I have "made" on paper $3400 and in the last two weeks I have started to lose on that. So is $3400 a valid risk of loss to protect $337K? I think so. Now....where are these gov't bonds at 7.5%? And should I get in now or wait for them to go to 9%. I am far too old to be in anything for the long haul that isn't paying hard cash to me. I am retired and on SS and want my money paying me a qtrly return. IOW, I want to spend my earnings. When I called my broker he got real vague on the bonds issue. I don't trust them any more than a used car dealer either. They make money off of the investor whether it goes up or down. And if anyone thinks they are looking after their interests, its only when their own interests coincide. Again, many thanks for your input. Taz
-- Taz (Tassi123@aol.com), February 04, 2000.
Taz - Have you thought about diversifying offshore? It would expand your investment universe considerably and you could move some of your investments out of the VERY overvalued US Dollar.
-- Dave (firstname.lastname@example.org), February 04, 2000.
Dave..when I was younger I spent some time in Mexico. Due to the fact that a life long friend had married the Minister of DEfense, I hobknobbed with the elite and the gov't heads in Mexico City. So I had "insider info". I invested, what at that time for me, was a lot of money, into the Peso, which then immediately went tits up and I lost it all. Is this what you mean by overseas investment? You have to explain it in very simple detail as I am a real dummy. I am listening and email is real. Taz
-- Taz (Tassi123@aol.com), February 04, 2000.
I sincerely thank you for this post. Yes, I read it all the way through, word for word as it is the first one that I (the Village Idiot of Stocks) have been able to completly understand.
And, to me, all you've explained makes perfect sense. My opinion is that it's one big House of Cards. May the gods have mercy when it does come tumbling down. 1929 will look like a Picnic in the Park.
I know for a fact that many older people in this area have gone so far as to take out mortgages (second or otherwise) to get into the market and make a quick buck. This isn't gonna be pretty.
-- Richard (Astral-Acres@webtv.net), February 04, 2000.
I'm sorry but you have HUGE glaring errors in your thread.
For this demonstration, let's look at YAHOO, which recently traded at over 600-to-1 (P/E ratio). When you have stocks that are overvalued 600-to-1, this means the price of the stock is 600 times the annual dividend earnings. In other words, if that particular YAHOO stocks pays out $1 / year in dividends, it would be priced at $600 per share.
P/E ratio has nothing to do with dividends. Yahoo doesn't pay a dividend. P/E ratio is earnings per share versus the stock price. If a company like Amazon, for example, is losing money every quarter they don't have a P/E ratio because there is no EARNINGS not dividends.
Dividends are a cash payout to stockholders per share on a quarterly basis. Earnings per share are quoted on a quarterly basis.
I agree with a lot of your analysis but then you hit a major snag with a very basic financial definition. I don't understand.
Care to clear up this misunderstanding? I still agree with you, Yahoo is massively overvalued and the P/E today is over 1800 which is absurd.
-- Guy Daley (email@example.com), February 04, 2000.
What is not spelled out completely is that before you can pay dividends, you have to earn them. Thus, if Yahoo paid all of its earnings out in dividends, the PE ratio matters. Of course, paying all of your earnings out in dividends would leave you strapped for capital to run your business, so dividends would probably never reach the level of earnings, which makes Yahoo, etc. even more overvalued.
-- J (Y2J@home.com), February 04, 2000.
Taz, sorry for the vagueness. If you got out of this markey a little early with gains like you state than you certainly are no dumy. What I meant by overseas is certainly not the thrid world, such as Mexico or South America. The only place with any semblence of fiscal sanity today is Europe. The European "hard" currencies such as the DMark and Swiss Franc, IMHO, will outperform the dollar in the 21st century. The US is a bankrupt country who will have to devalue the dollar in the near future. This will be the third time since the creation of the Federal Reserve (neither federal no any reserves) that the US will have to default. The first was in 1933 when Roosevelt illegally confiscated US citizens gold, the second was 1971 when Nixon closed the gold window to the foreigners. Now we owe TRILLIONS to foreigners and everyday we borrow more, commonly called the trade deficit. Something will have to give soon. Sure, Europe is not fast and sexy, they have way to much government, but they also have a different mindset. And they are much smarter bankers, and in a world controlled by private bankers, this will go a long way. I will make two recommendations, subscribe to a newsletter called Global Mutual Fund Investor, www.eas.ca and/or talk to JML Investments in Switzerland, www.jml.ch.
You sound like a smart guy you just need to educate yourself. This bond excitement is another derivatives blowup. The US banks are holding over $33 TRILLION in derivatives, mostly interest rate swaps. This position is covered by a paltry $460 billion in capital (1.4%). It's a disaster waiting to happen.
-- Dave (firstname.lastname@example.org), February 04, 2000.
For once I've read something pertaining to the market I could understand....All in all, this is pretty intense...Lots of folks losing lots of money...A friend of my sisters just lost 12,000.00 on Sony stock. I couldnt imagine losing that kind of money.
-- consumer (email@example.com), February 04, 2000.
Great explanation of the pyramid scam the markets have become...of course there's a pyramid on our dollar bills, isn't there? Ever ask yourself why?
-- Carl Jenkins (Somewherepress@aol.com), February 04, 2000.